Sunday, March 15, 2009

Krugman on the Economic Crisis

Paul Krugman 2008

Paul Krugman, winner of the 2008 Nobel Prize in Economics, did an interview with the Madrid paper El País: "Obama es demasiado prudente" 15.03.09. The quote in the title is, "Obama is too cautious".

I'm always a little leery of translating something from Spanish to English when I assume the original was in English and I don't have the original English text. At his blog, he gives a short description of the particular economic problem facing Spain right now: Spanish doldrums 03/14/09. In the interview, he compares the situation in Spain to that in California and Florida, because all three are particularly hard hit by the collapse of the housing bubble.

Krugman stresses that fixing the world's private financial system, which has flat-out failed in its economic functions and which has failed in every sense of the word in the case of several large financial institutions, is a critical condition for restoring the world economy to healthy growth.

His criticism of Obama will be familiar to those who have followed Krugman in recent months. Although Obama has taken measures that seem to be more audacious that what his own preferred cautious approach would have suggested, Krugman says Obama is still being too cautious given the magnitude of the crisis. Both addressing the problems of the financial system more effectively and additional federal stimulus are required. Krugman thinks the temporary nationalization of Citigroup and possibly Bank of America will be necessary.

"Máximo exponente de los neokeynesianos" is how El País describes him, "the leading exponent of the neo-Keynesians". Krugman acceeds to the interviewers description of the current crisis as a depression, noting that in contrast to the Japanese depression of the 1990s, this one affects the entire world. He observes that there will be a natural end to the crisis, but it could take a long time.

I feel safe in interpreting what he means there is that even with mistaken governmental policies and insufficient stimulus, eventually every recession bottoms out. At some point, production goes so low and households and business postpone purchases so long that consumers have to start buying again and demand begins to exceed supply which increases production which starts a virtuous cycle of growth. But that "natural" point may only be reached after a tremendous amount of human suffering and economic damage. And the "natural" cycle doesn't take account of factors like, for example, the need to preserve a domestic auto industry for both economic and national security considerations.

As he does in his TV appearances, his blog and his New York Times column, Krugman stresses the need for government stimulus. He also mentions in this interview that China has a notion that they can move out of the crisis by expanding their exports, and Krugman notes that this could be the basis of another crisis, without going into much description of the point.

He does make the comment that if you owe someone $100, you have a problem; if you owe someone a billion dollars, they have a problem. He uses that in connection with the debtor relationship that the US has to China. Our dependence on China for financing our trade deficit creates a dependency on China. But China's large holdings in American debt also create a major dependency by China on the United States, as well. China couldn't really afford to see the US default. (So China isn't likely to go back to some 1960s policy of trying to destroy the paper tiger of American imperialism any time soon. The credit they extend to the US is more than just paper.)

A meeting of the G-20 countries is coming up this week. Krugman expresses skepticism that the EU and the US will be able to coordinate their countercyclical policies to the extent he thinks is necessary.

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