Thursday, February 5, 2009

The return of depression economics - Paul Krugman

As you walk down the aisle of a bookstore, you see some books that aren't quite topical. And you see some that are. Sometimes, just sometimes, you see a book that is topical in so many different ways that you have no choice but to pick it up and read it. "The return of depression economics - And the crisis of 2008" falls in this last category.

The D-word has been much in the news recently. And any book that claims to unlock the economic lessons from the dark days of the 30s, is going to register pretty highly on my radar right now. Then there is the sub-title "- And the crisis of 2008" (which was added to the title of this book originally published in 1999, as it was re-printed this year). Makes it officially one of the first books on these turbulent times. Finally, there is the author. Paul Krugman recently received the 2008 Nobel prize in economics. Which makes him hot. Or lukewarm. After all, he is just an economist. They don't even have a real Nobel prize. "The Sveriges Riksbank prize in economic sciences in memory of Alfred Nobel" ... whatever.

Anyway, there you have it then - a perfect trifecta of reasons why to read the book. Now let us go through all of Brick and Rope's reasons why you would be disappointed if you read "Depression Economics" only for its contemporaneousness.

First off, this book isn't really about the Depression. (I realize it doesn't claim to be. But thinking that it is would be an undertandable mistake.) It is about Depression Economics - prevailing theories among econnomists today on how Depression-like economic conditions can be averted. Let me summarize it for you in two phrases - monetary loosening, and fiscal stimulus. There you have it. You have that part of the book covered now. I found a couple of interesting nuggets on those, to be fair. There is a really simple example of a baby-sitting co-op which Krugman uses as a miniature version of an economy, and that demonstrates how we could have recessions even if there is absolutely nothing wrong with the 'fundamentals' of the system. Readers of other books by Krugman might already remember this, because this is one of his favorite illustrations. And it is a good one. On the fiscal stimulus piece, what I found most interesting was Krugman's belief that when an economy is entering deep recession, and monetary loosening is by itself turning out to be insufficient, one shouldn't overthink fiscal stimulus. Paraphrasing Keynes, Krugman writes 'Let the government borrow money and use the funds to finance public investment projects - if possible to good purpose, but that is a secondary consideration - and thereby provide jobs, which will make people more willing to spend, which will generate still more jobs, and so on.'

This is also not a book about the crisis of 2008. The said crisis makes its first real appearance in the last 30 pages of the book. So if you walked into this aisle looking for a book that will explain what happened last year and why we are all in the doghouse right now ... keep walking, 'cos this ain't it.
So on to the third part of our trifecta - Mr. Krugman himself. Economists aren't often seen as a particularly polarizing lot. They are supposed to be factual, scholarly, deadpan, serious ... in other words, boring. Krugman is some of those things, but he is sure not boring. With his extremly high output over the last few years, he has also become something of a polarizing figure among the politically active. (After all, this is an economist with a blog called Conscience of a liberal) So if you don't quite follow his political persuasion, you might not necessarily like what he has to say here.

With all these caveats, let me now tell you what I did like -

Depression Economics has a very good review of some of the economic crises in different parts of the world over the last few decades. I liked to read about Latin American currency crises, the Asian crash, and Japan's 'growth recession'. I loved the anecdote on the attack on Hong Kong dollar by hedge funds ... and the HK government's unexpectedly brave fightback. Krugman's assertion that the Asian and Latin American crises were 'warnings ignored' go somewhat unbacked by direct evidence, but they were illuminating to read about nonetheless.

Krugman also makes the point in the book that one of the things that has changed in recent times is the emergence of 'shadow banks' - institutions doing very banking like activity, but that are not counted as banks, and are much less regulated. This is something that Jamie Dimon of JPM Chase for example has been saying for a while now. In Krugman's words (talking about 2008) - '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'.

Finally, (let me admit it) I liked that roast of Alan Greenspan. Krugman is clearly no fan of the Oracle. He has an entire chapter dedicated to 'Greenspan's bubbles', which he starts with listing all the adulatory and awe-struck titles that have been associated with Greenspan over the times - including Time magazines 'senior member of the Committee to Save the World'. (You can almost picture Krugman shaking his head as he is writing this). Then he goes after most things Greenspan. He rants about Greenspan's inaction against the 'irrational exuberance' he famously christened. He offers much of the credit for the benign economic environment under Greenspan to the previous Fed chief Paul Volcker. And he creates this new identity for the Maestro - 'the Fed Chairman holds what I believe is a unique record among central bankers: he presided over not one but two enormous asset bubbles, first in stocks, then in housing.' More pithily - 'Greenspan succeeded by replacing the stock bubble by the housing bubble'.

Gather around folks - ECONOMIST-FIGHT!!!

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