Paul Krugman: Why We Didn't See The Economic Crisis Coming

NY Times:

A few months ago I found myself at a meeting of economists and finance officials, discussing -- what else? -- the crisis. There was a lot of soul-searching going on. One senior policy maker asked, "Why didn't we see this coming?"

There was, of course, only one thing to say in reply, so I said it: "What do you mean 'we,' white man?"

Seriously, though, the official had a point. Some people say that the current crisis is unprecedented, but the truth is that there were plenty of precedents, some of them of very recent vintage. Yet these precedents were ignored. And the story of how "we" failed to see this coming has a clear policy implication -- namely, that financial market reform should be pressed quickly, that it shouldn't wait until the crisis is resolved.

Read the whole story: NY Times

Comments

[Mildmannered]

Paul, take a look at this article -- http://www.huffingtonpost.com/2008/12/01/bush-administration-weake_n_147311.html -- "Bush administration "ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.­"

[Carolab]

Read "The Tyranny of Oil" and "Greenspan's Fraud" and Thom Hartmann's "S C R E W E D" and THEN tell me "they didn't see it coming"; not only did they see it coming, they planned it.

[marijam]

This is from a piece by Amity Shales, the one where she's saying Krugman doesn't know what he's talking about:
This reality shows most clearly in the data -- everyone's data. During the Depression the federal government did not survey unemployment routinely as it does today. But a young economist named Stanley Lebergott helped the Bureau of Labor Statistics in Washington compile systematic unemployment data for that key period. He counted up what he called "regular work" such as a job as a school teacher or a job in the private sector. He intentionally did not include temporary jobs in emergency programs -- because to count a short-term, make-work project as a real job was to mask the anxiety of one who really didn't have regular work with long-term prospects.
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By this definition, I do not have work with long-term prospects, nor does anyone else. Once the 24-year men are let go from the auto industry, our last, best-known long-term employer will be no more.

[who38]

There are still people out there like tenured teachers. That will probably be the next to go.

[Kay72403]

Wall Street did not see it coming, all they saw was $$$$$$$$. Middle America saw it coming, questioning the outrageous profits, lack of regulation in the mortgage and housing market. I think Realtors, appraisers were also complicit, marketing and appraising homes beyond reasonable value. Imagine here in CA a condo sold after 2 years more than doubling its original purchase price!! The bubble had to burst.

I believe Krugman is right on " the wheeler dealers will be making easy money again - and will lobby hard against anyone who tries to limit their bottom line". Weren't they lucky to have had Bush and the republican party supporting their drive for that bottom line for the last 8 years?

[Viper]

This could be seen coming in 1981 with trickle down, free trade that no one else practices, and out sourcing, destruction of U.S. mfg in every industry, our costly healthcare system, increases in budget and trade deficits and the race to the bottom! The question was exactly when.

If you bought foreign cars and shopped at Wal-mart as I did , you were and are part of the problem. If you voted for Reagan as I did, you are part of the problem. If you supported NAFTA you are part of the problem. If you supported low taxes paid for by borrowing you are part of the problem.

And if you Are repug as I was you own 95% of this problem.

Regards

[who38]

My "foreign" car was built in the US.

[Mildmannered]

you make some good points -- also if you took out a subprime mortgage the past few years.

[000Jade000]

All who agree with Krugman should take the time to write a letter to Senator Byron Dorgan. Dorgan was against the deregs that allowed this nightmare to happen. If anyone, he would be one most interested in putting together new legislation. Non-North Dakotans can contact Dorgan by sending letters to his Washington address.

[Boomerwoman]

My family has been discussing this for a year. In the winter of 2008, we all pulled our money out of the stock market and put it into cd's treasuries etc. So, this little ol' middle class family could see it coming. I don't know, perhaps that's because we are realists.

[FightingTheRight]

Low information economists and financial officials didn't see this coming.

More dumbing down of Amercia.

Anyone with any real world experience with adjustible rate loans and baloon payments knew that ARMs and interest only loans were a bad idea.

But not Greenspan.

Not the Bush administration and the Republican controlled congress in 2003, when they passed legislation that changed the criteria for making loans.

[FightingTheRight]

Changing the lending criteria is different than the changes made during the Carter years, for anyone who wants to put the blame there.

[thepeoplechoose]

I think the central problem stems from the fact that sales and marketing types control the lions share of commentary coming from within the marketplace itself. Their rosy forecasts are always suspect and typically wildly off the mark. From within the marketplace technical analysts are pressured to conform to the company line even when numerical trends are in conflict. Just look at agency ratings that had their numbers called into question and the influence of those seeking to present a view in favor of revenue projections become clear. This is essentially a marketplace that operates entirely without accountability and will do and say anything in order to meet revenue goals. Pitching a fast buck is what it's all about.

[Antifascist-08]

I just want to say that, as a neophyte in economics I really appreciate and admire all the knowledge available here on this blog. The articles are interesting and from high level people and the discussion is great.

I have been doing my own work and I think we need to move now to a different sort of society and money system- neither communistic or capitalistic. Aren't we ready to refine these ancient concepts into something that works for the common good and yet allows for innovation and the good old American inventive spirit. I think so and we have the brain power to do it.

So lets ignore the nay-sayers and bleaters of past ideologies and move on to bigger and better things.

[Carolab]

Have you ever visited http://www.solari.com?

[Daniel74]

"They" knew this was coming when they gutted the bankruptcy laws completely in favor of the banks.

[ProfessorDuh]

Exactly. The effective goal is to loot the economy for the benefit of the hyper-rich, incidentally wiping out the uppity, educated American middle class in the process. People living on subsistence wages are so much more "cooperati­ve."

[lynettema]

Everyone except the guy driving the SUV and the other guy with 8 houses saw this coming.

[Mildmannered]

Greenspan should be Times Man of the Year -- it was his policies/theories that gave us this worldwide financial meltdown.

The financial meltdown probably added 3-5 points to Obama/democrats victory.

[Mildmannered]

So Paul what will the next crisis/bubble be?

[Kache]

Paul thinks we should put the hinges back on the door before we try rounding up the horses and herding them back into the barn. Sounds sensible, but they wont do it. Now that the horses have tasted green pasture they're not too keen on those doors.