Paul Krugman: How America Was Spared the Worst of Financial Crisis

In his latest New York Times column, economist Paul Krugman points to a series of federal economic policies that spared America the worst of the Great Recession. Despite staunch Republican opposition—including fights over raising the debt ceiling—the White House and Federal Reserve, "have mostly worried about the right things," enacting policies that may not have been perfect, but nevertheless blunted the worst effects of the financial crisis. 


Their actions fell far short of what should have been done; unemployment should have come down much faster than it did. But at least they avoided taking destructive steps to fight phantoms.

Start with the Fed. In his recent book “The Courage to Act,” Ben Bernanke, the former Fed chairman, celebrates his institution’s willingness to step in and rescue the financial system, which was indeed the right thing to do. But everyone did that.

The real profile in courage was the Fed’s behavior in 2010-11, when it stood fast in the face of demands that it tighten policy despite high unemployment. The pressure was intense, with leading Republicans including Paul Ryan, now the speaker of the House, accusing Mr. Bernanke of “debasing” the dollar and suggesting that he was corruptly aiding President Obama. Hard-money advocates seized on a rise in headline consumer prices, claiming that it was a harbinger of high inflation to come.

But the Fed stuck to its, um, printing presses, arguing that the rise in inflation was a one-time blip driven mainly by oil prices — and it was proved right.

That's in contrast to Europe, Krugman points out, where the richer nations tanked poorer countries' economies by imposing harsh austerity measures. Although the federal government could -- and should -- have pushed through a far bigger stimulus package, Krugman notes, "it was much better than nothing, and was enacted over scorched-earth opposition from Republicans claiming it would cause soaring interest rates and a fiscal crisis. Again, this is in strong contrast to Europe, which never did much stimulus and turned quickly to savage austerity in debtor nations."
The result, Krugman says, was that a series of "'not-so-bad policies' have resulted in a 'not-so-bad economy."
"It’s not a great economy, by any measure: Unemployment is low, but that has a lot to do with a decline in the fraction of the population looking for work, and the weakness of wages ensures that it doesn’t feel like prosperity. Still, things could be worse."
Read the entire column.

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