CBS Early Show, October 14, 2008

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HARRY SMITH, co-host: Joining us now us Paul Krugman, who was just awarded the Nobel Prize in Economics. He's a professor at Princeton University and a columnist and blogger for The New York Times. Good morning, and congratulations.

Mr. PAUL KRUGMAN (2008 Nobel Memorial Prize in Economics): Good morning, and thank you.

SMITH: First off, this infusion of $250 billion, some of it straight into America's biggest banks, is this a good idea?

Mr. KRUGMAN: Yes, it is. In--we're following the lead of the British who did this actually on a--relative to the size of their economy, on an even bigger scale yesterday. So this is--this is what a lot of economists have been calling for. The problem is the banks don't have enough capital to do their business, people don't trust them. This is what the doctor ordered, as far as we can tell.

SMITH: Right. But the--we've been listening for all these years to all these free marketeers who are saying, `Get the regulation out. Keep the government away.' Yet, now all of a sudden these banks and the government are literally going to be business partners.

Mr. KRUGMAN: Well, it's an amazing thing, you know. The Bush administration has seized the commanding height of the economy. Whoever thought that would happen? But it's necessary. You know, there are times--the free markets are great, but sometimes you got to step in. And right now, you know, we're on the edge of the precipice. So you need to do this.

SMITH: Yeah. Do you have a sense that in the days and weeks to come the markets will be as volatile as we've seen in the last month?

Mr. KRUGMAN: Sure. Because the truth is, no one--although most economists that I know think this is the right thing to do, no one is sure it'll work. And there's going to be manic-depressive markets as people wonder. And we don't have the evidence in yet about whether it'll really work. So this was a leap of faith, literally, by the--by the Dow yesterday. And there may be, you know, moments of depression coming along, too.

SMITH: So there's a Band-Aid now. Maybe it--maybe it proves to be the--may be the cure. On the end, though, we're starting to see mounting job loss. This is going to be passed...

Mr. KRUGMAN: Right.

SMITH: ...on down the economy in the months to come. How bad do you foresee this recession going to be?

Mr. KRUGMAN: It looks like a nasty recession even if this works, right? What we're talking about here is preventing the collapse of the banking system, which is--collapse of the banking system is what turned a recession in the 1930s into the Great Depression.

SMITH: Mm-hmm.

Mr. KRUGMAN: So we're trying. But the recession is still, you know, barrelling along. There's a lot of momentum behind it. This is not--these are not going to be good times. We're just trying to prevent them from being terrible times.

SMITH: Hm. You get a prize of more than a million dollars when you win the Nobel. I'm just very curious if, once you get that check, how will you invest it?

Mr. KRUGMAN: People are--partly depends on where the markets are. I mean, as--you know, as of before the markets opened yesterday, I was thinking maybe stocks are looking cheap. I'm not sure anymore.

SMITH: Paul Krugman, thank you very, very much for taking the time to speak with us. And again, congratulations.

Mr. KRUGMAN: Thanks so much.

SMITH: Do appreciate it. All right, Julie.

JULIE CHEN, co-host: All right. Thanks, Harry.

Originally broadcast, 10.14.08