Paul Krugman correctly predicted that the financial crisis wouldn’t be superficial and wouldn’t end quickly. Now he’s out to make sure the lack of a spectacular economic or market collapse isn’t tricking anybody: The economy is still screwed, he says, and something must be done.
Home prices are down about 16 per cent over the past year, and show no sign of stabilizing. The pain from this bust is widely spread: there are millions of American families who didn’t buy mortgage-backed securities and haven’t lost their houses, but have nonetheless been impoverished by the destruction of much or all of their home equity.
Meanwhile, the job market has deteriorated even more than you’d guess from the jump in the headline unemployment rate. The broadest measure of unemployment, which takes into account the rapidly rising number of workers forced to take cuts in paid hours and wages, has risen from 8.3 per cent to 10.3 per cent over the past year, roughly matching its high point five years ago.
On The Fed/Government:
Ben Bernanke and his colleagues at the Federal Reserve have cut the interest rates they control repeatedly since last September. But they haven’t managed to reduce borrowing costs for the private sector. Mortgage rates are about the same as they were last summer, and the interest rates many corporations have to pay have actually gone up. So Fed policy hasn’t done anything to encourage private investment.
The problem is fear: private-sector finance has dried up because investors, burned by their losses on securities that were supposed to be safe, are now reluctant to buy anything that isn’t guaranteed by the U.S. government. And the proliferation of special rescue packages — the TAF, the TSLF, the Bear Stearns deal, the Fannie-Freddie thing — may have staved off blind panic, but has fallen far short of restoring confidence.
The government can’t stop house prices from falling (although Lord knows they’ll keep trying) and can’t stop dumb-arse loans from going bad. The Fed can’t cut interest rates anymore. So Krugman says that the answer is massive fiscal stimulus, presumably in the form of more tax rebates and more infrastructure spending. However, he’s afraid both Obama and McCain are too tied to the ideals of the free market to solve the crisis.
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