Back in 1999 Paul Krugman saw the economic crisis in Mexico, Argentina and Indonesia along with the collapse and bailout of the American hedgefund Long Term Capital Management as a wake up call in his book The Return of Depression Economics. He has recently updated, expanded and re-released the book and is on his way to Sweden to accept the Nobel Prize for Economics. In short he blames the over leveraging (gambling in the $ Trillions of dollars), lack of adequate cash reserves, lack of transparency and lack of common sense regulation of large swaths of the financial industry that allowed this all to happen and imperil people all over the globe.
Linked here is a brief interview with Mr. Krugman from salon.com http://www.salon.com/tech/htww/feature/2008/12/08/paul_krugman/
It's a short piece and well worth the read (especially for those who tend to rely on commercial TV for what passes as news and information there), but I've included a couple of the more pointed experpts below.
Andrew Leonard: What do you think is the one thread that links all these crises together?Paul
Krugman: Two threads, I think: leverage and the economic fragility it creates, on one side, and the limits to monetary policy on the other. The collapse of Indonesia or Argentina was all about leverage, and we've seen that replayed in the collapse of securitization in the United States. Japan showed us that central bankers can't always save the day, and Ben Bernanke is seeing that truth right now.
Andrew Leonard: What practical steps can we take to immunize ourselves from debilitating panics?
Paul Krugman: Well, we had about 60 years of financial stability, basically because we had an effectively regulated banking system. Then we fell prey to a combination of excessive optimism and excessive literalism. We started believing that financial markets always work, and we also believed that everything was OK as long as things we call banks were guaranteed, not realizing that lots of things we don't call banks are nonetheless subject to bank runs. So the answer is to relearn our grandfathers' lessons: Highly leveraged financial institutions have to be regulated and insured.
Andrew Leonard: What explains the growth of the unregulated shadow banking industry to a point where it could imperil the living standards of everyone on the globe? Was it simply the triumph of deregulatory ideology?
Paul Krugman: Ideology played a big role -- but we should also bear in mind that the shadow banking system was making a few people incredibly rich. And that much wealth distorts policy, not just through campaign contributions and the revolving door, but because people who make that much money come across as masters of the universe who know what they're doing.
Andrew Leonard: And how soon do you think it will be before Republican ideologues start blaming Obama for making it worse? Grover Norquist is already making the claim that the bear market is a result of the 2006 election.
Paul Krugman: To some extent you can't fight it -- people will believe what they want to believe. If they can make FDR the cause of the Great Depression, they can do anything. But one thing progressives can do is make sure that the story of the Bush administration is told, in all respects. There's going to be huge pressure from the usual suspects to let bygones be bygones, to forget about everything from torture to reckless disregard of financial warnings. But I want truth and reconciliation across the board, and progressives have to make it clear that it was an ideology, not an act of God, that made this crisis possible.