Krugman examines the economic crisis in the NY Review of Books

[nebris]

by Gaius Publius on 9/16/2010 01:46:00 PM



If you are interested in a longer examination of the current crisis from Paul Krugman than quick blog posts or OpEd articles, this article, in the New York Review of Books, is for you.

It's called "The Slump Goes On: Why?" by Paul Krugman and Robin Wells, and is being published in two parts. Click the link for Part 1.

Like many essays in NYRB, this one is structured around a set of book reviews, but is actually as much about the reviewers' opinions as those of the authors. The set of books reviewed is interesting:

Fault Lines: How Hidden Fractures Still Threaten the World Economy
by Raghuram G. Rajan

Crisis Economics: A Crash Course in the Future of Finance
by Nouriel Roubini and Stephen Mihm

The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession
by Richard C. Koo

Rajan is a fresh-water economist from the University of Chicago whom I've got on Movement-Activist watch. He's making less and less sense, and sometimes no sense at all, in defense of his AEI-inspired positions. (In my opinion, but not Krugman's, he's getting by on a once-honest academic career; but he looks like a made man now.)

Roubini you probably know of; he's the infamous "Dr. Doom" who predicted the current mess and got much press for it. And Koo is a respected economist from the Nomura Research Institute.

As you can imagine, Rajan comes off rather badly, primarily for pushing the meme "It's all Barney Frank's fault" against much contrary evidence.

The piece is very well written, but also long. So I'll leave you with an overview and a taste. Krugman and Wells start by observing that while there are books about the Why of the crisis, and books about What Not To Do next time, there are no books about fixing the current mess, especially unemployment.

In Part 1, we learn about the four commonly declared causes, and what each of the authors, plus Krugman and Wells, thinks of them. Call it the great North Atlantic real estate bubble: in the first decade of the third millennium, prices of both housing and commercial real estate soared in parts of Europe and North America. From 1997 to 2007, housing prices rose 175 percent in the United States, 180 percent in Spain, 210 percent in Britain, and 240 percent in Ireland.

Why did real estate prices rise so much, in so many places? Broadly speaking, there are four popular explanations (which aren’t mutually exclusive): the low interest rate policy of the Federal Reserve after the 2001 recession; the “global savings glut”; financial innovations that disguised risk; and government programs that created moral hazard.
The bulk of Part 1 involves that four-part assessment. I found it both fascinating and engaging - a fine read with much worthy detail. Here's the Rajan take-down: While it’s a story that ties everything up in one neat package, however, it’s strongly at odds with the evidence. And it’s disappointing to see Rajan, a widely respected economist who was among the first to warn about a runaway Wall Street, buy into what is mainly a politically motivated myth. Rajan’s book relies heavily on studies from the American Enterprise Institute, a right-wing think tank; he doesn’t mention any of the many studies and commentaries debunking the government-did-it thesis.5 Roubini and Mihm, by contrast, get it right[.]
Krugman's been questioning Rajan for a while without impugning his intellectual honesty. (I believe this to be Krugman's blind spot, by the way. Too much collegial "well, we just disagree"; not enough reading of his own book on what he calls "a revolutionary force" and how it behaves.)

Krugman and Wells' discussion of the Minsky Moment and its role in the explanation is especially enlightening.

Enjoy Part 1; it won't take long to get through it. I'm one of those who envy Krugman and Wells their clarity. (Robin Wells is Krugman's wife, co-author, and editor. Lucky man.)

And stay tuned for Part 2 in a few weeks.

GP