The Return of Depression Economics and the Crisis of 2008 by Paul Krugman
Penguin, £9.99
Alan Greenspan, when chairman of the Federal Reserve, said that a fall in house prices was “most unlikely” and added: “Not only have financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” Ben Bernanke, who succeeded Greenspan as head of the Fed, said there would be “no more boom and bust.” And Robert Lucas, a Nobel Prize-winning economist, claimed: “The central problem of depression prevention has been solved.”
Well, well. They were wrong. The truth is that inflated reputations, supply side economics and free market policies have all been shown to be as bankrupt as the banks they served. As Paul Krugman, Professor of Economics and International Affairs at Princeton, shows in this update of his textbook from 1999, the misbegotten need to “win the markets’ confidence” pushes countries to make slumps worse by cutting demand as Hoover did during the Great Depression by cutting spending and raising taxes.
After the Great Depression banks and international capital flows, which had played such a destructive role, were both much more tightly regulated. But, as Krugman says, “growing international capital flows set the stage for devastating currency crises in the 1990s and for a global financial crisis in 2008.”
With financial globalisation, highly-leveraged financial institutions hold large stakes abroad which are transmission belts for economic crises. The solution of maximum integration into global capitalism turns out to be the cause of the crisis.
The present crisis combines a burst real estate bubble and a liquidity trap (like Japan in the 1990s), bank runs (like the 1930s), and currency crises (like Asia in the 1990s), all adding up to a global slump. Krugman admits that we need “long-term restrictions on international capital flows, not just temporary controls in times of crisis.”
Many of us on the left argue that there is little point in propping up a capitalist system which has not only collapsed, but is bound to collapse again in the future. That is, after all, the nature of the rollercoaster ride that is free market capitalism. It is neither free, nor much of a market, and it always produces many more losers than winners. Instead of trying to shore up a system which demonstrably does not work, and is bound to fail again in the future, we should be trying to build an alternative economic, cultural and social structure.
Will Podmore
