Economics And The Crisis Of 2008 Summary

The Return of Depression Economics and the Crisis of 2008, written by Paul Krugman, was fairly easy to read and understand. In the first chapter, Krugman provides a very simplified, but a good example of how the economy works, by using a Capitol Hill Babysitting co-op as an example. Parents in the co-op earned babysitting coupons for their babysitting services, and were allowed to redeem them for the services of others. The babysitting co-op economy emulates complications encountered by our economy and demonstrates that, recession begins when folks begin to save more than they spend, and others follow suit. Krugman believes that the economy is controlled by basic demand and that recessions can be cured by solely pumping more money into the

As Krugman provides facts and explains the details, we begin to observe a pattern or cycle occurring, which Krugman refers to as the “confidence loop”. The cycle is described as periods of confidence, followed by phases of economic growth, and ending with times of fear or panic. Michael Haar provides similar information in his 2010 review of the book. “To fuel economic booms, participants in the economy have a great deal of confidence, so much so that during economic expansion, large bets are placed on the prospects of continued success. However, a financial crisis begins with a seemingly small change that chips away at confidence, eventually turning into a pit of panic”. Harr (2010). Followed by the second half of the book, where Krugman discusses today’s global financial system, and how it has evolved over time. We learn about the gold standard as well as hedge funds. Krugman also touches on the Federal Reserve and Alan Greenspan, followed by economic bubbles, regulation and

At one time Greenspan was hailed the greatest central banker in history, after the 2008 crash, everybody blamed him for the country’s distress. In 2000, Greenspan raised interest rates several times; these actions were believed by many to have caused the bursting of the dot-com bubble. Krugman exclaims, “Greenspan didn't raise interest rates to curb the market's enthusiasm; he didn't even seek to impose margin requirements on stock market investors. Instead, he waited until the bubble burst, as it did in 2000, and then tried to clean up the mess afterward”. The Economist (2010) also considers that cheap money led to the wholesale underpricing of risks. Greenspan is now calling for tighter banking regulation in several areas and canvasses a more expansive view of the state’s role (Chan,