Tuesday, October 14, 2008

Nobel Prize winner interviewed on financial crisis

Paul Krugman, interviewed on PBS Newshour:
PAUL KRUGMAN: If you read deep into the Nobel Committee's discussion of my work, they do talk about the work I've done on economic crises. And, in fact, I did a lot of work on trying to understand crises in places like Indonesia and Argentina, which, unfortunately, is relevant.

It does turn out that some of the same mechanisms, some of the same sort of domino effects that lead to financial collapse have been operating in the United States and the rest of the world, so there is a connection to some of my academic work, but not the trade work.

JIM LEHRER: Yes. Any satisfaction at all in being right about the calamities that were coming?

PAUL KRUGMAN: You know, better to have been right than to have not seen anything of it, but, no, I mean -- I'm terrified by, you know, I -- I did not expect to be seeing anything in my lifetime that was reminiscent of the 1930s and I'm not gratified to be living through it, thank you. I'd rather have been wrong in this case.
There was also this on the same program:
Well, Joseph Stiglitz, after a horrible week last week, a hugely positive today, market up about 936 points. What do you think was the key thing to turn the markets today?

JOSEPH STIGLITZ, Columbia University: I think it was the concerted action in Europe and the fact that finally -- finally -- the Paulson, the Bush administration is beginning to consider the equity-injection approach that has been used in other countries around the world and that has been adopted in Europe.

The contrast between the slowness with which the Bush administration has approached the problem and the speed with which the U.K., for instance, has been able to produce a program and then already implement it is really stark.

And I think the fact that that kind of approach can be implemented quickly has been very reassuring.

JEFFREY BROWN: Martin Feldstein, we talked so much last week about the need to inject confidence into the markets, into the system. Is there reason for confidence today?

MARTIN FELDSTEIN, Harvard University: There's more reason for confidence. There's certainly reason for the individual saver, depositor to be confident, both about their bank deposits and also their money market mutual fund balances.

But I don't think that the program that we've heard is going to provide enough confidence to generate substantial interbank lending or lending from the banks to the wider economy.

JEFFREY BROWN: What are its shortcomings?

MARTIN FELDSTEIN: Well, simply injecting equity by itself isn't going -- there isn't going to be enough equity injected to make other financial institutions and other investors in the commercial market willing to provide lots of additional funds to the major banks that are holding impaired securities.

What the Europeans are doing that we're not doing is providing some kinds of credit guarantees on top of that.

But the fundamental thing in my mind about the situation in the United States that makes us very different from Europe is that our bad mortgage paper, our bad assets in these financial institutions, is being driven by the foreclosures and defaults in the residential real estate market.


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