Krugman on the Crash of 2008

Paul Krugman, The Return of Depression Economics and the Crash of 2008. Norton, 1999, 2009.

This book is a very substantial revision of a 1999 volume called The Return of Depressions Economics. The title was meant to shock in 1999. Financial crises like Thailand's or deep persistent slumps like Japan's -- they couldn't happen here, could they? Krugman wanted to wake up policy makers to the fragility of the financial system and the idea that financial crisis could lead to depression-style economic crisis. No one will be shocked by the title today, ten years later.

I have used this book in my classes continuously since it was first published, although my spin on it has evolved as economic conditions have changed. Krugman's revision is pretty much in line with the way I taught this material last semester. I take this to mean that I have not entirely misread the world has we have moved towards this point, although I obviously do not claim Krugman's expertise. Or maybe we both misread it the same way. Time will tell.

Not everyone will be happy with the way the book is organized. Krugman saves his analysis of the current crisis until the final chapters and I think many readers will want to see this material earlier. But I am on Krugman's side. It seems to me that you really do need to understand the financial crises of the last twenty years in order to appreciate our current situation. Those who don't understand history are doomed to repeat it, they say. The crises in Japan, Mexico, Thailand, Hong Kong, Russia and Argentina give Krugman an opportunity to introduce key theories and concepts in a real world context that is highly relevant to the final analysis.

Not everyone will like the end of the book, either, where Krugman provides policy recommendation. Many readers will be looking for very detailed proposals from the most recent Nobel winner instead of broad outlines, but is that fair to ask? Events move too quickly now; the situation is so fluid. Krugman's three-part plan (large-scale capital infusions to stop the financial crisis, large-scale fiscal stimulus to end the economic slump, reformed financial regulation to extend bank-type controls to bank-like institutions) makes sense now and will probably be seen to make sense when we look back upon them in ten years.

One thing that I missed was a fuller discussion of capital controls. Krugman talked in more detail about controls on destabilizing hot money movements in the earlier volume and comes very close to endorsing them here, at least in emergency situations. But he doesn't really make the case. You can't please everyone, I guess.

There are many good moments in the book, including the analysis of the Greenspan years and the housing bubble and the discussion of hedge funds and the rise of unregulated non-bank banks. And there was one scary moment for me. Reading the first paragraph of the last chapter I immediately recognized the words. Where had I read them before? "The world economy is not in depression; it probably won't fall into depression ..." (my emphasis added).

Oh, yes. They are exactly the same words he in this same place in the book used ten years ago.

Empires of Trust

Thomas F. Madden, Empires of Trust: How Rome Built -- and America is Building -- a New World. Dutton, 2008.

It has been all the rage to talk about the world -- and especially the United States -- in terms of empires in recent years. It began, I think, with the collapse of communism, leaving the U.S. as the sole superpower and it accelerated after 9-11 as U.S. policy became more intentionally international. My colleague Dave Balaam teaches a class on Empires -- one of probably hundreds offered on college campuses today. He doesn't have to look very far to find interesting books and articles for his students to read.

Part of the appeal of Empires today is the idea of rise and fall and these are times when it looks to many like the U.S. is heading for collapse; thinking about the U.S. this way fits easily into the arguments the pessimists want to make.

Thomas F. Madden's book takes the idea of a U.S. empire seriously -- as a real condition rather than a loose metaphor -- and his book makes good reading whether you are into the empire idea or not. Empires rise and fall, Madden says -- that's what they do. But they aren't all the same. He cites three types of empires: empires of conquest (not given much treatment here), empires of commerce (like Britain in the 19th century) and empires of trust (Rome ... and the United States).

Empires of conquest and commerce are intentionally outward-looking. They seek resources and markets respectively. But empires of trust, in Madden's analysis, just want want to be left alone. They mainly venture abroad when foreign actions are necessary for domestic (should I say "homeland") security. Empires of trust have different motives and actions, Madden argues, and have the potential for long life. Rome's empire lasted for centuries before the inevitable collapse. There is no particuar reason to think that the U.S. era will be over soon if the U.S. holds true to the principles that cause foreign powers to trust its motives.

Madden's method here is to tell stories of Rome's experiences in some detail and then use them to reflect on key events in U.S. international policy. Some of the insights have astonishing, causing me to stop and rethink previous opinions. That's the purpose of the book, in my view. Not to convince you that the U.S. empire is a good thing (although it might be) or that it is fundamentally peace-seeking (because it isn't always), but rather to get you to think seriously about world affairs and not fall into shallow intellectual ruts, as it is so easy to do.

So I recommend this book very highly (and I thank my mentor Phil Phibbs for recommending it to me) as an aid to serious analysis. You need to read the whole book, however, to capture the full effect. This is not a burden, however, as Madden is a good story teller. I devoured the 300 pages on the plane to Tucson.