Paul Krugman at Rand with Zócalo
If you don’t know Paul Krugman, he’s a Princeton economist and probably, until recently when he won the Nobel Prize in economics, most famous for writing a column in the New York Times. I was lucky enough to be able watch him give a talk last night at Rand as part of a series of talks organized by a non-profit called Zócolo. I’m quite chuffed with myself because I reserved tickets for the event before he was awarded the Nobel. The organizers had been sending email all week telling people to get there early because there was quite a bit of demand. When my friend and I got there (over an hour early) there was already a pretty long queue for any unclaimed seats and a bit of a queue for the reserved seats. We got in no problem but it sounds like quite a few people got turned away.
The talk itself was excellent. He has a professorial style and makes a relaxed, convincing and coherent argument even with a cold! The subject was the current financial crisis and to be honest the picture he painted was pretty scary in terms of the possible impact on the US and global economies. He began by taking us through the causes of the collapse, which can be summed up as two points:
- The housing bubble.
- Lack of regulation of the “shadow banking system”
He described the housing bubble as people thinking “the old rules no longer applied to things like buildings!” in a comparison to the 1990s internet bubble which at least had a dramatic technology shift to justify the claims that the rules (prices can fall) no longer applied. In terms of the shadow banking system, it was shocking how big it has gotten, roughly the same size ($10 trillon) as the assets of normal banks. A point that I’d like to remember is his definition of a bank as “anything that borrows short and lends long”.
After discussing the causes of this crisis, he discussed some policy proposals, which can be boiled down to three points:
- Stabilize the financial sector through the government taking over/investing directly in financial firms.
- Global regulation of the shadow banking system.
- Large scale public works projects to get the economy moving again. (His quote “it’s time for a new WPA” got a huge round of applause from the audience.)
Finally, he discussed politics (republicans are out of policy ideas) and did a fairly long QA. Unfortunately, I didn’t get to ask my question about whether he thought having an audit trail or knowing the provenance of mortgage backed securities would have helped lessened the impact of housing bubble popping.
Krugman’s talk really brought home how interconnected we are. He discussed how economists just weeks ago were thinking that developing world countries were safer than developed countries because they were “decoupled”, which turns out not to be true. Just in the past couple of days these countries have begun to get hit by this crisis. Essentially, “A collapse in the price of condos in San Diego can bankrupt Iceland”. Investors are invested everywhere, we are “awesomely globalized”.
It was a great evening very intellectually stimulating without being to heavy (Krugman: “…maybe McCain will rediscover his maverisity”). The speech was recorded and I’ll post the podcast when its made available by the organizers.
Update: You can listen to the podcast of Krugman’s talk here.