There is no way I can summarise what happened during the GFC, and provide an analysis of how it played out the way it did better than the Professor Krugman, so I won’t try. Read for yourself his remarks in Portugal last week. Read them critically, for the facts and for where he clearly identifies what his opinion is on the matter. Because the facts are the facts, and whether you agree or not with the hypothesis of the failure to respond, it is a fantastic summary of the events.
And then have a think and see if you can come up with an alternative explanation on why so many “very serious people” got the response to the crisis very wrong, because its important. It’s important because Europe still has a vast amont of private debt that it has to de-leverage from, not to mention the sovereign debt, and the currently proposed all-austerity approaches all smells like failure.
To me, the big failure I define in terms of efficiency. You can have an argument over what the role of government is in relation to an economy, but the argument about whether it can have an effect is over. The loss by not doing effective stimulus (a large amount of tax cuts aren’t stimulus) in the US and Europe is incredible. Imagine if the US had done a 1.2 trillion dollars of real stimulus (as opposed to 300 billion of stimulus and 400 billion of tax cuts mostly to the rich that then did not trickle down). Now imagine if the US had borrowed most all of that at 1% (which it still can by the way, check the US long term bond rate). Imagine how effective that borrowing would have been had it been ploughed into the infrastructure repairs needed countrywide, the teachers that need not have been laid off or not hired in the first place, and the beginning work to transform the transmission grid in the US to set it up for the energy efficiency and micro-generation improvements that could solve the vast majority of its greenhouse problems without anyone having to modify their lifestyle. Now think about the generation of people who have left or are leaving university in various disciplines in the past 4 years and the next two that would be employed in their chosen field.
I call the efficiency loss and failure to capitalise on the possible gain monumental. Personally I would love to be able to borrow all the money I wanted for 1% for 10 or 30 years. I bet I could do some good things all on my own.