NOBEL PRIZE WINNER PAUL KRUGMAN

He's speaking up for ordinary Joes


By Zhen Ming


THE problem first started with financial intermediaries.

Back then, the institutions whose liabilities were perceived as having an implicit government guarantee were essentially unregulated.

This led to severe moral hazard problems.

Consequently, the excessive risky lending of these institutions created inflation - not of goods but of asset prices.

The overpricing of assets was then sustained in part by a sort of circular process: The proliferation of risky lending first drove up the prices of risky assets which, in turn, made the financial condition of the intermediaries seem sounder than what it was.

And then the bubble burst.

Sounds familiar? Sounds like 2008? And sounds like the final bursting of the recent US housing bubble, doesn't it?

Yes, it does sound familiar. Yes, it does sound like 2008. And yes, it does sound like mortgage titans Fannie Mae and Freddie Mac getting themselves in deep trouble.

But it is not. It is instead an incisive analysis of what happened back in 1997. And the financial institutions that were in deep trouble back then were those in Asia.

This analysis was first made by none other Mr Paul Krugman, a professor at Princeton and concurrently an Op-Ed page columnist for The New York Times.

And as all economists should know by now, Mr Krugman, 55, will receive this year's Nobel Memorial Prize in Economic Science in Stockholm, Sweden on 10 December.

The prize, however, was awarded for earlier academic research that Mr Krugman had conducted, starting in 1979, on the 'analysis of trade patterns and locations of economic activity'.

Mr Krugman's solid-gold reputation, however, was only forged in the mid-'90s, when he was among the most consistent predictors of the 1997 Asian crisis.

A couple of years later, he correctly predicted that Asia would stage an impressive comeback.

But this enfant terrible of international trade theory, this self-proclaimed 'conscience of a liberal' - a larger-than-life critic of US President George W Bush - is not without controversy.

Back in September 1998, Mr Krugman irked the Western establishment, especially the International Monetary Fund, when he openly supported the controversial economic strategy of then Malaysian Prime Minister Dr Mahathir Mohamad.

Back then, Dr Mahathir had blamed machinations by Western speculators for Malaysia's woes. He had also imposed temporary controls on the outflow of capital - 'a step denounced by all but a handful of Western economists'.

At that time, in his September 1998 article for Fortune titled Saving Asia: It's Time to Get Radical, Mr Krugman had called for emergency currency controls.

Shortly after its publication, Dr Mahathir boldly implemented Mr Krugman's 'radical' recommendations.

Said Mr Krugman: 'As it turned out, (Dr Mahathir's) economic strategy was right.'

More recently, with the onset of the latest global financial crisis, Mr Krugman has shifted his focus to highlighting President Bush's many failed economic policies.

In his 9 Oct 2008 op-ed column entitled Moment of Truth, he said: 'Last month, when the US Treasury Department allowed Lehman Brothers to fail, I wrote that Henry Paulson, the Treasury secretary, was playing financial Russian roulette.

'Sure enough, there was a bullet in that chamber: Lehman's failure caused the world financial crisis, already severe, to get much, much worse.'

Tough line

But with the US elections only 12 days away, Mr Krugman has also flagged key bread-and-butter issues that concern ordinary Americans.

On supposedly 'ordinary American' Samuel J Wurzelbacher (America's by-now-famous and very-highly-paid 'Joe the Plumber'), he quipped: 'You may recall that in one of the early Democratic debates, Charles Gibson of ABC suggested that US$200,000 ($300,000) a year was a middle-class income.

'Tell that to Ohio plumbers: According to the May 2007 occupational earnings report from the Bureau of Labor Statistics, the average annual income of 'plumbers, pipefitters and steamfitters' in Ohio was US$47,930.'

For now, as far as Mr Krugman is concerned, the most important thing for him is to make ordinary Americans realise that 'the story of modern America is, in large part, the story of the fall and rise of inequality'.

Spoken like a true-blue bleeding-heart economist. And one with a liberal conscience too.


Source: The New Paper, Thu 23 Oct 2008