With his face flushed red and his eyes making only darting forays into the audience before returning to stare at the floor, Paul Krugman took the stage.
Those who know Krugman as the “shrill” and Bush-bashing New York Timescolumnist would have hardly recognized the star of the night. Laying a single page of notes before him, Krugman grabbed the sides of the lectern, crossed his feet oddly and began to speak. The awkward stance and stuttering speech belied the fact that this was a Nobel Prize-winning economist about to lecture on a topic – “the nature of the [economic] crisis” — he is presumably very comfortable with.
It doesn’t matter how many “um”s he needed or how often he clutched at his sheet of paper. Once Krugman started methodically dissecting the crisis and prescribing a solution, he was an economics legend bestowing wisdom on anyone concerned enough about our economic troubles to want to fix them. He was extended the invitation to speak before he became the envy of economists and target of Wikipedia-assassination because he knows the international economy, because he wrote the book on it. (Literally. Northwestern’s International Finance class uses a textbook co-authored by Krugman).
Coon Auditorium, where Krugman spoke Monday night, hardly ever fills its capacity of 600. But tonight, hundreds of nicely-dressed older gentlemen — most of them Kellogg alumni — replaced the sweatpants-clad contingent of students normally drooped over the seats. This was the inaugural speech in Kellogg’s Distinguished Lecture Series. And if it were to be judged by attendance alone, the 150-plus people who remained standing after every seat was filled would mark it a success.
“I open up my Internet connection every morning with a little trepidation, wondering what new disasters have materialized overnight,” Krugman said, quickly moving to the heart of the matter. Yes, the economy sucks, but Krugman is on the case.
If anything were funny about this crisis, it might be how it started. The late nineties saw “a very perverse thing, poor countries lending lots of money to rich countries, and especially to the United States.” China alone owns $1.5 trillion in U.S. Treasuries. That means United States debt. We piss off China and they could sell all our debt, and devastate our economy.
As countries got into the habit of buying up each other’s currencies as a way to protect against currency crises, the situation got stranger. “There are stories of people borrowing in Yen to build houses in Spain,” as a way of buying cheap money, said Krugman. If it sounds like the international economy was getting more complex and more dangerous, it’s because it was.
Credit was easy and currency was cheap and interest rates were low. This is when we really screwed things up. With low interest rates, everyone wanted a loan to buy a house. But it “was a natural ponzi scheme… Everyone keeps making money and it goes on for a while… and then you run out of further suckers to pull in,” Krugman said. By the summer of 2006, the United States had depleted its supply of suckers, which you may know as sub-prime borrowers.
As Krugman was explaining the minutiae of how the crisis came to be, the audience began to look like any group normally assembled in Coon Auditorium for an economics lecture. There were at least seven people napping at the halfway mark and one woman was slumped so far down in her seat that her head barely poked above the seat back. Another woman, sitting in the alumn section, was surfing Wikipedia. A cell phone went off but Krugman, a Princeton University professor, looked unperturbed. One alumnus had a pad and pen but barely one sentence in and his pen was on the floor – the guy had fallen asleep.
Forty more minutes on the nature of the crisis — it had to do with too much lending to the wrong people and not enough attention paid to weird, complex “financial products” — and we’re not really close to a solution. “I thought it was predictable,” Krugman said about the bursting of the bubble. But “what I didn’t see, I berate myself for not seeing it.”
That seems to be the consensus: We know what went wrong, we should have known, we didn’t and now we can’t agree on a solution.
Commenting on the current administration’s attempts at bailout, Krugman said, “It still looks weak and it looks small. Although everyone was horrified by the $700 billion figure, Japan moved in to rescue its banks in 1998 and it did that with a $500 billion capital injection. Japan’s GDP in 1998 was a quarter of what ours is now.”
Krugman, who’s not particularly known for shying away from speaking about himself, seems to have adopted a new reticence when it comes to those “certain other things,” as he referred to the Nobel.
The only bit Krugman offered on the prize was to share the story of how, when he got “the call from the guy with the obviously fake Swedish accent,” he then phoned his wife who replied, “We don’t have time for this.” (He told the same anecdote to Charlie Rose.)
When Krugman is proposing a solution, it would be wise to listen. His contribution to economics went against convention in its day but has since become the standard. Before Krugman, there was Adam Smith writing on trade in 1776’s Wealth of Nations. Smith stayed the standard until David Ricardo in 1817 wrote up his theory of comparative advantage, which added a few more twists but kept the basic narrative the same. But for the next 160 years, the world kept disappointing and never easily fit into the models. It needed a new model, and with a key 10-page paper in The American Economic Review in 1980, Krugman introduced us to what’s now referred to as “new trade theory.” It may not bear his name, but it’s definitely covered in his economic innovations.