Krugman applauds deficit spending

told an audience of roughly 300 in McCosh 50 on Wednesday afternoon

“We basically replayed the first year of the Great Depression,” said Krugman, the recipient of the 2008 Nobel Prize in Economics. He noted that the Great Depression lasted four years, during which severe human damage was inflicted. The good news, though, “is that we do not appear to be replaying the second year; the plunge seems to have stopped,” he said.

This does not mean the risk is over, but rather that “we stepped back from the edge of the abyss,” Krugman explained, describing the 2008 financial crisis as the bursting of a bubble inflated by the overvaluation of housing prices and inflow of capital to Eastern European economies.

These bubbles “were the clearest craziness that I’ve ever seen in my life,” Krugman said, adding that “a combination of deregulation and failure to keep up with the complexity of the [financial] system” was responsible for turning “what was sure to have been a nasty recession into something much worse than that.”

Though there were vigorous regulatory tools for traditional financial institutions, “what everybody failed to think about was that something doesn’t have to look like a bank to be a bank,” Krugman said, explaining that any institution that offers customers easy access to cash can be categorized as a bank, and this network of “shadow banking” went largely unregulated.

The recession rendered obsolete “the view that the events of the Great Depression were the result of a complete lack of understanding and that if only our grandfathers knew what we now know, it could have been prevented,” Krugman said.

Yet the United States’ experience with the Great Depression helped lead to a more rapid response to the current crisis, he noted. “We were, to a certain extent, inoculated,” Krugman said, praising the unconventional monetary policy adopted by the Federal Reserve Chairman Ben Bernanke, a former economics professor at the University. Financial columnist Stan Collender was correct in observing that the $1.4 trillion budget deficit is a triumph of fiscal policy, Krugman added, saying, “We would have had Great Depression 2, [but] the deficit saved the world.”

This is not a time for traditional monetary policies, Krugman said, quoting St. Augustine: “ ‘Oh Lord, make me chaste and continent, but not yet.’ ”

Students at the lecture said they thought Krugman’s remarks were characteristic of the views he espouses in his New York Times column.

“It wasn’t the most uplifting speech, but not the most pessimistic either,” Matthew Mandelberg, a graduate student in the Wilson School, said of Krugman’s address.

“It paralleled what he’s writing for The New York Times a lot,” Julian Dean ’13 said, adding that the speech was “unique and interesting.”

Krugman concluded his remarks on a note of cautious optimism. “It’s going to be tough,” he said, “but the world did not end this year, which is always a good thing.”