Why the Financial Crisis Happened: Debt, Economy & the Stock Market -- Paul Krugman

Why the Financial Crisis Happened: Debt, Economy & the Stock Market - Paul Krugman (2008)




The financial crisis of 2007--2008, also known as the Global Financial Crisis and 2008 financial crisis, is considered by many economists the worst financial crisis since the Great Depression of the 1930s. It resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of U.S. dollars, and a downturn in economic activity leading to the 2008--2012 global recession and contributing to the European sovereign-debt crisis. The active phase of the crisis, which manifested as a liquidity crisis, can be dated from August 9, 2007, when BNP Paribas terminated withdrawals from three hedge funds citing "a complete evaporation of liquidity".

The bursting of the U.S. housing bubble, which peaked in 2006,[5] caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally.[6][7] The financial crisis was triggered by a complex interplay of policies that encouraged home ownership, providing easier access to loans for (lending) borrowers, overvaluation of bundled sub-prime mortgages based on the theory that housing prices would continue to escalate, questionable trading practices on behalf of both buyers and sellers, compensation structures that prioritize short-term deal flow over long-term value creation, and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making.[8][9][10][11] Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined.[12] Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts. In the U.S., Congress passed the American Recovery and Reinvestment Act of 2009.

Many causes for the financial crisis have been suggested, with varying weight assigned by experts.[13] The U.S. Senate's Levin--Coburn Report concluded that the crisis was the result of "high risk, complex financial products; undisclosed conflicts of interest; the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street."[14] The Financial Crisis Inquiry Commission concluded that the financial crisis was avoidable and was caused by "widespread failures in financial regulation and supervision," "dramatic failures of corporate governance and risk management at many systemically important financial institutions," "a combination of excessive borrowing, risky investments, and lack of transparency" by financial institutions, ill preparation and inconsistent action by government that "added to the uncertainty and panic," a "systemic breakdown in accountability and ethics," "collapsing mortgage-lending standards and the mortgage securitization pipeline," deregulation of over-the-counter derivatives, especially credit default swaps, and "the failures of credit rating agencies" to correctly price risk.[15] The 1999 repeal of the Glass-Steagall Act effectively removed the separation between investment banks and depository banks in the United States.[16] Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st-century financial markets.[17] Research into the causes of the financial crisis has also focused on the role of interest rate spreads.[18]

In the immediate aftermath of the financial crisis palliative fiscal and monetary policies were adopted to lessen the shock to the economy.[19] In July 2010, the Dodd--Frank regulatory reforms were enacted to lessen the chance of a recurrence.

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What Happened to Middle Class America: Economist Paul Krugman on Social Programs & Unions (2007)

Trade liberalization may shift economic inequality from a global to a domestic scale. When rich countries trade with poor countries, the low-skilled workers in the rich countries may see reduced wages as a result of the competition, while low-skilled workers in the poor countries may see increased wages. Trade economist Paul Krugman estimates that trade liberalisation has had a measurable effect on the rising inequality in the United States. He attributes this trend to increased trade with poor countries and the fragmentation of the means of production, resulting in low skilled jobs becoming more tradeable. However, he concedes that the effect of trade on inequality in America is minor when compared to other causes, such as technological innovation, a view shared by other experts. Lawrence Katz estimates that trade has only accounted for 5-15% of rising income inequality. Robert Lawrence argues that technological innovation and automation has meant that low-skilled jobs have been replaced by machine labor in wealthier nations, and that wealthier countries no longer have significant numbers of low-skilled manufacturing workers that could be affected by competition from poor countries.

Paul Krugman : No Debt Crisis, We Can Just Print Money

Responding to House Budget Chairman Paul Ryan's warning that if the federal government continues to run annual $1 trillion deficits we will eventually face a debt crisis, liberal economist and New York Times columnist Paul Krugman said Wednesday that that is not a legitimate worry because the U.S. government can always print money and weaken the buying power of the dollar. “The United States is a country that has its own currency--can’t run out of cash because we print the money. If you even try to think what would happen--suppose that investors get down on the United States. Even so, that would weaken the dollar, not send interest rates soaring, and that would be good. That would help our exports,” said Liberal economist and New York Times columnist Paul Krugman