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Return Of Depression Economics And The Crisis Of 2008 Hardcover – 2009
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The Return of Depression Economics and the Crisis of 2008 by Krugman, Paul [W...
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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.
Overall, this is a quick easy read, helpful as a concise, clearly written primer on what been going on recently.
I plan to re-read the book in a few months!
If you don't have any money, it's not that there is a crisis (it's annoying that you exaggerate) but just that you personally keep sinning and rejecting the Lamb of God. There will be less and less money in your account until you reject whatever non-Christian and therefore false beliefs you may have about the world and its origins. There is no economic crisis, only a spiritual one caused by embracing evolution, Obama and the PBS show "Sid the Science Kid" (which teaches children to question everything, even Jesus), so stop genuflecting at the altar of Azazel and worship the Truth.
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.