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Preview — The Return of Depression Economics and the Crisis of 2008 by Paul Krugman
The Return of Depression Economics and the Crisis of 2008
First it was Asia, in July 1997, when a series of event led to the collapse of six economies including Japan. Then came the failure of the Russian economy, followed by the Federal Reserve Board's ba...more
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Very interesting as well is the way that he deals with "moral hazard" not making judgments but allowing the reader to determine if this is a factor in causing fiscal chaos or not. How much ...more
This book was really looking at the Asian Financial Crisis, but has been updated to include information on the GFC of 2008.
The most interesting parts of the book relate to the need to re-regulate the financi ...more
From 1953 to 1973, Japan stunned the world wi ...more
Krugman uses the example of a baby-sitting co-op to illustrate how money supply and inflation play their part in financial booms and busts. He also provides solutions on ...more
Paul Krugman, if you haven't been paying attention to economics for a while, writes a column for the New York Times. He has a reputation as a modern-day Cassandra, who repeatedly describes the state of modern economics and lays out policy goals for how to fix them, only to not be listened to by anyone in power. His columns have definitely become more annoyed over the past five years because of that, and he even has his own image macro:
...which is honestly pretty appropriate, considering the utter idiocy coming from both sides of the political divide nowadays (thought not in equal amounts, admittedly)
But this book was written before any of that happened! Long before, actually--the original The Return of Depression Economics was published in 2000 in response to the Asian financial crisis of the late 90s, and this version updates it with additional thoughts about the banking crisis of 2008 and how its roots are traceable in the same sort of problems that caused the Asian financial crisis.
I originally had this as five stars, but changed it to four stars after a bit of thought. The why is down at the end.
Most of the beginning of the book is a parable of economics in the form of the Capitol Hill Baby-Sitting Co-op. A group of couples composed of staffers on Capitol Hill get together and start a baby-sitting co-op, where they agree to provide baby-sitting for each other. They print up a bunch of coupons, distribute them evenly to all founding members, and each coupon is good for one hour of baby-sitting. Anyone who wants to go out more will have to baby-sit more and save up the coupons to spend later. Here, you have the basics of an economic system.
Now, what happens if a group of couples are worried that in the future, they'll want to go out several nights in a row, and maybe a bit after that, and they won't have enough coupons saved up because the supply is limited? They stop going out now and start looking for more opportunities to baby-sit. The problem is, that reduces the pool of available baby-sitting nights for everyone, so pretty soon more people start worrying that they won't be able to go out when they want to, and they stop going out, which makes things worse and worse as more and more baby-sitters are chasing fewer and fewer baby-sittings.
Congratulations! You're in a recession!
The main reason Krugman brings this is up is to show how malicious or stupid (or both) most arguments about recessions tend to be. It's not because workers are lazy, or because their skills don't fit the new economy, or because regulations are too tight, or because of some quirk of "Capitol Hill culture," or whatever the excuse is. Perfectly rational people can drive an economy into recession by following perfectly rational goals.
One way to fix this is for the co-op to issue more coupons. If the supply of coupons is larger, than the couples worried that they won't have enough coupons will be assured that there will be plenty of chances to get them, so they start going out now, thus increasing the supply of chances of baby-sit, thus mollifying everyone else who was worried, and bringing things back to normal. And that's why banks issue more money during recessions, and what the point of quantitative easing is.
Another way is for coupons to devalue over time. Since fewer people want to go out in the winter, the logical choice for any single couple is to baby-sit in the winter and go out in the summer, but that leads to supply issues in both seasons. But if each coupon buys one hour of babysitting in winter, but only 45 minutes of babysitting in the summer, couples have an incentive to spend them instead of hoarding them, thus keeping them circulating, and so the co-op economy survives. And that's why persistant inflation can be a good thing.
Obviously, this is incredibly simplified, and in a real economy there are dozens or hundreds of other things to consider, but it's a surprisingly good example for how concise it is and how silly it seems.
I don't want to go into too much detail about the various crises covered in the book, because Krugman does an excellent job, but a lot of them come down to three things: A) speculators gonna speculate or B) failure by the government to properly regulate or C) moral hazard.
Moral hazard is probably the most immediately relevant to Americans like myself, since it's a huge reason for the banking crisis that's currently still going on and was never properly dealt with. The basic principle is that betting with other people's money means you don't really care as much when you lose, and most of modern finance is betting with other people's money without risk--the government will always bail out the banks, then if they win they keep all the money, and if they lose they suck the extra from the government, and thus win either way.
"I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. ... You are a den of vipers and thieves."And almost 200 years later, things aren't that different.
The book says that austerity is precisely the wrong way to deal with the kind of crises depicted within, because seizing up a market further when the flow of money has already been choked will just make things worse. And in the years since this was written, with what's happened to Europe and it's own policies of austerity, which have multiple times threatened the very existence of the Euro and brought Greece to the brink of financial apocalypse (youth unemployment is above 50%)...well, no wonder they call him a modern Cassandra. Here is the warning, and it was not listened to. He suggests that the government temporarily nationalize the banks and directly lend to the consumer while the financial system was sorted out. Unfortunately, due to supply-side idiocy and Protestant work ethic moralizing that economy needed to "suffer" to purge out the "rot," none of that happened.
And now housing prices in Southern California are approaching or exceeding the level they were before the crash, bank profits are at an all-time high, and unemployment remains above 7%. Crash 2.0, anyone?
Unfortunately, the book loses a star from me because I don't think that the solutions proposed really work. Krugman says that governments need to be sure to regulate the "shadow banking system" that provides a lot of the benefits of the actual banking system without the same restrictions. Most of the solutions are on the national level, but as Krugman admits, a lot of the problems were caused by global finance, and without any sort of international organization to regulate that, the end result of regulations in any individual country are the creations of more Monacos and Cypruses and Canary Islands.
Exactly what form the next response should take isn't clear, but financial globalization has definitely turned out to be even more dangerous than we realized.Indeed. But if we, and Europe, can't even handle our own national financial systems, how can we regulate the international system?
If only we had an answer. ...more
This book was very readable. Paul Krugman does a great job providing simple, succinct, easy-to-understand explanations of economic ideas and also to-the-point, in-a-nutshell historical information. I haven't yet found anything of his a slog to read, which I do appreciate.
His main thesis seems to be that economists don't know as much as they thought they did, and ...more
Krugman strikes a fine balance between simplifying global investment banking and unloading the economist jargon. In order to explain the basic characteristics of a recession (and several other market fluctuations) he uses t ...more
Most of the book is just background of various financial crises of the past 100 years. Of course in hindsight, Krugman in all his wisdom can see how if the different parties in the crises had just done what he thinks they should have, everything would have turned out fine. I'm not an economist, so I can't really argue intelligently about his conclusions. M ...more
The book was about the return to depression Economics. What are depression economics, you ask? I don't know. He never actually explains what he means by that!
He ends the book by saying we have to go back to 'good old Keynesian macro-economics'. But he never explains what that means either!!!!! The book is SUPPOSED to be for non-economists. That's the whole reason he uses the 'Capital City Baby Sitting Co-op' in a 'w ...more
I was struck by the following passage, in which Krugman wrote about the decline of mainstream socialist thought. Though "socialism" remains the right's favorite bugbear, Krugman captures the reality in American life pretty succinctly, for better or for worse.
"But who can now use the words of socialism with a straight face? As ...more
I was disappointed because this book is more of a history of the various recessions and depressions that have affected the world in the past 60 odd years. The author has explained their causes and how successful the measures to combat them were. But the book stops right there. ...more
Too many broad-brush reasons were given as if they were undisputed facts. Notwithstanding quite a few ridiculous errors, the efforts at drawing common elements in all crises were also woeful.
As a result, the conclusions drawn were always likely to be faulty and they were. But much wor ...more
Krugman, the mouthpiece for liberal inflationary economics, is often touted for his "Nobel Prize" which is actually specific to international trade. What stands out when you read his books is that his "solutions" always include exampl ...more
The author takes readers through a hypothesis based analysis to reach a conclusion about return of depression economics, he analyze various economic crises around the world over the last half century, each crises with specific reasons and various outcomes - leading to the world's economic situation post 2008 financial crises, then delivering future outlook, its challenges as well as suggested methods to overcome predicted cris ...more