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SYNOPSIS: Paul discusses the current financial crisis, recession, and how to address them

GREGORY: All right, John. Thanks very much. Going to hear from you later in the program as part of our panel. Thanks. What to turn now to the Pulitzer Prize-winning columnist for "The New York Times," and more recently the Nobel Prize-winning economist. That, of course, is Paul Krugman. Paul, good to see you here. Thanks for being here.

PAUL KRUGMAN, "THE NEW YORK TIMES": Hi there.

GREGORY: Let me talk more broadly before we talk about the summit. I want to talk about the economy in general, and I want to turn to something that the treasury secretary, Hank Paulson, said just today on CNBC. Listen to this.

(BEGIN VIDEO CLIP)

HENRY PAULSON, TREASURY SECRETARY: I think the system has been stabilized. I think it has clearly been stabilized. I don`t think people are going to bed at night wondering which major financial institution might have a problem. You`re never, ever going to get me to apologize for being so prudent as to change a strategy when the facts changed, and to do it in a way that protects the taxpayer.

(END VIDEO CLIP)

GREGORY: Paul, is the treasury secretary analyzing, witnessing, looking at the same economy that most consumers are looking at which when they pull back their spending, or other corporations on the brink of collapse, or investors who are not investing in this market, or lenders who are not lending money? Can he really say with a straight face that the situation has been stabilized?

KRUGMAN: You know, he is talking about the narrow financial picture. He is talking about banks` lending rates, swap spreads, all those things. And he`s right, there has been some stabilization. I`ve been saying, you know, we had a 107-degree fever. Now it`s down to 103, if all you`re looking at is these financial indicators. So the interbank market is working a little bit better than it was. LIBOR is down. You know, I can go on with the jargon. Which is all good. It means that the high speeds -- you know, the world is going to melt down tomorrow crisis -- has receded a little bit. The world probably won`t end tomorrow, but the real economy is falling apart as we speak. Jobs, manufacturing, the auto companies are at risk of going under. So, yes, he is in a way talking about a different planet. That planet is important too, but it doesn`t address the problem which is now. You know, we`ve shifted focus, and now jobs and production, rather than financial markets, are where the action is.

GREGORY: But do you think the administration, and for that matter, the incoming administration, is really leveling with the American people about what kind of sacrifice is going to be entailed in getting the economy to a normal temperature, to use your analogy?

KRUGMAN: I`m not sure "sacrifice" is quite the right word. I mean, this is a situation in which the main sacrifice is you`re going to have to borrow a lot of money in the short run to prop the thing up. And then there will be other things later on. But, you know, the incoming administration is being cagey about exactly what it`s going to do, partly because they`re really figuring it out, and partly, I think, because as -- I know that outside analysts are looking at the numbers and sort of saying, oh, my god, this is going to have to be a bigger program than anyone expected to ever see in their lifetimes. And they must be doing the same thing inside the Obama team, and then saying, can we really sell the kinds of things that we think are going to be necessary to pull us back from the brink?

GREGORY: But let`s talk about the wisdom of borrowing a lot of money to prop businesses up. And that`s really the question. What evidence do we have thus far that the amount of money that the administration is pledging to pump into the financial system and the economy generally, which is a lot more than $750 billion -- it`s much closer to $1 trillion if you look at the money that was already pledged to the GSEs prior to some of the bank lending that went on. Where is there evidence that that has actually stabilized, that it`s contributed to more lending, and that, more to the point, it has attracted investors to provide capital to the economy, which is what is needed? Investors remain totally scared.

KRUGMAN: That`s right. I mean, you have to contrast, you know, what you would like to see happening, which we are not seeing, with what we were afraid was going to happen, which luckily, it hasn`t quite happened yet. I mean, there was -- if you go back to around September 20th, thereabouts, when -- after Lehman had failed, the world financial system, just the ordinary business, the grease on the gears that keep even basics going, had ground to a halt. There was just nothing flowing. We were really looking at -- it looked like financial Armageddon. And that has not happened. Some of the basic credit is flowing again, some of it -- now, none of this is rescuing. The economy is continuing to get worse. So we`re basically saying, gosh, we`re very, very sick, but we`ve stopped the patient from bleeding to death immediately. It`s a very, very qualified success. Not nearly enough.

GREGORY: But the concern, it seems to me, as somebody who is not an economist, is to say, if the enormity of the problem was such that the government said we`re going to take this big action so that we can persuade you, the consumer, not to get spooked, well, that`s not working because the consumer is still spooked. So the remedy is not there, and everybody`s saying, well, it could get a lot bigger, but it`s gotten bigger than everybody said it would get initially.

KRUGMAN: That`s right. And so that`s why more financial stuff may be necessary because we may approach the brink again. But it doesn`t solve the problem. And so...

GREGORY: But in your column today, you talked about the need for really a huge, a super-sized, a hungry, super-sized stimulus package to the order of $600 billion. Why is more necessarily better?

KRUGMAN: Because this is different. What we`ve been doing now is we`ve been providing cash to financial institutions so they don`t go under. Now we`re talking about actually going out there and building bridges and, you know, employing people. We`re talking about actually putting people to work, or if it`s (INAUDIBLE), stopping people from being laid off. So this is -- we`re now talking about shifting. And we`ve been talking about Wall Street basically. Everything that has happened so far is about trying to patch up Wall Street. Now we`re talking about actually providing a lot of aid to Main Street. Now, maybe I`m all wrong and this won`t work, but it`s not the same thing as what we`ve been doing so far.

GREGORY: All right. Paul Krugman, there`s a lot to watch and witness and analyze. And appreciate you doing some of that here tonight.

KRUGMAN: Thanks.

GREGORY: Coming next, a possible cabinet position for Senator Hillary Clinton. Barack Obama has always talked about a team of rivals, but there may be another reason for considering Clinton. We`ll get to that in a minute. Plus, call it a sign of bipartisan unity. John McCain and Barack Obama have set up a meeting of the minds. It`s all ahead on 1600 PENNSYLVANIA AVENUE after this.

Originally broadcast, 11.14.08