Network News

X My Profile
View More Activity
Posted at 11:23 AM ET, 11/19/2010

An unnecessary, inevitable slump

By Ezra Klein

Alongside Gauti Eggertsson of the New York Fed, Paul Krugman has been spending some time on a longer paper looking at debt, deleveraging, and liquidity traps. Building the model for it, he says, has helped him see the crisis more clearly. And what he's seen has depressed him:

If our view of the current crisis as largely a deleveraging shock is correct, and if our basic outline of how things work in the aftermath is also correct — both of which I believe — then the gods really hate us. For the slump that follows a deleveraging shock is simultaneously gratuitous and almost impossible to avoid.

What do I mean by that? The model, and more broadly overall logic, suggests that there is good no reason why the economy has to suffer a large loss of output and employment after a Minsky moment. The capacity is there, and nothing about the fact that some people have too much debt makes it impossible to use that capacity to produce goods and services for other people.

But the policies that can prevent that gratuitous slump — a commitment to higher inflation over the medium term, and/or deficit spending — run right up against ingrained prejudices. The foundations for the shock were laid by a long period of relative stability, especially low inflation; it’s very hard for policy makers to accept that what was good in 2000 or even 2007 is no longer at all good now that Minsky has struck. And everyone has just seen the punishment for too much debt; asking others to run up debt to help fix the problem, even though it’s right, is unavoidably a tough sell.

By Ezra Klein  | November 19, 2010; 11:23 AM ET
Categories:  Economics  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: START here
Next: Why did primary-care doctors increase from 1990 to 2000?


I know payday loans is not a solution for problems but Of course, the greatest advantage of these loans is that they can bring you the much-needed cash almost instantly. In usual circumstances, you can easily get the money directly credited into your checking account the same day from "Nimble Payday" I use them most of the time

Posted by: richardbeckley | November 19, 2010 11:43 AM | Report abuse

What you HAVE to like about Krugman is that his post analysis judgement always agrees exactly with his pre-analysis judgement, only more so.

In fact nothing tells us what a genius Paul Krugman is, better than the models that Paul Krugmann constructs!

Posted by: 54465446 | November 19, 2010 1:10 PM | Report abuse

"The capacity is there, and nothing about the fact that some people have too much debt makes it impossible to use that capacity to produce goods and services for other people."

Nothing except the fact that people who have too much debt aren't going to buy those goods and services no matter how much capacity we have.

Sheesh. That guy is a total moron.

Posted by: bgmma50 | November 19, 2010 7:59 PM | Report abuse

A good slide show & audio from Prof. Steve Keen, on this very topic, using his non-traditional economic analysis and tools:

He integrates a lot of different economic thoughts, including Minsky, and live-demos his model explaining the great depression and current 'great recession' dynamics, with debt as the central actor, and banks as the main villain.

A bit long, but _well_ worth a listen. If you don't have the time to sit through the entire Flash stream, you can try fast-reading through his slides in PowerPoint:

Posted by: terryh1 | November 20, 2010 7:27 AM | Report abuse

Post a Comment

We encourage users to analyze, comment on and even challenge's articles, blogs, reviews and multimedia features.

User reviews and comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions.

characters remaining

RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company