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FRED BERGSTEN: Yes, I think the government, in taking a big position in the banks, in Europe and here, are going to be insisting on tough conditions. They`re certainly going to limit executive compensation. They`re certainly going to require a cessation of dividend payments until the banks are earning money again. They`re charging very high interest rates. The British are charging 12 percent on the preferred stock they`re buying. And they`re going to require the banks -- at least in the British case -- to lend to small and medium enterprises, to lend to homeowners so they can deal with their foreclosure problems. The governments are going to put conditions on this that won`t let the lousy managers keep doing lousy management.

JEFFREY BROWN: All right. We will watch for the next shoe tomorrow. Fred Bergstein, Joseph Stiglitz, and Martin Feldstein, thank you all very much.

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JIM LEHRER: And finally tonight, a conversation with Paul Krugman, winner of the 2008 Nobel Prize in Economics. He`s a professor of economics at Princeton University, a columnist for the New York Times, and a frequent guest here on the NewsHour. I spoke with him earlier today. Paul Krugman, welcome and congratulations.

PAUL KRUGMAN, Columnist, New York Times: Thank you. It`s been an awesome day.

JIM LEHRER: Yes, I bet it has. The Nobel Committee said the prize was for your theory on international trade. Explain that.

PAUL KRUGMAN: Before the late 1970s, international trade was a theory about countries that are different. One country, you know, some place is tropical, another place is temperate, so the tropical country is going to produce coffee, the temperate place is going to produce wheat, and that was how you thought about international trade. A lot of us were groping toward saying, you know, that`s only part of the story. There`s a lot of almost arbitrary specialization between countries. You know, somebody gets a head start. Somebody starts producing a product before someone else. And then just the logic of specialization -- once you`ve got -- there are advantages to producing things on a large scale -- lead to countries producing different things, lead to international trade. And making sense of that, turning that into a clear story, something you could test against data, that`s the kind of work that I did. That`s really what the prize is about.

JIM LEHRER: And the theory led to what? I mean, what has -- what has happened as a result of your coming up with this theory?

PAUL KRUGMAN: Well, first of all, it`s -- there was a huge blank spot. We couldn`t understand before why the United States and Canada were doing so much trade, why France and Germany were shipping seemingly similar goods back and forth, why you were sending Peugeots from France to Germany and Volkswagens from Germany to France. And the theory told you why that was happening. And then it has, to some extent, shaped policy, because it tells you why, for example, integrating the European economy is so important, the advantages of being able to have 15 economies that are doing slightly different things, so that each of them is doing it at an adequate scale, instead of having this fragmented marketplace. So I think it`s helped with the policy, but mostly, you know, it`s scientific work. We`re trying to understand, why does the world work the way it does?

JIM LEHRER: Sure. So it`s an understanding theory as much as...

PAUL KRUGMAN: Yes, this was not -- most of it was not really very much about policy. There are policy implications, but it was, why is there international trade?

JIM LEHRER: I got you. All right, is there no connection, do you believe then, between the warnings you`ve been giving the last three years or so about the difficulties coming in the economy if something wasn`t done?

PAUL KRUGMAN: If you read deep into the Nobel Committee`s discussion of my work, they do talk about the work I`ve done on economic crises. And, in fact, I did a lot of work on trying to understand crises in places like Indonesia and Argentina, which, unfortunately, is relevant. It does turn out that some of the same mechanisms, some of the same sort of domino effects that lead to financial collapse have been operating in the United States and the rest of the world, so there is a connection to some of my academic work, but not the trade work.

JIM LEHRER: Yes. Any satisfaction at all in being right about the calamities that were coming?

PAUL KRUGMAN: You know, better to have been right than to have not seen anything of it, but, no, I mean -- I`m terrified by, you know, I -- I did not expect to be seeing anything in my lifetime that was reminiscent of the 1930s and I`m not gratified to be living through it, thank you. I`d rather have been wrong in this case.

JIM LEHRER: On the -- you were on a program, of course, last Friday, and you were downbeat. Now, has anything changed as a result of what happened in the market today, 950-plus points, et cetera?

PAUL KRUGMAN: Well, the market does what the market does. But, actually, there was some serious good news yesterday. Remember, you know, the United States is not the core of the world. We`re one of the big players, but the nations of continental Europe, the Eurozone, the 15 countries that use the euro as a currency, had a very good summit yesterday. They did much better than I thought they would. On Friday, I think I was just saying, you know, they can`t get their act together. Well, on Sunday, they did. They agreed on a rescue plan, which is similar to the plan that Britain has already implemented, similar to the plan that I hope the United States will implement, so actually the policy got significantly better. So I`m substantially more optimistic now than I was when last we talked. That`s not enough to make me, you know, actually optimistic, but it`s not as bad as...

JIM LEHRER: OK, as a result of the weekend, as a result of...

PAUL KRUGMAN: As a result -- as a result primarily of that European summit on Sunday.

JIM LEHRER: The 950 points of Wall Street shouldn`t be read as anything too serious, is that what you`re saying?

PAUL KRUGMAN: You know, it`s the old line that the stock market has predicted nine of the last six recessions and probably 10 of the last eight recoveries. I mean, the market can -- the market is not -- doesn`t necessarily understand what`s happening.

JIM LEHRER: When and why did you decide to become an economist in the first place?

PAUL KRUGMAN: Oh, that`s a little embarrassing. I was -- I don`t know how many of your viewers watch science fiction, read science fiction, but this very old series by Isaac Asimov, the "Foundation" novels, in which the social scientists who understand the true dynamics save civilization. And that`s what I wanted to be. And it doesn`t exist, but economics is as close as you can get. So when I was a teenager, I really got into it.

JIM LEHRER: And then -- but you decided to study it then and become an economist?

PAUL KRUGMAN: Well, I took courses in it and found that I thought it was really interesting as an undergraduate. And then in my -- late in my undergraduate, during my junior and senior years, I started working as a research assistant for some fine economists at Yale where I studied and that led me into the field.

JIM LEHRER: Did you have a master plan, a big list of expectations, "Hey, I`ll be an economist and I`ll do this, this, this"?

PAUL KRUGMAN: No, it`s all come as a surprise. I thought I would have a quiet academic life, you know, wear jackets with leather patches on the elbows and sit in a chair smoking a pipe, except that I don`t smoke. And all the stuff I`ve gotten into has been not at all what I`d had in mind.

JIM LEHRER: What do you think winning the Nobel Prize is going to do for you? Is it going to change any of your lifestyles or any of your thinking about yourself, and who you are, and what you`re going to do?

PAUL KRUGMAN: I don`t think so. I mean, obviously, it helps -- you know, it`s a great door-opener. People say, "What did you do? What was your, you know -- you say you`re an academic. How do I know that you`re serious?" "Well, you know, I got this label now." But, you know, in the field of economics, people know each other`s work. It`s not going to change their view of my work, because they know it already. And if they like it, they liked it. And if they don`t, they think the Nobel Committee made a mistake. And I don`t think it`s going to change the way I live in any significant way.

JIM LEHRER: Well, of course, in addition to your academic work, you`re also write a column regularly for the New York Times, and that is -- that is something in and of itself. Do you see that as separate from your academic life? Are they one and the same?

PAUL KRUGMAN: Well, it is different, right? I`m writing short pieces in plain English versus longer pieces that are largely incomprehensible in my other professional life. So that`s different. But I think that there`s some habit of thought that carries across, trying to boil things down, and what is really going on here? What do we need to know? What is the essence of the story? That applies equally well to a theoretical paper about international trade and to an 800-word column in the Times. So they do relate, but -- and I`m the same person, but obviously they are different.

JIM LEHRER: OK. Paul Krugman, again, congratulations. This is a big honor. Congratulations.

PAUL KRUGMAN: It`s extraordinary. Thank you.

JIM LEHRER: Thank you.

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JIM LEHRER: And, again, the other major developments of the day. World stock markets staged a comeback. The Dow Jones Industrial Average soared 936 points. And European nations moved to bolster the banking industry. Britain led the way, buying stakes in banks and injecting new cash. We`ll see you online and again here tomorrow evening. I`m Jim Lehrer. Thank you, and good night.

Originally broadcast, 10.13.08