The World Today, October 14, 2008

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ELEANOR HALL: He's just won the Nobel Prize for Economics and he's an avowed opponent of the economic policies of US President, George W Bush. But even Paul Krugman says he was surprised by the magnitude of the current financial crisis. Lisa Millar has our report.

LISA MILLAR: Knee-deep in a financial mess that's consumed his every waking hour, Paul Krugman wasn't even thinking about Nobel prizes.

PAUL KRUGMAN: I was stark naked about to step into the shower at 20 minutes to seven and my cell phone rang. I was actually in Washington for a meeting and there we went, just out of the blue, I actually had no anticipation. I wasn't thinking of the possibility at all, so it's an awesome surprise.

LISA MILLAR: The 55 year old is well known as a columnist for the New York Times, but it's his work as an academic at Princeton University that earned him the Nobel honour. In particular the development of theories that could help explain the effects of free trade and globalisation and the driving force behind worldwide urbanisation. He explains it to America's NPR.

PAUL KRUGMAN: Really countries trade with each other because they're different, one country's tropical, another one is temperate so one produces coffee and the other produces wheat and we said well that's part of the story, but there's also a lot of trade that's taking place because somebody gets a small head start in some industry and that builds into a cumulative advantage because of the various economies scale, the sort of circular logic that says that you want to do stuff where stuff like it is already being done. And that was a, it sound pretty simple but actually it wasn't clear in people's minds, it wasn't until we worked this out, so it is a very different view of globalisation and it came at a time when you know the world was getting more global so it has turned out to be very relevant.

LISA MILLAR: Economists around the world have congratulated him on the prize worth $1.4 million US, although there have been mutterings about the politicisation of the awards. Former vice president Al Gore won the Peace Prize last year, Democrat President Jimmy Carter won it in 2002. And with an election just three weeks away, some believe the decision by the Royal Swedish Academy will provoke fresh criticism. Paul Krugman is an unabashed liberal who thinks the economics of the Bush administration have been terrible but he told a news conference after winning the award that Nobel prizes are given to intellectuals and a lot of intellectuals are anti-Bush. He's been relentless in his criticism over the latest financial crisis, but admits even he didn't see it coming.

PAUL KRUGMAN: I should have, I mean I saw parts of it, I saw the housing bubble but I berate myself for not understanding the extent to which we've had these sort of financial domino effects. I saw that there would be a burst bubble and there would be a lot of pain but didn't realise how big the pain would be. Lots of people should have seen it, Alan Greenspan, if there's a villain it's Allan Greenspan who was warned about parts of it and brushed aside the warnings. But in general, in retrospect how could we have been so blind? We had created a financial system that basically outgrew the defences that we created back in the 1930s to protect against banking crisis. We should have understood because the system had outgrown those defences, there was the possibility of another one, but very few people saw it coming.

LISA MILLAR: Paul Krugman thinks the US is on the right path now, but is still moving too slowly and it's possible things could be worse under a McCain-Palin administration. Ironically Paul Krugman is likely to come face to face with the man whose policies he so despises if as on past occasions the President George W Bush invites all of the Nobel prize winners to the White House next month.

ELEANOR HALL: Lisa Millar reporting.

Originally broadcast, 10.14.08