Paul Krugman Goes Doom on Economy: End of the Euro?

Today, Paul Krugman posted something on his blog that knocked me right out of my chair.  I have disagreed with Dr. Krugman several times in the past only to find myself proven wrong.  He has given a scenario for what he calls an "end game" for the problems in Europe.  If he is correct, I don't see how it doesn't impact the entire worlds economy, and the elections here in the U.S.  It could very well determine who the next president is, and it will certainly change the game plans for both campaigns.

This is speculation on Krugman's part, and not a prediction, but if it plays out like the speculation, it could be 2008 all over again.

Below is his post in its entirety.


Some of us have been talking it over, and here’s what we think the end game looks like:

1. Greek euro exit, very possibly next month.

2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.

3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.

3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.

4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:

4b. End of the euro.

And we’re talking about months, not years, for this to play out.

European Crises

I have to ask myself, why would Dr. Krugman post something like this?  He is such a prominent economist, he could actually trigger some problems in the markets tomorrow by talking about this.  But on the other hand, this may be the ultimate warning to Europe, especially Germany, that they have to take action now to avoid this scenario.  And it just might work.  The elections in France and Greece have sent waves of horror through the austerity crowd, so maybe this will push them to try something else.

Keep in mind there are $trillions of dollars of Credit Default Swaps (bets), and other toys the geniuses on Wall Street created, piled on the worlds economies and ready to tumble like the proverbial stacked cards.  Also, in 2008 the Federal Reserve committed to supplying over $7 trillion to banks in the U.S. and Europe.  They probably can't do that today.

The Republicans have fought tooth and nail against any type of bank reform over the last several years.  They watered down Dodd-Frank, and they're gutting The Volcker rule.  And the Dems did their compromise until we have nothing so we can try and get one Republican so we can call it "bipartisan" approach.  The Geithner plan that Obama bought into may very well get tested over the next several months.  We need to keep a close eye on this and cross our fingers and hope like hell that Dr. Krugman's scenario doesn't get the chance to play out.

DailyKos / By pollwatcher

Posted at May 14, 2012, 3:07am

Today's Top Stories