krugman - the return of depression economics and the crisis of 2008 (2009)

PAUL KRUGMAN WINNER OF THE NOBEL PRIZE IN ECONOMICS THE RETURN OF DEPRESSION ECONOM CS AND THE CRISIS OF I 2008 ISBN 978-0-393-07101-6 USA $24.95 CAN. $27.50 W hat better guide could we have to the 2008 financial crisis and its resolution than our newest Nobel Laureate in Economics, the prolific columnist and author Paul Krugman? In his prescient 1999 classic, The Return of Depression Economics, Krugman surveyed the economic crises that had swept across Asia and Latin America and pointed out that they were a warning for all of us: like diseases that have become resistant to antibiotics, the economic maladies that caused the Great Depression were making a comeback. In the years that followed, as Wall Street boomed and financial wheeler-dealers made vast profits, the international crises of the 1990s faded from memory. But now depression economics has come to America. When the great housing bubble of the mid-2000s burst, the U.S. financial system proved as vulnerable as those of developing countries caught up in earlier crises—and a replay of the 1930s seems all too possible. In this new, greatly updated edition of The Return of Depression Economics, Krugman shows how the failure of regulation to keep pace with an increasingly out-of-control financial system set the United States and the world up for the greatest financial crisis since the 1930s. He also lays out the steps that must be taken to contain the crisis and turn around a world economy sliding into a deep recession. Brilliantly crafted in Krugman's trademark style—lucid, lively, and supremely informed—this new edition of The Return of Depression Economics will become an instant cornerstone of the debate over how to respond to the crisis. ». PAUL KRUGMAN is the recipient of the 2008 Nobel Prize in Economics. A prolific author, columnist, and blogger, he teaches economics and international affairs at Princeton University. JACKET DESIGN BY GRAY318 AUTHOR PHOTOGRAPH IY IAN IEITCN PRINTED IN THE UNITED STATES OF AMERICA BUSINESS/ECONOMICS Our newest Nobel Prize-winning economist shows how today's crisis parallels the events that caused the Great Depression— and explains what it will take to avoid catastrophe. FROM THE INTRODUCTION Most economists, to the extent that they think about the subject at all, regard the Great Depression of the 1930s as a gratuitous, unnecessary tragedy. If only Herbert Hoover hadn't tried to balance the budget in the face of an economic slump; if only the Federal Reserve hadn't defended the gold standard at the expense of the domestic economy; if only officials had rushed cash to threatened banks, and thus calmed the bank panic that developed in 1930-31 ; then the stock market crash of 1929 would have led only to a garden-variety recession, soon forgotten. And since economists and policymakers have learned their lesson nothing like the Great Depression can ever happen again. Or can it? THE RETURN OF DEPRESSION ECONOMICS AND THE CRISIS OF 2008 [...]... government officials In 1 9 6 8 John Kenneth Galbraith wrote, "With the rise of the modern corporation, the emergence of the organiza­ tion required by modern technology and planning and the divorce of the owner of capital from control of the enterprise, the entrepre­ neur no longer exists as an individual person in the mature indus- 24 The Return of Depression Economics trial enterprise." And who could... INTRODUCTION 3 1 "THE CENTRAL PROBLEM HAS BEEN SOLVED" 2 WARNING IGNORED: LATIN AMERICAS CRISES 3 JAPAN'S TRAP 56 4 ASIA'S CRASH 77 5 POLICY PERVERSITY 6 MASTERS OF THE UNIVERSE 7 GREENSPAN'S BUBBLES 8 BANKING IN THE SHADOWS 9 THE SUM OF ALL FEARS 10 9 101 119 139 153 165 THE RETURN OF DEPRESSION ECONOMICS 181 30 THE RETURN DEPRESSION AND THE OF ECONOMICS CRISIS OF 2008 INTRODUCTION ost economists, to the extent... happens, the tale of the baby-sitting co-op will turn out to be a powerful tool for understanding the not-at-all-whimsical problems of real-world economies The theoretical models econo- "THE C E N T R A L P R O B L E M HAS B E E N SOLVED" 19 mists use, mainly mathematical constructs, often sound far more complicated than this; but usually their lessons can be translated into simple parables like that of the. .. sense that the problems are very difficult, and there are no easy answers—a sense that may well be completely wrong Suppose, on the other hand, that I illustrate Japan's problems with the entertaining tale of the ups and downs of a baby-sitting co-op (which will, in fact, make 8 The Return of Depression Economics several appearances in this book) Maybe it sounds silly, maybe the levity will even offend... material as well, in an effort to explain how the United States found itself looking like Japan a decade earlier, how Iceland found itself look- 6 The Return of Depression E c o n o m i c s ing like Thailand, and how the original crisis countries of the 1990s have, to their horror, found themselves once again at the edge of the abyss About This Book Let me admit at the outset that this book is, at bottom,... like the Great Depression can ever happen again 3 The Return of Depression 4 Economics Or can it? In the late 1990s a group of Asian economies— economies that produced about a quarter of the world's output and were home to two-thirds of a billion people—experienced an eco­ nomic slump that bore an eerie resemblance to the Great Depres­ sion Like the Depression, the crisis struck out of a clear blue... extent that they think about the subject at all, regard the Great Depression of the 1930s as a gratuitous, unnecessary tragedy If only Herbert Hoover hadn't tried to balance the budget in the face of an economic slump; if only the Federal Reserve hadn't defended the gold standard at the expense of the domestic economy; if only officials had rushed cash to threatened banks, and thus calmed the bank panic... prices— such as a doubling of the price of oil and you have a recipe for nasty, if not Depression- sized, economic slumps But by the middle of the 1980s inflation had fallen back to toler­ able levels, oil was in abundant supply, and central bankers finally seemed to be getting the hang of economic management Indeed, 22 The Return of Depression E c o n o m i c s the shocks the economy experienced seemed,... this optimism was the fact that during the 1990s, economic problems reminiscent of the Great Depression had, in fact, popped up in a number of countries—including Japan, the world's second-largest economy But in the early years of this decade, depression- type problems had not yet hit the United States, while inflation the scourge of the 1970s—seemed, finally, to be well under control And the rela­ tively... countries—Poland, Esto­ nia, the Czech Republic—starting to look like success stories And Russia itself has become a surprisingly powerful source of financial and political instability for the rest of the world But let's reserve that story for Chapter 6 Another direct effect of the collapse of the Soviet regime was that other governments that had relied on its largesse were now on their own Since some of these . BANKING IN THE SHADOWS 153 9 THE SUM OF ALL FEARS 165 10 THE RETURN OF DEPRESSION ECONOMICS 181