The Return of Depression Economics and the Crisis of 2008

Paul Krugman is one of the world’s leading economists.  He is the 2008 winner of the Nobel Prize in Economics, won the John Bates Clark medal (an award that is considered even more prestigious than the Nobel), is a professor at Princeton, is a columnist at the NY Times, and has a blog.  I have been an avid reader of his columns and blog for some time.

He is one of the few who has been warning of the economic problems we are currently facing far ahead of the actual events.  He was also one of the very first I read who laid significant blame for much of the mess on Alan Greenspan, his anti-regulatory zeal, and foolish use of the “Greenspan Put”.  (A digression: moral hazard is a serious problem that we do need to deal with at some point.)

Krugman has released an updated version of his highly regarded book, The Return of Depression Economics, now titled The Return of Depression Economics and the Crisis of 2008.

This link will not stay good for long, but there is an interesting discussion of the book currently going on here.   Krugman is answering questions posed about the book by other prominent economists and policy makers.  It’s really quite interesting.

Here is the opening statement in from Krugman:

This is a heavily revised new edition of The Return of Depression Economics, originally published 9 years ago. When I wrote the original version, I had Asia on my mind. Some people looked at the crisis that swept Southeast Asia and at Japan’s monetary trap, and saw them as proof of the superiority of the American system. I looked at the same things and saw them as omens. I worried that similar things could happen to us. And now they have.

Right now the world economy is in a nosedive, and understanding what I call “depression economics” — the weird world you get into when even a zero interest rate isn’t low enough, and a messed-up financial system is dragging down the real economy — is essential if we’re going to avoid the worst.

The key thing, when you’re in a situation like this, is realizing that normal rules don’t apply. Ordinarily we’d welcome an increase in private saving; right now we’re living in a world subject to the “paradox of thrift,” in which private virtue is public vice. Normally we want to be careful that public funds are spent wisely; right now the crucial thing is that they be spent fast. (John Maynard Keynes once suggested burying bottles of cash in coal mines and letting the private sector dig them up — not as a real proposal, but as a way of emphasizing the priority of supporting demand.)


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