The Return of Depression Economics and the Crisis of 2008 Essay Example for Free

The Return of Depression Economics and the Crisis of 2008 Essay This novel is broken into segments; the first of which discusses crisis’ that have occurred in the past that are similar to present day crisis’, for example, the Great Depression and the worldwide depression of 2008. The second segment analyzes the current crises, for example, the effects of the Latin American and Asian crisis in the 1900’s. Krugman also brings into light how countries thousands of miles apart have such a large impact on one another like a domino effect, for example, how when Russia experienced a financial crisis and economic reform, it devalued the Brazilian ‘real’, which then in turn effected the United States bond markets. The author uses his knowledge and view to analyze the United States’ and other county’s economic issues. He critiques the mistakes that were made and the warning signs that governments should be aware of and not overlook in order to prevent economic failure. An example was the over confidence in capitalism success due to increase of technology, globalization to third world countries, and the fall of socialism and socialist ideas that were prevalent in international ideologies. This confidence in capitalism blindsided Economists to an approaching depression. Krugman warns that even though an economy may be very strong, they are still subject to fall and should never take warning signs lightly, however these signs may not always be the same for every country. As brought up in the book, it is discussed that perfect solutions for fixing an economy in one country may not work as well, or at all, in another country, for example capitalism success in the United States versus Japan and Mexico. Another example was when the British government devalued the pound and increased the interest rates. This led a strong economic recovery for Britain, but when Mexico tried this same tactic, it had no such success. Britain’s pound was devalued by 15 percent in 1990, thus being dropped from the European Monetary System’s Exchange Rate Mechanism. In 1995, the â€Å"Tequila Crisis† resulted from the mistake of the Mexican government not devaluing the peso enough and the GDP in Mexico dropped 7 percent and depreciated the peso by 15 percent, consequently. This is also an example of the domino effect of economic downfalls in countries impacting others. Even though Argentina’s peso is governed by a separate currency board, since they call their money the peso as well, currency speculation from investors in other countries didn’t regard the currencies as separate, thus negatively impacting the country. Robert Lucas, a professor at the University of Chicago, states that Macroeconomics needs to move forward from depression-prevention since the problem â€Å"had been solved for all practical purposes. â€Å"The Great Moderation† speech, by Ben Bernanke, then provided support to Lucas’ claim by stating that the business cycle problem had diminished, however, Krugman explains that instances similar to the Great Depression have more recently occurred, and in other countries in the 90’s. In the late 1990’s, Thailand caused trouble to the rest of the surrounding Asian countries when they began making lo ans to foreign investors to try and help their struggling economy, consequently leaving them with crippled trade exports. The Thai ‘Baht’ was devalued since these foreign investors were mainly only people who had connections with the government and the interest rates were much higher than other countries in attempt to boost their economy. This stipulation caused the economy to worsen, other countries to loose confidence, and for Thailand to loose investments. Krugman explains that if Thailand hadn’t tried to control the currency and interest rate, the ‘baht’ would have risen instead of causing their poor economy to expedite. Another piece that Krugman brings up is the Hedge funds, which are privately and actively managed investment funds and are subject to the regulatory restrictions of their country. Two examples discussed in the book were with Asia and Russia. Hedge funds were used on Hong Kong’s capitalist government and were forced them to use government intervention and non-capitalist ways to take back their stock market. In Russia, hedge funds were more widely created to excel profits, but consequently, led to their financial collapse. Alan Greenspan, on the Federal Reserves Board of Governors, served from May 1987 to January 2006 and played a large roll in the 2008 crisis. It was believed that he was the best fit for his position because of his vast knowledge of the Great Depression. In the beginning of his term, the economy was stable with low unemployment rates and a rising stock market. Consequently, Greenspan â€Å"let the good times roll† and when the stock market was in a ‘bubble’ he cut interest rates, but to no avail. This caused the unemployment rate to rise for almost three years and the recession to return. The housing bubble then developed in 2006 from the lack of Federal Reserve regulation of savings and loans and the â€Å"Shadow Banking System†. The housing market prices slowly skyrocketed to fifty percent over value but then suddenly dropped up to fifteen percent in the second quarter the following year. Krugman explains how this housing market crash crippled the United States economy, costing millions of Americans their lives as they knew them before. I found this book very appealing considering my vague understanding of the financial system. Although at times I felt lost in the terminology, the majority of the time I was able to comprehend what Krugman was trying to get across to the audience. What I found most compelling was how the book brought into perspective how history has consequently been repeating itself and will only continue to do so. With the examples Krugman gives with the Great Depression, Japan, Mexico, and our own economy deficit in 2008, we can see the errors that are repeatedly made through history. Krugman points out, while constantly questioning, why economic catastrophes keep occurring all over the world if all the signs leading up to them are ever so similar. If Mexico had used Britian as an example, they would have been able to get out of the ‘Tequila Crisis† much quicker. I also found interesting, yet disheartening, the amount of money that is lent to other countries and spent on helping them repair themselves when we ourselves have repairing to do in our economy still. I understand that it is a cyclical effect, and we may not know every detail about what is going on, and for that I have to give the government credit, but at the same time I don’t agree with the amounts given away that we never see any benefit from. Krugman used the example of Russia’s debt and the twenty-two billion given to them for a stabilization plan that was unheard of, and another fourty-one billion emergency bailout funds to Brazil. After reading this book, it has enlightened me about how an economy can get back on its feet and also what signs to look for in our economy so that we don’t repeat the past and we start learning from other country’s mistakes as well. [ 1 ]. Krugman. About Paul. New York Times, n. d. Web. 04 May 2013. [ 2 ]. Hedge Fund. Wikipedia. Wikimedia Foundation, 05 Mar. 2013. Web. 06 May 2013.