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Business. Nonfiction. HTML:Nobel PrizeĀ® winning economist Paul Krugman shows how today's crisis parallels the events that caused the Great Depression - and explains what it will take to avoid catastrophe. In 1999, Paul surveyed the economic crisis that had swept across Asia and Latin America, and warned that those crises 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, Paul shows how the failure of regulation to keep pace with an increasingly out-of-control financial system set the United States, and the world as a whole, 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 Paul'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 crisi… (more)
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Instead, it is a chronological recap of most (but not all) the financial crises of the last twenty years with a ten-page plea for a fiscal stimulus bolted-on (ch. 10). Chapter 2 presents Mexico and Argentina, ch. 3 Japan, ch. 4 Thailand and Malaysia, ch. 6 LTCM, ch. 7-9 USA (internet and housing bubbles). Chapter 5 sums up the key theme of the book about failed regulation and perverse advice. A casual reader of the financial press (Economist, Financial Times, Wall Street Journal, etc.) will learn little.
Even as a survey, the book fails as Krugman does not offer citations, a bibliography or even a further reading section. Null, nada. I cannot understand why Krugman does not at least point interested readers to more detailed accounts apart from the fact that not sourcing your own text is unacademic and impolite, as it cuts off connections and restricts checking.
The hodgepot of crises does not help either. Krugman never develops a framework to separate the different elements of macroeconomic mismanagement, crony capitalism, (de)regulation policies and recovery policies. The book's implicit lessons are that good regulation is essential and all activities which act like banks need to be covered by regulation. Krugman's baby sitting cooperative only shows the necessity of good monetary policy. He never develops a model for the (sensible) fiscal stimulus he advocates in the bolted-on chapter and conclusion. A closer look about Japan's flawed public works investments might have offered helpful guidance to the current discussion.
Krugman should stick to articles and essays.
Having read them, I suspect I understand as much as I expect to, and that it is not really understanding what happened that is my problem, but really making sense of an economic system that is really only expanding or contracting and how that feeds into consumerism, to make sure it is expanding rather than contracting. Before I go on I should say that the Krugman book is vastly better for the understanding. The Soros book was mainly concerned with his personal theory of what he calls Reflexivity, at least that was the only thing that he really explained. He talked about a lot of other things including buying short and buying long, which I finally got the definition of in Paul Krugman's book.
The main idea of reflexivity is that it is really impossible to know what will happen when you buy and sell stocks, because the act of buying and selling stocks itself influences the market. At one point he goes so far as to compare it with the Physics principle of indeterminacy and say that it cannot be known.
Well, I think he overstates things to say that they can't be known. A lot of the unknowns that caused people to invest when they shouldn't have were deliberately hidden, and not the same as the idea that you can not know both the speed and the position of an atom. It also seems rather obvious. A lack of confidence that feeds on itself and causes the bank failure or currency failure or whatever that the lack of confidence is about is pretty well known. Krugman's book is a lot more specific in giving concrete examples of this, as for example when a credit failure by Mexico caused problems for Argentina (which had not been having probems at that point) simply because of over-generalization that what was true of one Latin American country might be true for another. One of Krugman's examples was how Soros manipulated the devaluation of the British pound. Soros did things like ostentatiously exchange British currency for other currency, and himself or others in his group started rumors and so on. It turns out this was probably a good thing for the British economy as a whole which allowed their exports to expand and so on.
Anyway, I wouldn't bother with the Soros book, if I were you. I continued reading after the first couple of chapter just because he is involved in the markets and I thought his experience might spill out. It did a bit.
Krugman, on the other hand writes in a much more accessible way. A lot of it is about the formation of bubbles, such as in dot coms, savings and loans, housing. He explains the idea of moral hazard - another thing Soros mentioned in passing - basically when the party taking risks is not the party that will pay if an investment doesn't pay off - either because funds are specifically guaranteed like bank accounts or because they are deemed too big to fail and end up being propped up by the government when they look like they are going to fail, or because, although not specifically guaranteed, the damage to ordinary citizens is such that government is not willing to allow it to happen and the person taking the risks counts on that.
He talks about the lessons learned in the depression, one part of which is the need to stimulate the economy and/or add to the money supply when a recession or constriction of the economy threatens. Another was the regulations put in place on financial institutions to prevent the kind of risks that led to the financial crisis before the depression. The first lesson is still taken to heart but various things happened to the second. There was overconfidence in how well the economy could be managed that caused people to agitate and allow a loosening of regulation. At the same time a lot of financial institutions were created that were not part of the regulated, public set - things like auction-rate securities and hedge fund management, which have become huge and are mostly unregulated.
Anyway, enough about that. I would recommend the Krugman book which does a good job of making sense of a lot of this, though still leaving me with a sense of the chaos and illogic of capitalism. Among other things I became aware of a number of world crisis, and also some efforts to over come them that I had not even known existed.
Mr. Krugman describes several recent economic downturns around the world -- their causes and the effect of government actions to return to economic growth. This was an interesting and informative look at
Mr. Krugman has two basic messages. First, there is an important role for economic stimulus programs in a serious recession. Second, banking needs to be regulated, whether provided by banks or other institutions.
I don't think I learned much about economics, but did learn about economic policy. I wish the author had included a bibliography and/or better cited his references.
The title is appropriate as his thesis is that the economy has changed to reflect the current
My only complaint is that there isn't more on the 2008 crisis, as I assumed there would be from the title. Other than that, a very interesting and informative book.
By "Depression
The subject matter was very similar to Joseph Stiglitz's Globalization and Its Discontents, which I think is essential reading, and I'm not sure Krugman does a decent enough job explaining the situations to the lay reader unless they have already read Stiglitz.
That said, I would have loved to have used this book in my International Economics/Finance course, which is really just international macroeconomics. Krugman outlines the trilemma well, but it's difficult to ascertain which of the options a country can take and not end up in disaster. It seems that all roads lead to disaster in this book--but dealing with the disaster after the fact is what matters to Krugman. The Mundell-Fleming optimal currency area criteria are outlined and skepticism about the euro very well explained.
Krugman's baby-sitting co-op reappears in this work, just as it was introduced in his Peddling Prosperity book:
A group of people (in this case about 150 young couples with congressional connections) agrees to baby-sit for one another, obviating the need for cash payments to adolescents. It's a mutually beneficial arrangement: A couple that already has children around may find that watching another couple's kids for an evening is not that much of an additional burden, certainly compared with the benefit of receiving the same service some other evening. But there must be a system for making sure each couple does its fair share.
The Capitol Hill co-op adopted one fairly natural solution. It issued scrip--pieces of paper equivalent to one hour of baby-sitting time. Baby sitters would receive the appropriate number of coupons directly from the baby sittees. This made the system self-enforcing: Over time, each couple would automatically do as much baby-sitting as it received in return. As long as the people were reliable--and these young professionals certainly were--what could go wrong?
Well, it turned out that there was a small technical problem. Think about the coupon holdings of a typical couple. During periods when it had few occasions to go out, a couple would probably try to build up a reserve--then run that reserve down when the occasions arose. There would be an averaging out of these demands. One couple would be going out when another was staying at home. But since many couples would be holding reserves of coupons at any given time, the co-op needed to have a fairly large amount of scrip in circulation.
Now what happened in the Sweeneys' co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple's decision to go out was another's chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.
In short, the co-op had fallen into a recession.
Since most of the co-op's members were lawyers, it was difficult to convince them the problem was monetary. They tried to legislate recovery--passing a rule requiring each couple to go out at least twice a month. But eventually the economists prevailed. More coupons were issued, couples became more willing to go out, opportunities to baby-sit multiplied, and everyone was happy. Eventually, of course, the co-op issued too much scrip, leading to different problems ...
The problem is that Krugman quickly shifts from thinking about solving this problem in terms of excess cash balances into thinking about a solution in terms of interest rates. When interest rates hit zero, and people still don't go out on the town, then you're in the Keynesian "liquidity trap" that Krugman loves to say the U.S. and Japan are in.
But I think Krugman outlines the Japan crisis better than he does on his blog, clearly showing that monetary policy isn't ineffective at the zero bound so long as the central bank creates inflationary expectations-- something that Japan's central bank hasn't done in 20 years (they raise rates when there is even a hint of inflation, making deflation often more of a reality).
Krugman's explanation of the U.S. financial crisis is from a 2008 point of view, but covers most of what we now know to be a problem. His point is that the U.S. learned nothing about the real estate bubbles it saw in other countries' run-up to financial doom.
I give this book 3.5 stars out of 5. It was written for a lay person, but I think his oversimplifications might be a little much to ask a layperson to comprehend. I could use it for a class and make sure I elucidated and graphed more clearly Krugman's arguments.
Worth noting that someone who previously held my current position wrote a critique of the 1997 edition of Krugman's book for the Von Mises Institute. When asked about my opinion of the Austrian perspective, I always refer people to Bryan Caplan's well-informed article "Why I Am Not an Austrian Economist," which clearly elucidates the weaknesses and inconsistencies (and incoherence) of Austrian business cycle theory.