US View on the Current Economic Crisis

To most, the United States is the epicenter of the global financial crisis that has overtaken the world. The collapse began with American banking firms and was partially caused by the American subprime mortgage lending program that had been undertaken by banks all over the world. However, the responsibility of the American Federal Reserve Bank has minimized the impact of this economic downturn and has reduced any effects of this recession upon the rest of the world. While not going so far as to save all irresponsible American banks, the stimulus package was able to save some of the banks who were in danger of facing bankruptcy in the face of bad debts. Lehmann Brothers and Bear Stearns were able to have their best assets recovered and the losses to the American people were minimal.
The manner in which the global economy has progressed over the past several decades has meant that the world’s financial institutions have become intimately linked. With investments being made in foreign currencies and assets being traded from nation to nation, when one nation’s banking sector was hit as an effect of excessive deregulation others inevitably followed. The United States was not the only nation to be hurt by this issue. When Great Britain and the Netherlands decided they could make a higher inflation rate by investing in Iceland and their nation’s banks were hurt in much the same way. Japan went through a similar process in the 1990s and the Southeast Asian crisis went along the same lines as well. The United States is not to blame for the state of economic affairs the globe is currently experiencing but its actions to escape the recession should be followed as the nations of the world move past this horrible time.
The European Central bank underwent a similar bailout plan to recapitalize the banking system and give it the liquidity it required in order to avoid disaster. As the banking systems around the world become more able to lend without fear of overleveraging themselves, the world will begin to exit this crisis and be able to move forward stronger than ever. As the crisis abates, the world will have to remember that it was the extreme deregulation of the recent past that allowed for this crisis to occur and by ensuring that the banking system is appropriately governed by the responsible parties of the world, future crises can be avoided. The large stimulus package the United States invested into its economy has already begun to pay off as several banks have repaid the loans with interest. Any nations that are still feeling the reeling effects of the global crisis should take this point to heart as they can follow with their own stimulus packages in order to grow out of their own piece of the crisis. Under no circumstances should this crisis be used as an excuse to stop the process of globalization. The free movement of goods and capital cannot possibly be contained and stopped and any attempt to do so would only send those economies even further into a deep depression. The ages of isolationism are over and the global economy must be embraced. However, regulation of this global economy must be carried out in order to prevent individual actors from wreaking havoc upon the world once again.

Paul Krugman: Lessons From History Soon Forgotten

Paul Krugman’s The Return of Depression Economics takes a historical journey through past economic crises while relating them to the modern day. This strategy makes the book extremely applicable because it shows where mistakes have been made and repeated throughout history and which ones have contributed to the current global economic crisis. Journeys through the Great Depression, Argentina, Southeast Asia, Japan, Brazil, and the modern globe create a full picture for the reader to use in forming his or her own opinion on the causes of financial crises. Krugman is by his own admission a supporter of Keynes. For a further look of where his bias may lie, Krugman’s daily blog is named The Conscience of a Liberal. As is to be expected coming from a left-leaning economist, Krugman blames not the basic system for crises but the manner in which people have manipulated it. Instead of following Keynesian theory, nations under threat of a crisis have instead undertaken fiscal and monetary policies that were contractionary instead of expansionary and by doing so placed further strain upon the financial system and thereby driving it further into recession.

This was the mistake made by Hoover before the Great Depression and under orders from the IMF; the same mistake was repeated by several of the East Asian nations, Argentina, and Brazil. As for the current crisis, Krugman places some blame upon America’s economic “messiah” – Allan Greenspan. He points to the point that Greenspan replaced the Stock Bubble of the 1990s with the Housing Bubble of the current decade. The subprime mortgages that were allowed to be traded at will due to deregulation during the Bush Administration followed this and soon the highly leveraged “shadow banking” system was in collapse. As for an outlook on the future, Krugman remains skeptical as the stimulus package amounted to only about 1% of GDP while he believes a stimulus of at least 4% would be necessary to properly bring the economy out of its slump, as worked for Sweden in the 1990s. As for dangers to other economies, Krugman points to currency crises that come from not taking action early enough in the crisis. One lesson that he stresses is to make a decision, no matter what it is. Staying in a state of limbo only creates speculation and exacerbates the problems, making any action that will be taken less effective. Developing nations often faced the issue of choosing to either allow their currency to devalue or to raise interest rates, neither of which was desirable. However, the practice of choosing neither until it was too late always made things much worse for everyone involved. After looking at several of these crises, Krugman finally tackles the current crisis and generalizes that it is such a major disaster because it contains pieces from all of the previous crises in one. As he puts it, the current crisis has as parts of its whole a bursting real estate bubble, runs on banks in the shadow banking system, a liquidity trap, a disruption of international capital flows, and a currency crisis. With all of these placed together, Ben Bernanke has his work cut out for him and according to Krugman, he has not yet done enough to placate all of these economic beasts.

Krugman’s book, The Return of Depression Economics, is undoubtedly well written. His style is equally appropriate for the average American as it is for an aspiring PhD student. His uses of simple analogies, such as the recurring babysitting coop, make difficult concepts easier to grasp. Many will find issues with points he makes throughout the book, most namely of which his strong support of government intervention to prevent economic shocks for turning into full fledged recessions. Others will find issue with his mild opinion of Greenspan, as many once regarded him as one of America’s greatest economic leaders. Overall, I will argue that the book offers lessons for anyone who cares to read from a well educated and well spoken economist. It never tries to be an unbiased view of the world, but offers what Paul Krugman believes to be the soundest advice regarding economic crises that history has taught us time and time again. More than anything, this book is a plea for leaders of the world to be prepared to act in order to save the world from experiencing such a crisis ever again. He only wants us to finally stop repeating history.