Quotes from The Return of Depression Economics and the Crisis of 2008, by Paul Krugman


- ‘The first edition of this book was written in response to the Asian crisis of the 1990s. Where some saw the crisis as a specifically Asian phenomenon, I saw it as a troubling omen for all of us, a warning that the problems of depression economics have not disappeared in the modern world. Sad to say, I was right to be worried: as this new edition goes to press, much of the world, very much including the United States, is grappling with a financial and economic crisis that bears even more resemblance to the Great Depression than the Asian troubles of the 1990s.’ (4)
- ‘Let me admit at the outset that this book is, at bottom, an analytical tract. It is not so much what happened as why it happened; the important things to understand, I believe, are how this catastrophe can have happened, how the victims can recover, and how we can prevent it from happening again. This means that the ultimate objective is, as they say in business schools, to develop the theory of the case – to figure out how to think about this stuff.’ (6)
- ‘The [Asian] collapse began, rather oddly, in China. It is still mind-boggling to realize that Deng Xiaoping launched his nation on what turned out to be the road to capitalism in 1978, only three years after the Communist victory in Vietnam, only two years after the internal defeat of radical Maoists who wanted to resume the Cultural Revolution. Probably Deng did not fully realize how far that road would lead; certainly it took the rest of the world a long time to grasp that a billion people had quietly abandoned Marxism.’ (11)
- ‘Nobody really understands what happened to the Soviet regime. With the benefit of hindsight we now think of the whole structure as a sort of ramshackle affair, doomed to eventual failure. Yet this was a regime that had maintained its grip through civil war and famine, that had been able against terrible odds to defeat the Nazis, that was able to mobilize the scientific and industrial resources to contest America’s nuclear superiority. How it could have ended to suddenly, not with a bang but with a whimper, should be regarded as one of the great puzzles of political economy.’ (11)
- ‘A debilitating, unwinnable war in Afghanistan certainly helped the process along, as did the evident inability of Soviet industry to match Ronald Reagan’s arms buildup. Whatever the reasons, in 1989 the Soviet empire in Eastern Europe suddenly unraveled, and in 1991 so did the Soviet Union itself.’ (12)
- ‘Now it is a sick joke: after all the purges and gulags, Russia was as backward and corrupt as ever; after all the Great Leaps and Cultural Revolutions, China decided that making money is the highest good. There are still radical leftists out there, who stubbornly claim that true socialism has not yet been tried; and there are still moderate leftists, who claim with more justification that one can reject Marxist-Leninism without necessarily becoming a disciple of Milton Friedman. But the truth is that the heart has gone out of the opposition to capitalism.’ (14)
- ‘For the first time since 191, then, we live in a world in which property rights and free markets are viewed as fundamental principles, not grudging expedients; where the unpleasant aspects of a market system – inequality, unemployment, injustice – are accepted as facts of life.’ (14)
- ‘Whatever you do, don’t say that the answer is obvious – that recessions occur because of X, where X is the prejudice of your choice. The truth is that if you think about it – especially if you understand and generally believe in the idea that markets usually manage to match supply and demand – a recession is a very peculiar thing indeed.’ (16)
- ‘The problem was not with the [anecdotal] co-op’s ability to produce, but simply a lack of ‘effective demand’: too little spending on real goods (baby-sitting time) because people were trying to accumulate cash (baby-sitting coupons) instead. The lesson for the real world is that your vulnerability to the business cycle may have little or nothing to do with your more fundamental economic strengths and weaknesses: bad things can happen to good economies.’ (19)
- ‘Recessions, in other words, can be fought simply by printing money – and can sometimes (usually) be cured with surprising ease.’ (20)
- ‘But if it’s that easy, why do we ever experience economic slumps? Why don’t the central banks always print enough money to keep us at full employment? Before World War II, policymakers, quite simply, had no idea what they were supposed to be doing. Nowadays practically the whole spectrum of economists, from Milton Friedman leftward, agrees that the Great Depression was brought on by a collapse of effective demand that the Federal Reserve should have fought the slump with large injections of money.’ (20-21)
- ‘If the central bank is overoptimistic about how many jobs can be created, if it puts too much money into circulation, the result is inflation. And once that inflation has become deeply embedded in the public’s expectations, it can be wrung out of the system only through a period of high unemployment. Add in some external shock that suddenly increases prices – such as a doubling of the price of oil – and you have a recipe for nasty, if not Depression-sized economic slumps.’ (21)
- ‘What really fed economic optimism was the remarkable spread of prosperity – not merely to the advanced nations (where, indeed, the benefits were not as widely spread as one might have wished) but to many countries that not long ago had been written off as economically hopeless.’ (24)
- ‘Workers in those shirt and sneaker factories are, inevitably, paid very little and expected to endure terrible working conditions. I said ‘inevitably’ because their employers are not in business for their (or their workers’) health; they will of course try to pay as little as possible, and that minimum is determined by the other opportunities available to workers. And in many cases these are still extremely poor countries. Yet in those countries where the new export industries took root, there has been unmistakable improvement in the lives of ordinary people. Partly this is because a growing industry must offer its workers a somewhat higher wage than they could get elsewhere just in order to get them to move. More important, however, the growth of manufacturing, and of the penumbra of other jobs that the new export sector created, had a ripple effect throughout the economy. The pressure on the land became less intense, so rural wages rose; the pool of unemployed urban dwellers always anxious for work shrank, so factories started to compete with one another for workers, and urban wages also began to rise. In countries where the process has gone on long enough – say, in South Korea or Taiwan – wages have reached advanced-country levels. (In 1975 the average hourly wage in South Korea was only 5 percent of that in the United States; by 2006 it had risen to 62 percent.)’ (26)
- ‘The result was to move hundreds of millions of people from abject poverty to something that was in some cases still awful but nonetheless significantly better. And once again, capitalism could with considerable justification claim the credit.’ (27)
- ‘Even if the numbers were taken with a  grain of salt, it was pretty clear that the American economy’s progress had left at least 20 or 30 million people at the bottom of the distribution slipping backwards.’ (28)
- ‘The low wages and poor working conditions in those Third World export industries were a frequent source of moralizing – after all, by First World standards those workers were certainly miserable, and these critics had little patience with the argument that bad jobs at bad wages are better than no jobs at all.’ (28)
- ‘The Tequila crisis was not about the way the world at large works: it was a case of Mexico being Mexico. It was caused by Mexican policy errors – notably, allowing the currency to become overvalued, expanding credit instead of tightening it when speculation against the peso began, and botching the devaluation itself in a way the unnerved investors. And the depth of the slump that followed had mainly to do with the uniquely tricky political economy of the Mexican situation, with its still-unresolved legacy of populist and anti-Americanism.’ (52)
- ‘There was a time, not that long ago, when Americans were obsessed with Japan. The successes of Japanese industry inspired both admiration and fear; you couldn’t enter an airport bookstore without encountering rows of dust jackets featuring rising suns and samurai warriors. Some of these books promised to teach the secrets of Japanese management; others prophesied (or demanded) economic warfare.’ (56)
- ‘No country – not even the Soviet Union in the days of Stalin’s five-year plans, had ever experienced as stunning an economic transformation as Japan did in the high-growth years from 1953 to 1973.’ (57)
- ‘One element of the supposedly superior Japanese system was government guidance. In the fifties and sixties the Japanese government – both the famed Ministry of International Trade and Industry (MITI) and the quieter but even more influential Ministry of Finance – played a strong role in directing the economy. The economy’s growth was at least partly channeled by the government’s strategic designs, as bank loans and import licenses flowed to favored industries and firms.’ (59)
- ‘Mainly the cause was deregulation. Traditional banks were safe, but also very conservative; arguably they failed to direct capital to its most productive uses. The cure, argued reformers, was both more freedom and more competition: let banks lend where they thought best, and allow more players to compete for public savings. Somehow reformers forgot that this would give banks more freedom to take bad risks and that by reducing their franchise value it would give them less incentive to avoid them. Changes in the marketplace, notably the rise of alternative sources of corporate finance, further eroded the profit margins of bankers who clung to safe, old-fashioned ways of doing businesses. And so in the 1980s there was a sort of global epidemic of moral hazard.’ (65)
- ‘In Malaysia, in Indonesia, in Korea, as in Thailand, the market’s loss of confidence started a vicious circle of financial and economic collapse. It did not matter that these economies were only modestly linked in terms of physical flows of goods. They were linked in the minds of investors, who regarded the troubles of one Asian economy as bad news about the others; and when an economy is vulnerable to self-validating panic, believing makes it so.’ (94)
- ‘Were the Asian economies more vulnerable to financial panic in 1997 than they had been, say, five or ten years before. Yes, surely – but not because of crony capitalism, or indeed what would usually be considered bad government policies. Rather, they had become more vulnerable partly because they had opened up their financial markets – because they had, in fact, become better free-market economies, not worse. And they had also grown vulnerable because they had taken advantage of their new popularity with international lenders to run up substantial debts to the outside world.’ (97)
- ‘The point is that because speculative attacks can be self-justifying, following an economic policy that makes sense in terms of the fundamentals is not enough to assure market confidence. In fact, the need to win that confidence can actually prevent a country from following otherwise sensible policies and force it to follow policies that would normally seem perverse.’ (113)
- ‘One of the most bizarre aspects of the economic crisis of the 1990s was the prominent part played by ‘hedge funds,’ investment institutions that are able to take temporary control of assets far in excess of their owners’ wealth. Without question hedge funds, in both their success and their failure, rocked world markets.’ (120)
- ‘How big are hedge funds? Nobody really knows because until quite recently nobody thought it was necessary to find out. Indeed, despite occasional warnings from concerned economists, and even despite the events I’ll describe shortly, hedge funds have been left virtually untouched by regulation. Partly that’s because hedge funds – needing only a limited amount of capital, from a small number of people – can and do operate ‘offshore,’ establishing legal residence in accommodating jurisdictions to free themselves from annoying interference.’ (121-122)
- ‘Some economists, including yours truly, warned that there was a major housing bubble, and that its bursting would pose serious risks to the economy. But authoritative figures declared otherwise. Alan Greenspan, in particular, declared that any major decline in home prices would be ‘most unlikely.’ ’ (150)
- ‘Cynics said that Greenspan had succeeded only by replacing the stock bubble with a housing bubble – and they were right. And the question everyone should have been asking (but few were) was, What will happen when the housing bubble bursts?’ (152)
- ‘While the [1907] panic itself lasted little more than a week, it and the stock market collapse decimated the economy. A four-year recession ensued, with production falling 11 percent and unemployment rising from 3 to 8 percent.’ (156)
- ‘There’s more or less unanimous agreement among economic historians that the banking crisis is what turned a nasty recession into the Great Depression. The response was the creation of a system with many more safeguards. The Glass-Steagall Act separated banks into two kinds: commercial banks, which accepted deposits, and investments banks, which didn’t. Commercial banks were sharply restricted in the risks they could take; in return, they had ready access to credit from the Fed (the so-called discount window), and, probably most important of all, their deposits were insured by the taxpayer. Investment banks were much less tightly regulated, but that was considered acceptable because as nondepository institutions they weren’t supposed to be subject to bank runs.’ (157)
- ‘The financial crisis has, inevitably, led to a hunt for villains. Some of the accusations are entirely spurious, like the claim, popular on the right, that all our problems were caused by the Community Reinvestment Act, which supposedly forced banks to lend to minority home buyers who then defaulted on their mortgages; in fact, the act was passed in 1977, which makes it hard to see how it can be blamed for a crisis that didn’t happen until three decades later. Anyways, the act applied only to depository banks, which accounted for a small fraction of the bad loans during the housing bubble. Other accusations have a grain of truth, but are more wrong than right. Conservatives like to blame Fannie Mae and Freddie Mac, the government-sponsored lenders that pioneered securitization, for the housing bubble and the fragility of the financial system. The grain of truth here is that Fannie and Freddie, which had grown enormously between 1990 and 2003 – largely because they were filling the hole left by the collapse of many savings and loans – did make some imprudent loans, and suffered from accounting scandals besides. But the very scrutiny Fannie and Freddie attracted as a result of those scandals kept them mainly out of the picture during the housing bubble’s most feverish period, from 2004 to 2006. As a result, the agencies played only a minor role in the epidemic of bad lending. On the left, it’s popular to blame deregulation for the crisis – specifically, the 1999 repeal of the Glass-Steagall Act, which allowed commercial banks to get into the investment banking business and thereby take on more risks. In retrospect, this was surely a move in the wrong direction, and it may have contributed in subtle ways to the crisis – for example, some of the risky financial structures created during the boom years were the ‘off balance sheet’ operations of commercial banks. Yet the crisis, for the most part, hasn’t involved problems with deregulated institutions that took new risks. Instead, it has involved risks taken by institutions that were never regulated in the first place.’ (162-163)
- ‘That, I’d argue, is the core of what happened. As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that we were re-creating the kind of financial vulnerability that made the Great Depression possible – and they should have responded by extending regulation and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank.’ (163)
- ‘Foreclosure isn’t just a tragedy for the homeowners, it’s a lousy deal for the lender. Between the time it takes to get a foreclosed home back on the market, the legal expenses, the degradation that tends to happen in vacant homes, and so on, creditors seizing a house from the borrower typically get back only part, say half, of the original value of the loan.’ (167)
- ‘If you had to choose one individual to be in charge of the Fed during this crisis, that person would be Bernanke. He’s a scholar of the Great Depression. His research on the way the banking crisis intensified the Depression led him to make a major theoretical contribution to monetary economics.’ (173)
- ‘Nobody was more prepared, intellectually, for the mess we’re in. Yet as the crisis has unfolded, the Bernanke Fed has had a very hard time achieving any traction on either the financial markets or the economy as a whole.’ (173)
- ‘What about all the loans the Federal Reserve made to the banks? They have probably helped, but not as much as one might have expected, because conventional banks aren’t at the heart of the crisis.’ (174-175)
- ‘The triggering event seems to have been the fall of Lehman Brothers, the investment bank, on September 15, 2008. When Bear Stearns, another of the original five major investment banks, got in trouble in March 2008, the Fed and the Treasury moved in – not to rescue the firm, which disappeared, but to protect the firm’s ‘counterparties,’ those to whom it owed money or with whom it had made financial deals. There was a widespread expectation that Lehman would receive the same treatment. But the Treasury Department decided that the consequences of a Lehman failure would not be too severe, and allowed the firm to go under without any protection for its counterparties. Within days it was clear that this had been a disastrous move: confidence plunged further, asset prices fell off another cliff, and the few remaining working channels of credit dried up. The effective nationalization of AIG, the giant insurer, a few days later, failed to stem the panic.’ (178)
- ‘We’re not in a depression now, and despite everything, I don’t think we’re heading into one (although I’m not as sure of that as I’d like to be). We are, however, well into the realm of depression economics.’ (180)
- ‘We – by which I mean not only economists but also policymakers and the educated public at large – weren’t ready for this. The specific set of foolish ideas that has laid claim to the name ‘supply-side economics’ is a crank doctrine that would have had little influence if it did not appeal to the prejudices of editors and wealthy men. But over the past few decades there has been a steady drift in emphasis in economic thinking away from the demand side to the supply side of the economy.’ (182)
- ‘The truth is that good old-fashioned demand-side macroeconomics has a lot to offer in our current predicament – but its defenders lack all conviction, while its critics are filled with a passionate intensity.’ (183)
- ‘What the world needs right now is a rescue operation. The global credit system is in a state of paralysis, and a global slump is building momentum as I write this. Reform of the weaknesses that made this crisis possible is essential, but it can wait a little while. First, we need to deal with the clear and present danger. To do this, policymakers around the world need to do two things: get credit flowing again and prop up spending.’ (184)
- ‘The obvious solution is to put in more capital. In fact, that’s a standard response in financial crises. In 1933 the Roosevelt administration used the Reconstruction Finance Corporation to recapitalize banks by buying preferred stock – stock that had seniority over common stock in terms of its claims on profits. When Sweden experienced a financial crisis in the early 1990s, the government stepped in and provided the banks with additional capital equal to 4 percent of the country’s GDP – the equivalent of about $600 billion for the United States today – in return for a partial ownership. When Japan moved to rescue its banks in 1998, it purchased more then $500 billion in preferred stock, the equivalent relative to GDP of around a $2 trillion capital injection in the United States. In each case, the provision of capital helped restore the ability of banks to lend, and unfroze the credit markets.’ (185)
- ‘It’s not clear whether banks will be willing to lend out the funds, as opposed to sitting on them (a problem encountered by the New Deal seventy-five years ago).’ (186)
- ‘My guess is that the recapitalization will eventually have to get bigger and broader, and that there will eventually have to be more assertion of government control – in effect, it will come closer to a full temporary nationalization of a significant part of the financial system. Just to be clear, this isn’t a long-term goal, a matter of seizing the economy’s commanding heights: finance should be reprivatized as soon as it’s safe to do so.’ (186)
- ‘The same goes for another line of approach to resolving the credit crunch: getting the feds, temporarily, into the business of lending directly to the nonfinancial sector. The Federal Reserve’s willingness to buy commercial paper is a major step in this direction, but more will probably be necessary.’ (186)
- ‘All these actions should be coordinated with other advanced countries.’ (186)
- ‘The spread of the financial crisis to emerging markets makes a global rescue for developing countries part of the solution to the crisis. As with recapitalization, parts of this were already in place at the time of writing: the International Monetary Fund was providing loans to countries with troubled economies like Ukraine, with less of the moralizing and demands for austerity that it engaged in during the Asian crisis of the 1990s.’ (187)
- ‘Even if the rescue of the financial system starts to bring credit markets back to life, we’ll still face a global slump that’s gathering momentum. What should be done about that? The answer, almost surely, is good old Keynesian fiscal stimulus.’ (187)
- ‘The next plan should focus on sustaining and expanding government spending – sustaining it by providing aid to state and local governments, expanding it with spending on roads, bridges, and other forms of infrastructure.’ (187)
- ‘What we’re going to have to do, clearly, is relearn the lessons our grandfathers were taught by the Great Depression. I won’t try to lay out the details of a new regulatory regime, but the basic principle should be clear: anything that has to be rescued during a financial crisis, because it plays an essential role in the financial mechanism, should be regulated when there isn’t a crisis so that it doesn’t take excessive risks. Since the 1930s commercial banks have been required to have adequate capital, hold reserves of liquid assets that can be quickly converted into cash, and limit the types of investments they make, all in return for federal guarantees when things go wrong. Now that we’ve seen a wide range of non-bank institutions create what amounts to a banking crisis, comparable regulation has to be extended to a much larger part of the system.’ (189-190)
- ‘We’re also going to have to think hard about how to deal with financial globalization. In the aftermath of the Asian crisis of the 1990s, there were some calls for long-term restrictions on international capital flows, not just temporary controls in times of crisis.’ (190)
- ‘I believe that the only important structural obstacles to world prosperity are the obsolete doctrines that clutter the minds of men.’ (191)

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