Customer Reviews

The Return of Depression Economics and the Crisis of 2008

5 star:		(64)
4 star:		(39)
3 star:		(12)
2 star:		(3)
1 star:		(13)

 

 

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.

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.

Although the title makes the book sound dismal, Krugman's book is actually an enjoyable read. The author goes out of his way to avoid a dry, stuffy tone. Instead, he tells simple stories, like the one about the baby sitting co-op in Washington, which he uses repeatedly throughout the book to explain progressively more complex ideas.

For me, the biggest eye-opener offered by this book is Krugman's explanation of the unregulated shadow banking system that emerged in recent years and has been caving in prior to and during this financial crisis. What are auction-rate securities, and why did the market for them collapse? And why didn't this get more coverage in the media? Krugman explains this, in part by drawing upon an alarming speech made by Timothy Geithner, Obama's nominated Treasury secretary, in June 2008 in which Geithner described a "parallel financial system vulnerable to a classic type of run, but without the protections such as deposit insurance that the banking system has in place to reduce such risks."

This is a great book: readable, informative and timely. I recommend it to anyone who's eager to dig into a deeper examination of the underlying causes of the financial crisis.

The current financial meltdown is something that effects us all, but most of us do not have time to study the issue, its roots, or its potential remedies. Most of us are busy doing our jobs and working to get out of this mess. For us, Krugman's book does a good job of putting a body of information and explanation in one place and that alone is valuable.

Krugman's style and use of analogies is also helpful for people to understand what is going on -- it gets tough at times -- but overall you do not need a post graduate degree in economic to understand what he is saying and arguing. That is even more important as there will be a wave of books coming that treat the collapse in terms of hyperbole and demagoguery looking for easy scapegoats and even easier remedies. You see some of that already happening in other reviews of this book.

I would read this book as a start and to level set what is going on, before the barrage of books come out in the first quarter proclaiming to know what happened and what did not happen. I make this recommendation for several reasons.

The book is largely focused on what has happened and explaining the relationship between capital, consumer spending, investment, interest rates and foreign exchange rates. Those are complex things that are explained pretty clearly.

The book is short and focused, so it is readily accessible and written at a broad enough level to look at the problem without being so detailed that the reader gets lost.

The book knows its limits and stays focused on the events and actions rather than the individual actors. This is what separates it from popular books that look to vilify an individual.

Krugman has a bias in his view, but he does a fairly good job of keeping that bias in check in terms of explaining the economics, capital flows, etc. He also admits when he has called it wrong. That bias does come out most at the end, but by then you are ready for it.

Krugman's prescription for the economy - the need to stimulate demand - is playing itself out every day in the papers as we see demand just drying up as monetary policy becomes so accommodative and low interest rates are not getting it done. This time around is different and we need to recognize that difference and act accordingly.

I am not saying that he has all the answers, but this book is a good place to start in terms of understanding what has happened, why you did not feel it back in the 1990's and why this will be a tough few years to come. Not impossible and not `penance for our sins' just tough work that will hopefully set up another thirty years of economic growth.

I had mixed feelings about this book -- I liked it, but I didn't think it worth 5 stars and I toyed with giving it just 3 stars. A brief rundown of the pros and cons, starting with the cons.

In the intro, Krugman says this is a book of interpretation. (I guess as opposed to fact.) This apparently leads Krugman to think he's off-the-hook in having to do any research. He does present facts in the book, or at least things that look like facts, but they appear to have come from memory. Which I guess is why there are no footnotes or bibliography -- he probably didn't recall how he came across a particular fact. The lack of any references also does nothing to help the reader interested in doing further research into the topic. And the lack of an index furthers the impression that this edition was a rush job.

On the pro side: Krugman is a smart cookie who understands a lot more about the current financial/economic situation than those othodox macroeconomists regularly quoted in the press, who don't seem to have a clue. (Two of whom actually wrote widely used textbooks on the subject, which says something about the state of economic thought in this country.) I found particularly interesting Krugman's interpretation of the Asian (and South American) financial panics/crashes of the 1990s and how they relate to the current situation.

Krugman's conclusion is that we are not in a depression -- at the time he wrote the book -- and hopes we won't get into one, but that the economic forces at work are those of "depression economics", as opposed to economic forces active in typical business cycle recessions. The key difference is the collapse of the financial structure.

So, the upshot is, the reader will get some good insights here that would be difficult to get elsewhere.

Maybe I didn't read the critical reviews closely enough before buying The Return of Depression Economics and the Crisis of 2008, but this book wasn't quite what I expected. Paul Krugman is a well-known liberal who also wrote a book, that I haven't read, called The Conscience of a Liberal. I expected The Return of Depression Economics and the Crisis of 2008 to spend a lot of time beating up conservatives and pushing Krugman's own opinions. It did that to some extent, but turned out to be mostly a good history book on various recent economic crises. Krugman includes a discussion of the Latin American crisis of the 1980s, Japan's crisis that began in the early `90s and really continues to today, and Asia's crash of the late `90s. He does a nice job relating those crises to the crisis that we are in today, and includes a discussion of hedge funds, Greenspan's impact, and the shadow banking system.

There were a few interesting comments in the book that surprised me. Krugman uses a babysitting co-op example from the 1970s to help explain some economic concepts. It is a useful and helpful analogy. But, to my amazement, he says, "And so the co-op's story ought to inoculate us against fatalism and pessimism. It seems to imply that recessions are always, and indeed easily, curable." (emphasis mine) He uses the word "always" strongly in that context based on an extremely simple analogy. It is quite a stretch to draw such a strong conclusion from a simple analogy. Another quote that I found surprising was with respect to Japan's crisis, "...why not just print enough money to keep spending up so that the economy makes full use of the capacity it has?" I can think of many reasons not to do this, such as the debt load created, inability of congress or the fed to reign in spending or money, etc.. He certainly knows the same arguments and probably disagrees with them; unfortunately, he doesn't bother to address them. He just leaves that statement hanging there. I found that disappointing, as I would have liked to have read his arguments.

While I didn't agree with all of Krugman's conclusions, I liked the book. Most of it told of historical events, and while he threw in his analysis and conclusions, and took a few potshots at conservatives, I believe that anyone from any political or economic persuasion should enjoy reading it. It is thoughtful, well written, and easy to read. It is not written as a textbook, but in a style that anyone can read and enjoy.

Krugman makes the case in his new book, The Return of Depression Economics and the Crisis of 2008, that we have a scarcity of understanding, not resources. He claims that "the only important obstacles to world prosperity are the obsolete doctrines that clutter the minds of men." If you have any interest in uncluttering your mind and achieving some degree of understanding, consider reading this fine book. Krugman writes in a clear style, and uses plenty of examples to illustrate his key points. This book updates the one he wrote in 1999 on the same general topic. The intervening years have made his message even more compelling: we need to abandon the conventional thinking that's getting us nowhere. This engaging and thought-provoking book led me to reexamine my thinking, and to consider the degree to which my mind is cluttered with obsolete thoughts. I highly recommend this book to any reader interested in exploring our economic problems.

Rating: Four-star (Highly Recommended)

Krugman made his name as an economist who could do the heavy mathematical lifting that passes for intellectual machismo in the discipline but who also understands the basic intuitive insights of economic modeling. In this book, he explains in layperson's terms how truly depressed (zero-interest rate, high unemployment, low capacity utilization) economies operate according to a bizarre up-is-down logic that was first identified by John Maynard Keynes. The way such an economy works is deeply counter-intuitive, and having it explained clearly is a real public service, even if Krugman's Cassandra-like warnings have been ignored by policy makers and most pundits. Read this book to get a grasp on our contemporary (mid-2010) macro-economic predicament.

A history of economic disasters from the past 30 years reveals more about the U.S.'s current troubles, and scares the crap out of me in the process. Pretty easy read, and afterwords, I felt much more informed about the 2008 crash, and possible routes out of our current mess. Would've rated it higher but Krugman didn't see the need to include references or a bibliography. We're just supposed to believe him?

While the title of the book might lead one to believe that the core of the text is about the latest financial crisis, Krugman's writing comes from his thoughts about other financial crises in the late 1990s. He became persuaded that the Great Moderation of the late 20th century was a myth, that we were not finished with old-style depressions, and any country (including the United States) could slip into a liquidity trap.

Unfortunately, the world confirmed his judgment far sooner and more brutally than most thought possible. Lest you dismiss his work because you think of him as a domestic-policy critic from his writing for the New York Times, Paul Krugman won the 2008 Nobel Prize in economics for his work in international trade. Pay attention: agree or not, this is a coherent argument about the world we have inherited from 2008.