Krugman on What To Do Now

Paul Krugman on our "new era of depression economics" and what to do about it is shocking and dismaying, and probably close to right. We need a rescue operation for the economy, he says, and that means a massive capital injection into the system. Only, he thinks what we've proposed probably won't be enough.

He expects we may have to go through "closer to a full temporary nationalization of a significant part of the financial system" before the economy turns around, and possibly other forms of increased government control over our economy, though on a temporary basis.

He expects the Federal Reserve and other central banks will have to start lending to non-banks.

And he calls for spending something on the order of 4 percent of GDP for infrastructure. This will produce a direct impact on the economy, unlike injecting funds into banks or giving consumers tax rebates, which can be hoarded, or used to reduce debt.

Only after the recovery starts will we get into regulation, he says. Of which,

What we're going to have to do, clearly, is relearn the lessons our grandfathers were taught by the Great Depression. I won't try to lay out the details of a new regulatory regime, but the basic principle should be clear: anything that has to be rescued during a financial crisis, because it plays an essential role in the financial mechanism, should be regulated when there isn't a crisis so that it doesn't take excessive risks.
His arguments are the sort of things to give the no-free-lunch crowd indigestion. He's open about suggesting that we need in effect a new Keynesianism. Anybody who's fiscally prudent will find it shockingly irresponsible to spend the kind of money he's suggesting, given the deficit. But the idea that cutting capital gains rates to zero (thank you, John Boehner) will solve our economic problems sounds like the punchline to a bad joke. In any case, Krugman's stimulating piece should be read.