Our newest Nobel Prize–winning economist shows how the 2008 financial crisis parallels the events that caused the Great Depression—and explains what it will take to avoid catastrophe.

What better guide could we have to the 2008 financial crisis and its resolution than prolific columnist and author Paul Krugman? In his prescient 1999 classic, The Return of Depression Economics, Krugman (The Conscience of a Liberal, The Great Unraveling) surveyed the economic crises that had swept across Asia and Latin America, and pointed out that those crises were a warning for all of us: like diseases that have become resistant to antibiotics, the economic maladies that caused the Great Depression were making a comeback. In the years that followed, as Wall Street boomed and financial wheeler-dealers made vast profits, the international crises of the 1990s faded from memory. But now depression economics has come to America: when the great housing bubble of the mid-2000s burst, the U.S. financial system proved as vulnerable as those of developing countries caught up in earlier crises, and a replay of the 1930s seems all too possible.

In this greatly updated edition of The Return of Depression Economics, Krugman shows how the failure of regulation to keep pace with an increasingly out-of-control financial system set up the United States, and the world as a whole, for the greatest financial crisis since the 1930s. He also lays out the steps that must be taken to contain the crisis, and turn around a world economy sliding into a deep recession. Brilliantly crafted in Krugman's trademark style—lucid, lively, and supremely informed—this edition will become an instant cornerstone of the debate over how to respond to the crisis.

Excerpt: The Return of Depression Econoics By Paul Krugman What does it mean to say that depression economics has returned? Essentially it means that for the first time in two generations, failures on the demand side of the economy—insufficient private spending to make use of the available productive capacity—have become the clear and present limitation on prosperity for a large part of the world. What the world needs right now is a rescue operation. The global credit system is in a state of paralysis and a global slump is building momentum. Reform of the weaknesses that made the crisis possible is essential, but it can wait a little while. First, we need to deal with the clear and present danger. To do this, policy makers around the world need to do two things: get credit flowing and prop up spending. The first task is the harder of the two, but it must be done and soon. The obvious solution is to put in more capital. In fact that’s a standard response in financial crisis. In 1933 the Roosevelt administration used the Reconstruction Finance Corporation to recapitalize banks by buying preferred stocks. When Japan moved to rescue its banks in 1998, it purchased more than $500 billion in preferred stock, the equivalent of around a $2 trillion capital injection in the United States. In each case, the provision of capital helped restore the ability of bankers to lend and unfroze credit markets. My guess is that the recapitalization of the American banking system will eventually have to get bigger and broader, and that there will eventually have to be more assertion of government control—in effect, it will come closer to a full temporary nationalization of a significant part of the financial system. Just to be clear: this isn’t a long-term goal, a matter of seizing the economy’s commanding heights: finance should be reprivatized as soon as it’s safe to do so. But for now the important thing is to loosen up credit by any means at hand, without getting tied up in ideological knots ... continue reading >

sfriedman	Posted on Mar 9, 2009 1:57 PM
expert opinion Krugman is one of the only people we should be listening to. He knows what's going on, he knows how we got here, he knows how we can get out, and he says so clearly.
dmoffett	Posted on Feb 20, 2009 7:50 PM
Must read for today's economic reality. Fantastic . . . If tis quote from the book does not hook you, I do not know what will . . ."It is said by many that we are in a period we have never seen before. However, it may be more accurate to say that we have, just not all at the same time'" Paul Krugman effortlessly weaves a fantastic narrative of economic conditions from 1907 to the Asian currency crisis to today. Read this and you will be armed with the information that all Americans need.
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Paul Krugman is a member of the economics faculty at Princeton University and the London School of Economics, and an op-ed columnist for the the New York Times. He is the author or editor of more than twenty books, including The Return of Depression Economics and the Crisis of 2008, and more than two hundred professional journal articles, many of them on international trade and finance. Krugman has written extensively for non-economists, in publications such as Slate, Fortune, the New Republic, Foreign Policy, Newsweek, and the New York Times Magazine.