On Saturday, European officials stunned Cypriots (and many others) by announcing a rescue package for their country that involves a levy on all bank deposits. The news is spreading far and wide, causing quite a bit of controversy in the process.
Central banks should be respected. And they can certainly counter air pockets, but not forever. Either fundamentals will improve or asset prices will fall. Which outcome we eventually see depends in large part on whether other government entities finally step up to their policy responsibilities.
The world economic recovery continues, but it has weakened further. In advanced countries, growth is now too low to make a substantial dent in unemployment. And in major emerging countries, growth that had been strong earlier has also decreased.
An open "politicization" of finance came out as a consequence of governments and central banks stepping in, in the sense that the dynamics of financial asset prices is now determined directly in the political sphere.
Just like central banking, economics wants to speak politically, but doesn't necessarily welcome a response. In Krugman, it sometimes comes across as condescension. At the Fed, it can appear more sinister.
It did not begin with the subprime disaster in 2007, nor the crash and burn of Lehman in 2008, nor are we able to blame any bubbles, be they dot.com or other. This Economic War began with the Asian Financial Crisis back in 1997.