June 14, 2009

Paul Krugman on the State of the Recession

Will Hutton of The Guardian has an interesting interview with Dr. Krugman about the current state of the global economy and his fear that the world could face stagnation. One thing that comes back to me again and again when reading Krugman's analysis, is how we are truly in unchartered waters and there are still some enormously challenging times ahead.

The crisis can be boiled down to too much debt, the liquidity trap and no foreseeable way out of the hole we are in.

PK: The thing about Japan, as with all of these cases, is how much people claim to know what happened, without having any evidence. What we do know is that recessions normally end everywhere because the monetary authority cuts interest rates a lot, and that gets things moving. And what we know in Japan was that eventually they cut their interest rates to zero and that wasn't enough. And, so far, although we made the cuts faster than they did and cut them all the way to zero, it isn't enough. We've hit that lower bound the same as they did. Now, everything after that is more or less speculation.

...In their case, the problems had a lot to do with demography. That made them a natural capital exporter, from older savers, and also made it harder for them to have enough demand. They also had one hell of a bubble in the 1980s and the wreckage left behind by that bubble - in their case a highly leveraged corporate sector - was and is a drag on the economy.

The size of the shock to our systems is going to be much bigger than what happened to Japan in the 1990s. They never had a freefall in their economy - a period when GDP declined by 3%, 4%. It is by no means clear that the underlying differences in the structure of the situation are significant. What we do know is that the zero bound is real. We know that there are situations in which ordinary monetary policy loses all traction. And we know that we're in one now.

WH: So your point is that the crisis in Japan was about excess debt, excess leverage and lack of demand - reinforced by the fallout from the asset bubble collapsing. They didn't have credit contraction on anything like our scale, but even so, zero interest rates were just unable to turn the economy around.

PK: That's right, that's right.

...I hope I'm wrong but the question you always have to ask is: where do we think that this recovery's going to come from? It's not an easy story to tell.

Having read Dr. Krugman's The Return of Depression Economics and the Crisis of 2008, I found myself wondering how he feels having spent decades researching and studying these financial anomolies only to find himself now being asked to help the world find what will be the magic bullet that will help pull us out of these economic doldrums. Paul Krugman on the State of the Recession

Posted by Mary at June 14, 2009 10:52 AM | Economy | Technorati links |

America has been through worse times than this, but everybody acts it's the end of the world! If the American economy can rebound from %20 unemployment in 1929, we ought to be able to recover from %9 unemployment.


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Posted by: Nikki Thomas at June 14, 2009 02:20 PM

It's gonna be a long road to prosperity and there's no going back to the old ways. Still two more years of real estate losses, a lot of it commercial, yet to come. It's gonna be bumpy but in the long run reforming the healthcare and energy sectors will make us a much healthier country financially.

Posted by: markg8 at June 14, 2009 09:04 PM

There's a series of three recent lectures at London
school of Economics by Krugman worth a listen. Podcast available, just google LSE Public Lectures and Events.

Posted by: YY at June 15, 2009 05:00 AM

The Iranian leadership has ordered in a couple of foreign ambassadors to protest the so-called "hostile" reactions of the respective governments concerning the outcome of the presidential elections.

How official Iranian media reported, the ambassadors of the UK, the Netherlands, Italy, and Czech were ordered into (Iranian state dept.) besides the German ambassador. Czech is currently head of the European council. Western govts. were demanded to respect the outcome of the vote and they were demanded (non-intrusion) into internal affairs of Iran

Posted by: ccokz at June 17, 2009 03:07 AM

Prostitutes in Berlusconis Villa?

Posted by: ccoaler at June 20, 2009 02:44 AM

I've been wanting to read Krugman's book, but haven't had the time. Thanks for the link to the interview, which will be easier to tackle.

I hope he's wrong too, but I think he's just being realistic. Lots of other economists talk as though this situation weren't unprecedented, and then make glib, optimistic predictions. They're more cheerful to listen to, or at least until I consider how much of what they say is just made up to reassure the public.

Posted by: Flo at June 21, 2009 08:32 PM

I have read several of Dr. Krugman articles. Anyone who wants a detailed overview of the economy should read his work.
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Posted by: Insurance at June 26, 2009 03:59 AM

Hummina Hummina huh! Keep up the good work!!,

Posted by: Standel at June 26, 2009 08:22 PM