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RATHER (On Camera): Welcome back to the program. We've been making a special effort on this broadcast in recent weeks to bring you as much information as possible about concern number one in this country, the economy. It's a subject that is deep and complicated. But it affects or will affect every American. We're fortunate tonight to have one of the best explainers of economics around to share his thoughts. He's professor Krugman of Princeton University. He's also a columnist for the "New York Times." But one of the big headlines in his life just occurred. Professor Krugman has been awarded the Nobel Prize in Economics. Congratulations, professor. And welcome to the program.
PAUL KRUGMAN, PROFESSOR AND WINNER OF NOBEL PRIZE: Thank you and-
RATHER: Thank you for being here. What is the essence of the current story of economics in the United States and, for that matter, the globe?
KRUGMAN: You wanna think of it as being like the great banking crises of history. I mean, this is something-- there are family resemblances between what's happening now and what happened in the early 1930s. Big losses on some investments. Not a stock market bust this time but a housing bust-- leading to a sort of loss of trust, loss of confidence in the financial system. The only thing that's different now is that banks, traditional banks, big marble buildings that take deposits, have been fairly well regulated, have got a fairly good safety net. But it's other stuff, other institutions that l-- in effect, do the jobs of banks but aren't called banks that aren't subject to the old regulations are the ones that are in big trouble. And it's propagating. It's-- it's like 1931.
RATHER: When you say "other institutions," you're talking about Wall Street investment firms, financial sector-
KRUGMAN: Investment banks-- loan originators-- complicated things, auction rate securities. But all of these things that promised one set of people that they had ready access to their money, while at the same time, investing in other stuff that was supposed to be safe but has turned out not to be.
RATHER: Are we in a recession now, in your judgment? Have we been in one for a while? Or, as most of the so- called experts seem to put it, we're on the brink of a recession?
KRUGMAN: Well, I guess it depends on what you mean by the word "recession." But look, employment's been declining since the beginning of 2008. Unemployment rate has shot up from around four and a half to over six percent. Industrial production is way down. That, if it's not a recession, it's the moral equivalent of a recession. It feels-- it-- it's a terrible economy for people trying to get a job. A lot of people losing their jobs. It's tough times.
RATHER: And you said 1931. What are the chances that that will turn out to be an overstatement? Well, it's bad. We're in a recession, maybe a deep and lengthy recession but not like the 1930s.
KRUGMAN: Left to itself this financial crisis would be an equivalent we would be talking about Great Depression level collapse. Now, we have two great differences between now and 1931. One is that we think we understand the economy a little bit better than Herbert Hoover did. The other is that we know that 1931 happened. The biggest reason to think we won't have another Great Depression is that people remember that there was a Great Depression and are taking actions in an attempt to head that off. But the underlying crisis is deep and broad. This is-- this is the real thing.
RATHER: And how long does this last?
KRUGMAN: The last recession, although officially it ended after eight months, it really was two and a half years before the job market started to improve. There's no reason to think that this is gonna be any shorter. The housing bust, you know, there's a huge amount of adjustment to go on in housing. It's not quite s-- clear where the forces for strong recovery come from. So we could easily be looking at three years more of a depressed economy.
RATHER: For people at home what are we to do? What-- some practical advice or if your students come to you and say, listen, you've just won the Mo-- Nobel Prize for Economics. You must know what-- what to do.
RATHER: What to do?
KRUGMAN: Well, I mean, we're talking about individuals? We're talking about-
KRUGMAN: I mean, I-- I'm being very cautious, personally. I'm-- I'm not in the stock market at the moment. I'm-- I bought some muni bonds, mostly 'cause I think that in the end Washington will come to the rescue of the states and local governments. But, you know, take-- be careful. These are-- we-- we were assured that the wizards of Wall Street knew what they were doing. And it's now manifest that they-- they did not know what they were doing. And there are a lot of risks out there and probably some mines that haven't exploded yet.
RATHER: The bailout. Or if you prefer the word, the rescue. I've noticed by the way it's changed from a bailout to a rescue.
KRUGMAN: Yeah, I'm a bailout guy personally.
RATHER: All right. The bailout--what's in it for the taxpayers? What's in it for you, me, and other Americans?
KRUGMAN: Well, the-- consider the alternative. Basically what we're doing now is as-- as it now stands what's happening is that the U.S. government is buying a stake in the banks. And it's-- it's-- in-- in that way, it's providing them cash and then it's taking a share in the upside if and when things recover. So putting cash into the financial system is something we have to do. I don't like it. I don't like the idea that-- in some ways we're taking some of the people responsible for this mess and putting them-- taking them off the hook. But, you know, you don't play games with financial collapse.
RATHER: You mentioned some of the same people who created this or at least helped to create it are-- are now getting the benefit of the, quote, "bailout."
RATHER: There's a lot of public anger about that.
KRUGMAN: And-- and-- and rightly so. And, look-- if you compare tale of two countries. In Britain-- they-- which actually set the model for the bailout we're now doing. We're actually following the lead of the British government. The British government is putting in quite strict restrictions on executive pay-- putting on, you know, the conditions for the bailout are designed as much as possible to prevent the-- the guilty parties from-- from benefiting from the whole thing. The United States much less so. So I-- you know, it-- they-- I-- I would like to see a more aggressive saying, "Hey, you know, we're coming to the rescue here. Quid pro quo is that we're not gonna let, you know, the-- the-- the executives who profited when things look good-- get away scot free." But-- you know, that-- that's a different question. We don't wanna scrap the whole thing because of the injustice of it.
RATHER: Correct me if I'm wrong, you favor-- stricter regulation, maybe quite a bit stricter-
RATHER: --regulation. And-- oversight on Wall Street. But doesn't that or does it just run counter to what Wall Street is? Wall Street's in markets, you don't want regulation.
KRUGMAN: Well, you know, we-- 75 years ago somebody would have said, well, banks, you know, banks are the private sector. They should be left to themselves. But it turned out that banking crisis practically destroyed the world as we knew it. So strict regulation of banks-- strict oversight of banks was put into place. And, you know, the world worked pretty well for the next half century. That-- that was not a problem. Now it turns out that we have institutions that are as every bit as-- capable of wreaking havoc as banks that turn out we have to rescue them the way we rescued banks in the 1930s. So they ought to be regulated like banks. It's-- there's noth-- there's no natural law that says that financial markets have to be left-- as, you know, have to have Wild West codes of-- of behavior. We-- we can do this. And-- and we did it before. And I'm just saying we should do for this expanded banking system what we did for the old banking system when FDR was President.
RATHER: And to those who say, "Ah, but that's socialism. We believe in capitalism. Capitalism has its ups and downs. But, on the whole or in the main, it works a whole lot better than the government trying to run institutions such as banks," you say what?
KRUGMAN: Well, you know, After World War II, under this regulated banking system, relatively high taxes, we had the greatest generation of economic growth in American history. You know, call it whatever you-- you know, if you wanna call it socialism, I-- what's in a name? The fact of the matter is-- a market system with oversight, with some regulation-- is something that has historically worked pretty well and a whole lot better than this-- again, I say Wild West system that we've been running on for the last-- couple decades.
RATHER: In brief, what's happened to us? How did we get here?
KRUGMAN: It's a bunch of things, right? But we-- look, ideologically-- there was a push towards this "the market is always right; the government is always wrong." That push was possible largely I think because the memory of the Great Depression had faded. The '30s receded to the past. Began to seem like all the things that happened then were-- were old wives' tales, myths. It's not so much that we stripped away the safeguards we had in our system as the-- the world got more complicated and the safeguards were not updated to keep track of that. And so we were vulnerable to this awesome crisis.
RATHER: So the housing bust led to a banking bust. Any other busts out there near the horizon that we ought to be on the lookout for?
KRUGMAN: Well, yeah. There are several sectors that are not-- that are also have got lots of debt-- that might be problematic. It's mainly 'cause the economy itself is now slide-- the real economy, the economy of jobs and-- and-- and wages-- and profits is-- is-- is now in a steep slide. So then we worry about consumer debt. Worry about credit cards. There's rapidly rise in defaults in credit cards. Worry about corporate-- debt. Corporate bankruptcies are gonna go up. It's starting to happen. And all of that gives you the possibility of another round of stuff. I mean, I sometimes have this image in my mind, this is not reassuring, of, you know, when-- when a building is hit in an earthquake. Some of the top floors collapse. You say, oh, well, that's okay. But then they bring down another floor. And that brings down another floor. And that-- the building pancakes. And-- and I'm a little worried about this could happen to the-- to our system. And, in fact, you know, as-- as the housing market-- imploded and as home equity loans dried up, a lot of people turned to credit cards to keep on being able to pay their bills. So there's probably a lot of bad credit card debts accumulated relatively recently in the last couple of years which is gonna turn to a problem. So it's not as big. You know, nothing-- housing before the bust was $20 trillion of-- of-- of wealth, which has probably now been shrunk by seven or eight billion-- trillion. And even I can't get this right. And-- and the other things are not nearly that big. But it can feed on itself.
RATHER: Well, let's talk about the presidential campaign.
RATHER: How have Senator John McCain and Senator Barack Obama handled the economic crisis, what they've said about it?
KRUGMAN: Well-- Senator McCain, you know, is fundamentally a-- free market guy, a deregulation guy. His best friend, his chief economic advisor until he said something about us being a nation of whiners was-- was Phil Graham, who was-
KRUGMAN: Mr. De-- Deregulation.
RATHER: Former Senator Phil Graham.
KRUGMAN: That's right. And-- he really has-- he's tried to reinvent himself as, "Oh, well, I'm against greed." But, you know, that's not where he's been historically. And even when he tries to talk about it, he tries to place the blame on the government. Talks about Fannie and Freddie, which were certainly behaved badly but are not, by any reasonable analysis at the core of this crisis. But in McCain's vision, that's what it's about. Obama is basically a pro-regulation guy. He was actually pro-banking regulation, before that became sort of the consensus. He has not taken a leadership role on responding to the crisis, which maybe wish he were more-- doing more of that. But, on the other hand, that is very difficult for-- an individual presidential candidate to do. And he's, you know, he's making sense. And he's talking to people who-- who make sense. So-- clearly, you know, the-- the polls have moved strongly in Obama's direction since the crisis hit. And that makes sense. If you were asking which of these guys seems to be on top of it, clearly Obama's looking more like he is.
RATHER: But fair to say you've been an Obama backer and supporter from almost the beginning?
KRUGMAN: Well, I'm a "New York Times" columnist, which means I can't do endorsements. And in principle you don't know which party I-- I prefer and all of that. And I had some-- actually, I had some skepticism about Obama during the primary fights-- because I-- I actually basically considered him a little too conservative on economics for my taste and also too unwilling to sort of make the case that progressive economic policies are better than conservative. It was a lot of this sort of both sides have been in error and I'm going to reconcile it. But lately-- he's running as exactly the kind of candidate that I thought a Democrat should be. He's saying, "We're right. They're wrong. Markets need regulation. Look at the track record of the Clinton administration. Compare with that with the Bush re-- administration." So at this point, I certainly don't have any complaints about-- about the Obama campaign. And as for what he will do if he's-- if he is elected and-- and-- well, you know, we'll-- we'll see. But-- but there are a lot of smart people around him.
RATHER: A lot of smart people around him, like whom?
KRUGMAN: He's talking to Robert Rupin, Larry Sommers-
RATHER: And these are former Treasury secretaries-
KRUGMAN: Former Treasury secretaries who are, you know, very, very Clinton-associated people who are very good. And they didn't get everything right in this crisis, but they-- they're very good. A lot of speculation, I have no idea, no inside sources that Tim Geitner, who's the president of the New York-- and-- and necessarily non- partisan right now, might be the next Treasury Secretary. And I-- Geitner is a-- has been really good. And he's been calling more of the shots right in this crisis than anybody else in responsible positions.
RATHER: But if Senator McCain were to win, name me some people he might be likely to bring into his administration in Treasury and other key spots?
KRUGMAN: Well, I mean, his-- his chief economics person right now is Douglas Holtz Eekan, former Congressional Budget Office director. And Holtz Eekan is-- is a smart guy-- But, you know, I-- I have every reason to think that Sena-- former Senator Phil Graham would be very much in the running for Treasury Secretary, which is a terrifying thought.
RATHER: Terrifying thought, why?
KRUGMAN: Because he's been utterly wrong about this and is-- has-- you know, he's-- he's-- he's Mr. Deregulation. If-- if I were to name the two people most responsible for this crisis it would be, first, Alan Greenspan and then, in fairly distant second place, Phil Graham. So that's not good.
RATHER: Well, you mentioned Alan Greenspan. What was wrong with Alan Greenspan's term? He served in both the Democratic and Republican presidents.
KRUGMAN: Well, he presided during the '90s over an era of great prosperity and was given a lot of the credit for that and deserves a little bit of that credit because he at least was willing to say, you know, "I'm not gonna raise interest rates to choke off inflation until I actually see some inflation," which was a very good move it turned out 'cause the economy proved to be much more capable of growth than-- than most people imagined. But he really two-- two main things in terms of monetary management. One was that he-- the housing bubble was staring him in the face, and he refused to acknowledge it. Said, "Oh, maybe there's a little froth in the markets, but I don't see a bubble." And- - and he was repeatedly warned about the dangers of subprime lending. People were warned that this was spinning out of control and stood very strongly against doing anything about it. So we might have had some regulations, some efforts to curb the craziness-- if it were not that Alan Greenspan said to trust the markets, trust these-- these-- trust these-- financial derivatives. They're a great thing. They-- they eliminated a lot risk.
RATHER: Let's play a game for a moment. A new president is in, whether it be Senator McCain or Senator Obama, call you in, congratulations-- on your Nobel Prize. What is the first thing you think I, as President, should do, professor?
KRUGMAN: The first thing you do is rescue the-- now rescue the real economy. We need-- expand unemployment benefits to help the unemployed and also to pump money into the economy. We need infrastructure projects. Second thing to do is healthcare reform and actually do them concurrently-- 'cause that's the longer term thing is that's the most important thing to do.
RATHER: Where's the money for that gonna come? You say pour money into infrastructure. Take care of the healthcare problem. These are very expensive things.
KRUGMAN: Well, they are. But it's a one-time expense. It's not an ongoing-- thing. And look when you're in those kinds of circumstance, when you have a really depressed economy, you need-- you have to throw some of your fiscal caution to the winds and borrow and spend. I mean, the-- the Great Depression was finally ended by a-- giant-- debt finance public works program otherwise known as World War II. And-- you know, it-- it would be nice to say it was done through a deliberate effort. But we desp-- we do need that. There-- there are times when you wanna give-- a fiscal when you wanna say, "Look, we've really gotta get this deficit under control." This is not one of those times.
RATHER: What's the single-most important thing for people to know right now about the economy? And I'm talking about people who work every day, hope they can continue to keep their jobs, the kind of people who really form the spine of the country.
KRUGMAN: I think the answer is-- play it safe, you know? Saving is good. A good set of-- savings at least a good fraction of them held in a place that is actually safe, like an insured bank deposit-- is-- is good. You know, we-- we talked a lot about-- Americans as investors, as-- Americans as, you know, risk taking is a good thing. But we kind of forgot that, you know-- that's fine up to a point. But you really do wanna make sure that you have an ability to cope if the worst happens because sometimes it does. At some level there's only so much an individual can do, right? We-- this is why we need good government because what we need, above all, individuals should do what they can. But what we need above all is a leadership that takes us out of this mess.
RATHER: Professor Krugman, thank you.
KRUGMAN: Thank you.
RATHER: Congratulations again on the Nobel.
KRUGMAN: Thank you so much.
RATHER (On Camera): And when we return, in service to America, the Peace Corps is taking a whole new look. We'll explain from the Caribbean in high definition next.
Originally broadcast, 10.21.08