The Return of Depression Economics

That's the title of Paul Krugman's book that I just read (thanks bro!).  Obviously, I'm a huge Krugman fan, in good measure because he writes about economics in a way that's very accessible to the Great Unwashed like me.  His blog is an important daily read.

 

And the book is great.  Some important points from it (and from his blog's regular reading- I can't separate them):

• Many of us want to see bank runs, currency messes, and sinking economies as a morality lesson every time it happens.  And sometimes that's justified- it's pretty clear that Greece's mess was largely created by politicians' refusal there to make any hard choices.  But in other places the lesson just doesn't fit.  The Asian financial crisis of the 1990s started because of a currency run in Thailand, and then jumped from country to country there for no good reason other than they were all in the same geographic region.  Indonesia and South Korea did nothing wrong in their planning, but they were hammered by a contagious run on Asian currency and experienced bad recessions as a result. 
• All data points to the fact that the current worldwide recession was set off by the US real estate bubble, and has resulted in the freezing of credit markets as panic spread.  The problem now is that there's not enough demand for goods, so companies aren't hiring.  Government needs to step in to start spending during such times.  While excessive government borrowing in normal times hurts the economy by driving up interest rates, that's sort of a ridiculous problem to think about now, with interest rates extraordinarily low.  It's just not crowding out private borrowing.
• Other countries have it really bad when their currencies come under pressure.  Speculation in the currencies markets cause perceptions of problems to become self-fulfilling.  Figuring out when to devalue, when to peg currencies to the dollar or euro, or when to allow currency to float without intervention is really hard to figure out, and sometimes there is just no solution to the problem.  We're lucky in the US not to have this problem, anyway.
• It seems like the same movie plays over and over again when it comes to the banking sector: 
• Banks fail because they're leveraged too riskily
• Government has to bail them out to stop the economy from going into Depression
• Regulations are passed to force banks to leverage less so it won't happen again
• New institutions arise that perform similar functions, but aren't technically the same, so they're not under the same rules as the old banks
• The new institutions start leveraging more, resulting in fabulous profits when times are good.
• Wall Street assures us that it's a New Age, we've finally figured this out, and big profits are here to stay
• Something goes wrong, because ultimately if you leverage a lot and something happens, your bank fails.  And something always happens at some point.
• The new, bank-like institutions fail, and the cycle starts again

Anyway, I highly recommend the book.