A Nobel prize winner in economics who has written about "depression economics" is set to speak on the current economy at the University of Iowa Friday. Paul Krugman would not say the current situation is depression, but says it is quickly closing in on being as bad as things were in 1982.
He says we are certainly in the realm of depression economics where all the usual policy tools have lost all traction.
"And it could become very, very severe," Krugman says. He says most forecasts assume that the economy is going to turn around in five years, but he says "that’s more of an assumption than a result" as he says they don’t know where the turnaround is coming from. Krugman says Treasury Secretary Tim Geitner’s plan to turnaround the banks doesn’t do enough.
Krugman says the plan is an attempt on a shoestring budget to do something without more money from Congress. He says the plan is "financial hocus pocus" that doesn’t involved a lot of up front money to make the assets get better. Krugman says he doesn’t think the plan will work and says they need a full out plan to fix the banking system — using the same methods applied to the Savings and Loan situation in the 1980’s.
He says you restore confidence in the banks by guaranteeing their liabilities and then take over the banks that aren’t solvent and restructure them. Krugman says that turning the banks around probably won’t be enough to create recovery, as he says the government will have to spend a lot more money to do that. Krugman says he would have put in 50-percent more money than what the plan calls for now, as he says the plan won’t lead to full recovery.
Krugman says the plan is to mitigate the slump and count on "spontaneous recovery to take place from other directions," as he says it’s not really a recovery plan, it’s a mitigation plan. Some economists say this plan is better than nothing — Krugamn doesn’t necessarily argue with that.
Krugman says it’s probably true unless it "forecloses the option of doing the right thing." He says there’s the political question of whether a failed plan convince congress to get behind something more comprehensive, or does it squander the president’s credibility and make it impossible to do the right thing. Krugman says he expects the economic free-fall to stop eventually.
Krugman says though the economy will still probably keep growing so slowly that unemployment will keep on rising, just at a slower rate. "And I don’t see anything that will produce a genuine bounce back….quite a ways out. I looks like things probably continuing to deteriorate right through nesxt year, and after that, who knows," Krugman says.
Krugman, who is a columnist for the New York Time, will give a lecture Friday at four p.m. called "Improving the U.S. Economy in the Short and Long Term" in the McBride Auditorium at the University of Iowa.