Concerned Nobel Prize Winner
"This will be the worst crisis since the 1930s globally", said Paul Krugman, this year's Nobel Laureate in Economics.
12.12.2008 - Knut André Karlstad (translated by Jessica Hartenberger)
Krugman was in Norway last Friday, two days before he received his Nobel Prize in Stockholm. The occasion was a seminar organized by NHH and Handelsbanken. It was a pessimistic Nobel Prize winner who stood before the academic environment and press in Norway's capital city, as he dedicated a large portion of his speech to talk about the financial crisis.
"I am surprised at how severe the difficulties would be. This will be the worst crisis since the 1930s globally. The previous record was held by the difficulties in the 70s. But there are differences: In the 70s there was a good reason: war in the Middle East. It was a general external reason. What we have now is more like what happened in 1929 to 33. There was nothing going wrong, no war. But something about the system was very, very wrong" said Krugman.
THREE ECONOMISTS. Knut Anton Mork from Handelsbanken, Paul Krugman and Victor D. Norman in pleasant conversation before the Nobel Seminar on Friday.
Foto: Siv Dolmen
Similar countries trade the most
Paul Robin Krugman is a professor of economics at Princeton University, but perhaps best known for his columns in the New York Times. He is a Keynes fanatic, a well-known critic of the Bush administration's policy, and was awarded this year's Nobel Prize in economics for his work on the New Trade Theory, in the 1970s.
One of Krugman's main contributions to the field is his early explanation of why relatively similar countries trade fairly similar goods with one another. Classic Trade Theory says that developing countries will essentially export raw materials to industrial countries, while industrialized countries will export capital-intensive industrial goods. On the other hand, Krugman explains why, for example, France sells Citrôen cars to Germany, while Germany again sells BMWs to France.
NHH professor, Victor D. Norman participated in the panel discussion with Krugman during the Oslo visit; he himself has been a strong contributor within the same disciplines.
"According to the theory of Comparative Advantage, Norway should trade a lot with the Ivory Coast. This is not the case, as Sweden is our biggest trade partner. It is fantastic that Krugman received the Nobel Prize. It is especially exciting that the prize was awarded to an academic area which one has helped develop," said Norman to Paraplyen when it became known that Krugman would be awarded the prize.
The Japanese situation
Regarding today's situation, Krugman said:
"The difficulties that we really should have been looking at are Japan in 1999. I spent half my professional life in a world where the Japanese were ten feet tall. Then in the early 90s they slipped into an economic stagnation. A lot of people lost interest. Some of us thought the Japanese as failures were scarier than the Japanese as successes. The interest rates fell to 0.4 percent. We said: 'It can never happen again'. But it did happen again in Japan. And yesterday it was 0.2 percent in the US. Some economists were rattled. If it happened to Japan it could happen to other countries. How could other countries avoid this? I was one of these people; Lars E. O. Svensson who is now on leave from the Swedish Riksbank was another, and at Princeton; one Ben Bernanke."
With that, we are in a "Japanese situation", where interest rates are almost below zero and monetary policy has reached an extreme point.
"We're in a situation where conventional monetary policy has reached its limits. We're marching through Bernanke's CV, his production, and none of it has been enough" Krugman stated on the Fed's rescue package so far. "I'm very sympathetic, they've worked harder than any central bank, but none the less they've had very limited success slowing the widening of spreads. No success at all in turning the decline in the real economy. What comes next is fiscal politics. The trouble is the problem of slowness and the problems of lags. It is hard to make it work quickly."
THE NOBEL PRIZE WINNER. "This is a pure financial shock. It means it is a shock we thought we had learned to deal with" said Krugman about the financial crisis.
Foto: Siv Dolmen
Strong Obama team
Even though crisis initiatives have already been implemented, it is not enough according to the Nobel Prize winner who is concerned that the Blue Dog (conservative) Democrats are throwing sticks in the spokes of Obama's crisis aid.
"We're losing jobs! It really looks like the economy is falling really fast. We need things fast, but it's a possibility that we don't get things going until late next year. That could mean that we're really talking about double digit unemployment before the stimulus gets going. It is quite hard to get a big fiscal stimulus into work quickly. Consensus is not guaranteed."
The consequences may be dismal.
"12 million people under the poverty line, 7 million in extreme poverty and 10 million losing health insurance. The good news is that we are about to get an administration that has some very smart and experienced people that are also open minded. They're reading the same numbers as I am. What I want to see from Obamas first term is health insurance for every American" Krugman said.
"You worry too much"
When Barack Obama takes over the presidency in January, it is reported that he will implement measures to gain control of the crisis. And it is needed. In November alone, unemployment increased by a half a million people. Internationally there is a fear that the USA will act defensively and raise the trade barriers to prioritize American jobs.
"Everyone's worried about that. I think you worry too much. We had a Democratic fight where both candidates tried to persuade workers. His team is aware of the repercussions of protectionism. These people really believe in international cooperation. They're not going to spend political capital on new bilateral agreements. He's got an unusual name compared t any other US president, but his actual policy is slightly left of centre."
What about tax cuts?
"Tax relief can be done quickly. We've had a pretty bad experience with that. It is quite ineffective. Most of it seems to have been saved, not spent."
What have we learned from the crisis thus far?
"The growth of these non-bank banks, with no insurance, no regulation of capital, no credential regulations on investments. Timothy Geithner (Obama's Secretary of Finance) called it the "parallel banking system". They were doing banking but were not depository institutions. Banking is a wonderful thing but also dangerous. It needs regulations and control. We need regulations in the parallel banking systems along the lines of traditional banks. History is very much at guide here: It's a hyper version of the financial crisis in the 30's. The regulations will be a hyper version of the regulations in the 30s. Banking in the 70s was a boring and not especially lucrative business, but a safe one. The system now has come close to destroy the world as we know it."
To Bergen?
Krugman is also anxious about how fast the implemented crisis initiatives will work, but in the long run he is confident that the economy will get back on its feet again.
"Compared to the 30s it's definitely better. The intellectual side is good. In the long run we will get out. I'm a Keynes fanatic so you know what I'll say next: In the long run we're all dead."
Even though it was a pessimistic prize winner who visited Norway, NHH rector Jan I. Haaland was grateful to have gotten the chance to meet with the American.
"We are going to remember this afternoon and your speech for a very long time. We invited you to NHH for the first time in 1989, but you haven't been there yet."
The answer is quite straight forward.
"I apologize for being so depressing. Let's hope for much better times, I'll do my best to come to Bergen. Maybe this summer?"
NOBEL TEAM. NHH professors øystein Thøgersen and Victor D. Norman, political editor Sofie Mathiassen from Dagens Naeringsliv, Paul Krugman and NHH rector Jan I. Haaland.
Foto: Siv Dolmen
TOP HEAVY. There were many big names, both from the business sector, academic environment and management were present at the NHH seminar in Oslo. Stein Erik Hagen was among them.
Foto: Siv Dolmen
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