The New York Times bestseller: the Nobel Prize-winning economist shows how today's crisis parallels the Great Depression--and explains how to avoid catastrophe.
In this major bestseller, Paul Krugman warns that, like diseases that have become resistant to antibiotics, the economic maladies that caused the Great Depression have made a comeback. He lays bare the 2008 financial crisis--the greatest since the 1930s--tracing it to the failure of regulation to keep pace with an out-of-control financial system. He also tells us how 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 has become an instant classic.
"Nobody who writes about economics does it better than Paul Krugman." —Washington Post
"The man best able to explain the economic maelstrom." —San Francisco Chronicle
"Reading Paul Krugman always makes me feel like a smarter person and a better citizen. As an economist with a common touch, he shares the ability with a couple of other specialized authors--Stephen Jay Gould and Carl Sagan--to make clear some very complicated concepts from a specialized subject area, and to make the reader enjoy the experience." —Susan Gardner, Daily Kos
"Excellent...Reading Krugman as he glances over the economic history of the past several decades is both enjoyable and thought-provoking." —Floyd Norris, New York Times Book Review
(Source: New York Times)
* This is a brilliant book, but it scares me, for several reasons. One reason arises from Paul Krugman's history of financial crashes. Something seems to be making them happen more frequently as time goes on. Also, they seem to be getting more destructive. In the great depression of the 1930s, John Maynard Keynes said: "We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand." These days the machine is much bigger and infinitely more delicate, and we're still struggling to understand how it works.
One of the most striking things Krugman tells us is that you can have a recession even when an economy seems basically sound. To illustrate this, he uses the example of a babysitting group in Washington DC. Here, lots of couples agreed to babysit for each other, and to facilitate the process, they issued coupons — a sort of baby sitting currency. If a couple baby-sat, they'd get a coupon; if they engaged the services of a baby sitter, they'd pay a coupon. This sounds straightforward. Actually, it isn't.
What happened was this: couples, fearful of missing important social engagements, were more willing to babysit on a regular night than to go out on one. Because the ability to attend functions was more valuable than a night off, everybody wanted to hoard their coupons. There was no shortage of baby sitters, in other words, but nobody to baby sit for. So the babysitting group in effect fell into recession. The answer, Krugman says, would have been to tinker with the value of the coupons, like a central bank tinkering with a currency to stimulate an economy.
And this is the second reason the book scares me. Economists usually try to solve problems by tinkering with things , and making them more complicated. That's because it often works — until, suddenly, it doesn't. Krugman, a Nobel-prizewinning economist who specialises in recessions, takes us through the history of why they happen. It's always because people devise an ingenious way to make what appears to be free money, and nobody understands what the consequences might be until it's too late. There is, it turns out, no such thing as a free lunch.
Take the panic of 1907. In New York, people invested their money in banks, which were regulated, and "trusts", which were not. This meant that trusts, such as the Knickerbocker Trust, could make risky investments — which, in the boom years of the early 20th century, paid out hugely. Soon, there was as much money in trusts as there was in banks. Does this remind you of hedge funds 100 years later? (It should — 1907, says Krugman, "eerily prefigured our current crisis".) When one trust failed, lots of investors tried to pull their money out of the system at the same time. The stock market — and confidence in the economy as a whole — plunged.
This is another scary thing. The entire edifice of capitalism is based on capital — which is really just another word for confidence. Wealth is created because people who have capital, or confidence, expose it to risk. If people believe your confidence to be authentic, the risk you take is likely to be small. But as soon as people think you are bluffing, they panic — and panic destroys wealth faster than confidence can ever increase it.
Krugman looks at various crashes, such as the "Tequila crash" in South America in the mid-90s, and the Asian crash that happened three or four years later. They all happen for the same basic reason — the banking system exposes itself to too much risk. Then people lose confidence. Then panic starts. Panic doesn't even have to be based on anything real. Krugman compares panic to a feedback loop — noise from a speaker is magnified by a microphone, which relays this noise, now much louder, back through the speaker, and so on, until it's an ear-splitting shriek.
And this is, more or less, the sound emanating from today's global economy. In the past, every time a crash has happened, something big has stepped in to clean up the mess. In 1907, it was J P Morgan and his consortium of super-rich buddies. After the great depression, it was the second world war, which put people back to work for a couple of decades. When Mexico and Argentina crashed, America stepped in.
And now what will save us? Krugman is mildly optimistic. (But we must remember this book went to press a while ago.) "The quintessential economic sentence is supposed to be 'There is no free lunch '. Depression economics, however, is the study of situations where there is a free lunch, if we could only figure out how to get our hands on it. "
So there you are. Krugman, one of the sharpest economists in the world, still believes in free lunches. And that's something that really scares me.
(Source: The Guardian)
* “I’m tempted to say that the crisis is like nothing we’ve ever seen before. But it might be more accurate to say that it’s like everything we’ve seen before, all at once: a bursting real estate bubble comparable to what happened in Japan at the end of the 1980s; a wave of bank runs comparable to those of the early 1930s (albeit mainly involving the shadow banking system rather than conventional banks); a liquidity trap in the United States, again reminiscent of Japan; and, most recently, a disruption of international capital flows and a wave of currency crises all too reminiscent of what happened to Asia in the late 1990s.”
Reading Paul Krugman always makes me feel like a smarter person and a better citizen. As an economist with a common touch, he shares the ability with a couple of other specialized authors — Stephen Jay Gould and Carl Sagan — to make clear some very complicated concepts from a specialized subject area, and to make the reader enjoy the experience.
In The Return of Depression Economics and the Crisis of 2008 Krugman undertakes a bit of timely recycling and updating of material, taking dead aim at the current fiscal meltdown. This book is a repurposing of his previous work that focused on the 1990s tanking of the Asian and Malaysian economies, “which,” as he writes in the introduction to this edition, “turns out to have been a sort of rehearsal for the global crisis now in progress.”
As the block quote that opens this review indicates, there’s much more to this new edition than the mere Asian crisis as well. He takes us through the paces of a variety of many previous downturns, both shallow and deep, and explores their similarity (and unlearned lessons) in just the right amount of accessible detail. Throughout the book, he uses the simple concept of a babysitting co-op to illustrate the complex interplays of national and international economies, bringing a down-to-the-earth style to the larger concepts of gluts, recessions and boom times. What happens when members of the babysitting group fear that no babysitting will be available in the future? Why, a credit freeze, of course, with no one daring to go out because they want to save their chits for future better weather. This illustrative device is a gem, one returned to repeatedly during the course of the work.
“What the world needs now,” Krugman explains, “is informed action; and to get that kind of action, ideas must be presented in a way that is accessible to concerned people at large, not just those with economics Ph.D’s.”
The book’s early chapters make a clear-cut case for the victory of capitalism over communism in the world as we know it (as opposed to the world in which many theorists still wish to reside). With the downfall of Soviet Russia and its satellites, he argues, we’re no longer arguing about whether capitalism or communism will prevail:
“For the first time since 1917, then, we live in a world in which property rights and free markets are viewed as fundamental principles, not grudging expedients: where the unpleasant aspects of a market system–inequality, unemployment, injustice–are accepted as facts of life. As in the Victorian era, capitalism is secure not only because of its successes–which, as we will see in a moment, have been very real–but because nobody has a plausible alternative.”
This situation will not last forever. Surely there will be other ideologies, other dreams; and they will emerge sooner rather than later if the current economic crisis persists and deepens. But for now capitalism rules the world unchallenged.
This is not to say that Krugman does not see a wider range of tweaking capitalism on a more universal and socialistic model than fanatics of Milton Friedman are willing to endure. Indeed, conservatives undoubtedly would view many of Krugman’s proposals (like the much-touted-of-late Swedish model of government takeover of vital industries) as not capitalistic at all, but a very thin free-market veneer painted onto the dreaded all-powerful state. But then, dealing in degrees of nuance has never been the strong point of Chicago-school economics. And I’m sure many would miss Krugman’s longer view of history that he salutes in that final paragraph in the blockquote above; an economist with the long view and grasp of social and cultural forces spanning centuries surely has a more sanguine view of the world than the Reaganites.
More than most economists, Krugman takes pains to explain the crucial part that perception and psychology plays in markets. This is important, and worth more than the passing nod that is common (and again, it’s where his babysitting co-op model comes in handy). Whether bravado or anxiety is based on reality or not, at the macro level, these emotions can drive risky bubbles or sink even the most stable market, completely untethered to whether the fundamentals are in line with the perceptions.
“The funny thing is that once you take the possibility of self-fulfilling crises seriously, market psychology becomes crucial–so crucial that within limits, the expectations, even the prejudices of investors, become economic fundamentals–because believing makes it so….”
… because crises can be self-fulfilling, sound economic policy is not sufficient to gain market confidence–one must cater to the perceptions, the prejudices, the whims of the market. Or, rather, one must cater to what one hopes will be the perceptions of the markets.
This acknowledgement of the major part that psychology plays in our economy is part of the foundation for Krugman’s renowned and dogged insistence on the value of government regulation. Without the assurance that the playing field is level for insider and outsider–or that the traded instruments are even understood enough to properly regulate–the world is going to face crisis after crisis, with no economic lessons and learned and millions suffering from the whims of mass financial stampedes surrounding unregulated “magic” kind of packages like the CDOs that finally unraveled the world market this past fall.
In the end, Krugman’s most lasting insight, the he returns to again and again in The Return of Depression Economics and the Crisis of 2008, is that even when times are wonderful–indeed, especially when times are wonderful–we need to have oversight and accountability built into the economic system through regulation, and we need to stick to it rigorously:
“… anything that has to be rescued during a financial crisis, because it plays an essential role in the financial mechanism, should be regulated when there isn’t a crisis so that it doesn’t take excessive risks.”
For this insistence, backed up with case history after case history, this latest from Krugman is worth the cover price alone. The fact that economic theory is finally packaged and explained in a manner accessible to the average interested layperson, however, is what makes the book priceless.
(Source: American Nonesense)