Nobel Winner Krugman Offers Views on Financial Crisis During UC Visit

Friday’s visit to the University of Cincinnati by 2008 Nobel Prize in Economics winner Paul Krugman turned into an exercise in trying to put the current economic crisis in perspective.

A luncheon crowd of 400 – including 100 academic economists from 14 different states in attendance for the Midwest Economics Symposium, presented by UC’s Department of Economics – heard Krugman deliver keynote remarks on the economy that mixed plentiful information and occasional dark humor.

“So, I’m going to give you all a feel-good talk today,” joked Krugman, as a slide appeared on the screen behind him, displaying the title “Depression Economics, 2009.”

Krugman, who among his many roles is a columnist for the New York Times and a professor at Princeton University, has just published a book, “The Return of Depression Economics and the Crisis of 2008.”

While making the point that he doesn’t believe the current crisis will reach the depths of the Great Depression, Krugman set up his talk by admitting, “What has really spooked a lot of (economists) is that the kinds of problems we're having now are the kind of problems we thought we had solved.”

Economists believed they had created the Great Moderation, a new, more sophisticated phase in the economic cycle where massively negative events like the current crisis could not happen.

Now, Krugman said, the sequence of events appears to be playing out like a Greek tragedy – a long period of stability and prosperity creating such complacency that disregard of the rules becomes prevalent and a crisis results.

“One way to say this is that the whole world seemed to have forgotten about the Great Depression,” Krugman said. “You’ve heard of self-fulfilling prophecies – this was a self-denying prophecy.”

The causes of the crisis were many. As for policy responses, Krugman says the U.S. government is doing a decent job in two of three available areas: fiscal policy and monetary policy. The third area is the banking system, which he believes will need a major fix, something more dramatic than what the Obama administration is currently pursuing.

Don’t expect a rapid turnaround, in almost any case, according to Krugman.

“The last two months, things have been more mixed,” he said, adding that he thinks the sheer panic phase that began last September when Lehman Brothers failed and AIG admitted severe problems has abated. “Probably the nosedive we were in has turned into more of a downward glide.”

But where Krugman is still searching is on the question: How does the crisis end?

The deepest and most persistent recessions historically, he says, have been those that have come from financial crises or those that have been synchronized global crises. The current crisis incorporates both aspects.

“We have a problem, and I’m not sure how this will end,” Krugman said. “I don’t think I have an answer to that yet.”