The Return of Depression Economics and the Crisis of 2008 (Hardcover)

by Paul Krugman (Author)
Key Phrases: shadow banking system, senior shares, housing bubble, United States, Hong Kong, Latin America (more...)

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Book Description
Winner of the Nobel Prize in Economics

Product Description

In 1999, in The Return of Depression Economics, Paul Krugman surveyed the economic crises that had swept across Asia and Latin America, and pointed out 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, Krugman 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 Krugman'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 crisis.

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Product Details

• Hardcover: 224 pages
• Publisher: W. W. Norton (December 1, 2008)
• Language: English
• ISBN-10: 0393071014
• ISBN-13: 978-0393071016
• Product Dimensions: 9.4 x 6.3 x 0.9 inches
• Shipping Weight: 13.4 ounces (View shipping rates and policies)
• Average Customer Review: 4.1 out of 5 stars See all reviews (85 customer reviews)
• Amazon.com Sales Rank: #1,050 in Books (See Bestsellers in Books)

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Customer Reviews

Most Helpful Customer Reviews

173 of 205 people found the following review helpful:

4.0 out of 5 stars Demand Side Economics, November 27, 2008

By	Izaak VanGaalen (San Francisco, CA USA) - See all my reviews (TOP 500 REVIEWER)    (REAL NAME)

Depression economics is when conventional economic wisdom no longer applies. In a "normal" recession the Federal Reserve would lower interest rates in order to stimulate consumption and investment. According to Paul Krugman, that remedy is no longer getting any traction. He claims it's time to cast conventional economic wisdom to the wind. The economy is in such a deep hole that he's calling for another $600 billion in federal outlays. This is in addition to the $700 billion already asked for by Treasury Secretary Paulson, and looks very similar to Obama's spending plans for next year.

This is a re-issue of a book written by Krugman in 1999 after multiple economic crises in the decade of the 1990s. Japan had just lost a decade's worth of growth for responding too timidly to the bursting of their stock and real estate bubbles. Krugman also analyzes the various currency crises of that decade: from Britain and Sweden in the early 90s, to Mexico and Argentina in the mid-90s, and finally to Brazil and East Asia in the late 90s. These crises occurred as globalization was doing its work in the currency markets.

In his analysis of Japan's lost decade, he argues that everything must be done to increase aggregate demand. The collapse of demand caused by loss of confidence and fear had severely depressed spending and investment. At that point only government spending can lessen the severity of the recession and perhaps even turn the economy around. In Krugman's view, the lackluster response was the reason it took Japan so long to recover. He believes that one should only worry about deficits and debt when the economy is on the rebound. (This is completely contrary to what Robert Samuelson advises in The Great Inflation and Its Aftermath: The Past and Future of American Affluence.)

Krugman claims that the financial crises of 2008 is "functionally similar" to the Great Depression. He does not believe, however, that it will be as severe. We now have the financial tools and institutions - and the hindsight - to make for a softer landing. Nevertheless, this crisis has no end in sight yet. The one big thing that everyone seems to know now is that one does not increase taxes and implement budget cuts during a crisis, as Herbert Hoover did. And which FDR did several years into the Depression.

Another lesson that Krugman derives from the 90's is the need for greater regulation. As one country after another experienced currency problems from investor flight, there was one country that did better than others to weather the storm: that country was Malaysia. It's leader Mahathir Muhammed was of the same mind as Krugman. Managing the capital flows in and out of the country will soften the blows, should foreign investors decide to pull out. The conventional wisdom of the time was that price stability and currency convertibilty were the only things needed, and that the market would take care of the rest. However, in this case, a little more regulation saved them from a crisis.

Depression economics goes against the grain of conventional economic wisdom, and given the current crisis it is coming back into fashion, even among those who preached deregulation and fiscal restraint a decade ago. This theory should be applied sparringly, only in extreme cases - the present crisis probably qualifies. It should not be applied to every minor recession that comes along. The danger of overuse of depression economics is that it can cause a toxic brew of inflation and stagnation - not to mention corruption.

56 of 64 people found the following review helpful:

3.0 out of 5 stars Brief and concise, but not very deep, January 5, 2009

By	JS06830 (Greenwich, CT USA) - See all my reviews

This is a slim book (<200 pages with big font and wide line spacing) that covers a lot of material. While I like Paul Krugman's clear, informal writing style and use of analogies to past crises, I didn't find these episodes to be explored as deeply as I would have liked. This book seems more suited to people who are new to macroeconomics. For example, the babysitting coop analogy is a classic, and still one of the clearest, simplest ways to explain the interaction between monetary policy, aggregate demand, and consumer behavior. More data and a few charts would have helped to illustrate the economic and market conditions around the asian and latin american crises, and helped to put the magnitude of these (and the current crisis) in perspective. I liked his discussion of when the severity of some crises seem disproportionate to what fundamental conditions would initially suggest, which sounds a lot like soros' reflexivity (e.g. people perceive a bank to be bad (whether accurate or not), pull their money, cause a run, bank fails, => people create the conditions in which their fears are realized).

Overall, this is a quick easy read, helpful as a concise, clearly written primer on what been going on recently.

31 of 37 people found the following review helpful:

4.0 out of 5 stars Lucid, powerful, yet ultimately not satisfying, February 8, 2009

By	Richard Gibson "Rick Gibson" (Woodland Hills, CA) - See all my reviews

I did not come to this book with high expectations. I am conservative, and Paul Krugman, of course, is a highly visible liberal. I expected some sort of left-wing soft-headedness.

I was surprised by the quality of what I read. The content of the book was quite different than I had anticipated, and Krugman's path to his expected ringing endorsement of Keynes was not at all what I would have expected.

Most of the book has nothing to do with the current crisis. Instead, he goes through a series of vignettes about the international crises of recent decades, from the various Latin American debt crisis to those in East Asia and Japan to the Russian one. In each case, he builds a growing argument that, with the increased interconnectedness of the international financial system, national economies have become peculiarly vulnerable to panics by investors which destroy their finance systems.

He then ties this into an explanation of the current crisis. He argues that the U.S. economy has become like that of the other countries who went through financial crises. In our case, however, the problem was not that the world economy is more interconnected. Instead, in our case the problem is that the growth of the shadow banking industry built up a huge bubble, due to the non-banks not being regulated. He draws a convicing paralled with the Panic of 1907 by noting how that panic was caused by the non-banks of that time, the trust companies, which had far less oversight.

He concludes by arguing that what we need is: (1) a huge dose of fiscal spending to stimulate the economy; and (2) regulation of the non-banks.

All in all, it is a powerful performance. Krugman writes extremely well, and he is very persuasive. However, certain problems kept gnawing at me as I read the book.

First, Krugman never really explains the earlier crises in Latin America and East Asia, nor does he ever really connect them to our situation. He keeps using the technique of saying that, well to understand why the Mexican economy blew up, you need to understand X, which we will get to in the next chapter on Thailand. He keeps rolling over his explanations, and I ended up feeling flummoxed. I actually found each of the stories quite interesting, but I never felt like he really explained any of them properly. He also never really says why our current crisis has anything much to do with the Mexican or Thai crises.

Second, Krugman has a very persistent bias against explaining economic downturns by looking at the failure of prices to fall. As Krugman acknowledges in the last chapter, classical economic theory says that recessions should fix themselves. How? As the economy slows, prices and wages should fall. As prices fall, more people should buy. As wages fall, more people should be hired. The problem should fix itself.

Krugman mentions this in his last chapter. He also says that, in reality, prices do not fall much in recessions, and why this is so is a mystery much debated among economists. I find that pretty lame, on two of his central subjects: the Great Depression and the collapse of the Japanese bubble economy. I recently read Smiley's book on the Great Depression. He argues very persuasively that a recession turned into a prolonged recession, precisely because -- unlike earlier downturns in which prices and wages did fall -- they did not fall in the Great Depression, because both Hoover and FDR labored mightily to keep them up. Smiley also agrees with Krugman that monetary policy was disasterously restrictive in the Great Depression, but he is quite clear that a great deal of the problem was policy interference in the market which kept prices and wages artificially high.

Likewise I have some familiarity with the Japan bubble economy and its aftermath, having worked for an international law firm at that time. I watched both the Japanese crash and the American S & L crisis, which happened pretty close to each other in time. The key difference that I saw was, while real estate prices crashed in both countries, in America we admitted this, whereas the Japanese denied it. We let prices crash, let the S & Ls go bankrupt and used the RTC to clean up the mess. The Japanese, on the other hand, propped up their banks by refusing to admit that the real estate collateral supporting their loans was increasingly worthless. As a result, real estate prices did not fall as much as they should have, banks did not go bust as they should have, and a temporary downturn turned into a longterm national decline.

I also think that Krugman's time frame, in arguing that prices do not fall in a downturn, is relatively short. I believe it is accurate to say that, in the economic downturns starting with the Great Depression, prices have tended to be quite resistant to falling, even in recessions. This was NOT true in economic downturns in the 19th and early 20th century, all of which fixed themselves in the classic manner, of prices and wages falling and the market thus recovering.

All of this tells me that, in downturns, one of the key things is to let prices fall, so the market can find a bottom. Krugman seems oblivious to this, or hostile to it. It is a major hole in his analysis.

I have mixed feelings about his policy ideas. I am not enthusiastic about another big stimulus package, as he is. It seems to me that if deficit spending was going to fix the economy then we should not have had a problem to begin with, because we have had plenty of deficits. But, I am not sure that fiscal stimulus, in a controlled manner, is necessarily a bad thing, short-term. I also totally agree with him that the non-banks should be regulated. If we have to bail them out when they fail -- and we just did -- we should regulate them in good times.