"The financial crisis is far from over"

The rich world has entered a state of lasting economic depression, says Paul Krugman, 60, one of the world's most famous economists and Nobel laureate.

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Paul Krugman notes that Norway has had an amazing rise in property prices, but avoids predicting a property price fall. Foto: Siv Dolmen

  • Toralf Sandø
    Økonomijournalist
  • Michael Sandelson
iconDenne artikkelen er over seks år gammel

The 2008 Nobel Prize winner in economics arrived in Norway on Tuesday afternoon following a strenuous journey from a comfortable holiday existence in the Caribbean, to a grey, but mild Oslo in winter. He is the central figure at Skagen Fondnene's New Year Conference in the capital, Wednesday. Mr Krugman is slightly jet-lagged after spending a sleepless night spent in a faulty aircraft seat on the flight across the Atlantic, but quickly becomes animated as soon as he starts talking about where the world stands five years after the financial crisis raged at its worst.

"Barely recovered"

"My main message, Wednesday, is that the financial crisis is far from over. We've seen that economies have stabilised, and it doesn't seem as if the world will experience an economic meltdown. But we've barely recovered from and overcome the real effects of the financial crisis," says Paul Krugman to Aftenbladet and business daily Dagens Næringsliv, who have both been granted an interview with him.

The Professor of Economics at the US' Princeton University in New Jersey, as well as permanent blogger and writer at The New York Times emphasises two points:

  • Firstly, the economic crisis will persist.
  • Secondly, we've entered a world where the economic crisis and stress will follow us for the foreseeable future.

Stagnation and bubbles

The condition of persistent stagnation is an expression that Professor Krugman's colleague in the field of economics, Larry Summers, has launched. One aspect of Mr Summers' analysis is that the only way to keep the economy buoyant is to jump from one financial bubble to the next. The US experienced an IT and Internet stocks bubble around 2000, known as the Dotcom Bubble. It burst in 2001.

Paul Krugman mener at innstrammingspolitikken som har vært ført i en rekke europeiske land har vært skadelig. Når det nå går bedre i en del land, tilskriver Krugman at innstrammingene nå er lettet. Foto: Siv Dolmen

Prices rose sharply in the the US in the years that followed. The bubble burst in 2007. The sharp fall in property prices subsequently led us into the financial crisis, because banks and other financial institutions suffered giant losses on mortgages .

Chronic condition

"If we look back over the last 15 years or so, we see that the United States and, in fact, Europe have never managed to achieve full employment even during bubbles in the economy. Unemployment rises when these burst. We're in a kind of chronic condition where we either have dangerous bubbles, or high unemployment and economic depression," says Professor Krugman.

At the same time, he would not say that the economy needs bubbles to tick along, but something or other is required to ensured demand remains buoyant.

Loans have explosive power

"There's quite strong evidence showing that what we experienced in 2008 and afterwards is not a one-off event, but that it looks more like being a chronic condition" Professor Krugman explains.

He believes that some bubbles may be benign, referring to the Dotcom Bubble. Bubbles that have become larger with the aid of loans are worse.

"The problem of housing bubbles in the US and Europe was that they were financed by loans, which led to a much stronger economic crisis."

"No share bubble"

Share prices in this part of the world have risen sharply over the past year — i.e. in established well-developed economies. In Europe, share prices have risen by over 16 per cent measured in European currencies. Stocks have soared some 26 per cent in the US. Share prices in emerging economies have fallen by 5 per cent. Professor Krugman does not think that current share prices live in a bubble.

"It's possible that share prices may turn out to be too high. Economies are not going too well, but companies' profits are high. In my view, there's no reason to say we're experiencing a shares bubble now.

"Unbelievable property price rise in Norway"

The Professor of economics professor believes that the standstill we are currently witnessing concerns the entire rich, developed area of the world, but with a few exceptions, including Norway. He notes, however, that Norwegian property prices are astonishingly high, even though these have fallen slightly over the past half year.

Are we experiencing a housing bubble in Norway?

"Norway has had an unbelievable rise in house prices. One could argue that there are fundamental factors indicating a certain type of growth, namely that oil activity and Sovereign Wealth Fund levels should indicate high prices for land and housing. It looks pretty incredible. I'm not familiar enough with the Norwegian data to be 100 per cent certain, but the strong growth in property prices and high degree of household debt makes me worried.

Foto: Siv Dolmen

Professor Krugman adds that Norwegians may see the world though a veil, observe that they are wealthy, and that the state, with its oil wealth, stands behind as an unspoken guarantor of household debt should it become priceless, literally-speaking.

Heading towards a "Minsky moment"?

"But you can also describe a story in which Norway will experience a "Minsky moment" regarding household debt."

The term "Minsky moment" is named after American economist Hyman Minsky (1919-1991) and his description of how the economy is cyclical. A "Minsky moment" occurs after a period of economic recovery, where increasing values ​​of investment objects — such as housing - leads to increasing speculation using borrowed money. Housing prices, or those of any other object of speculation, drop when no new money enters the system.

"Tightening is incorrect"

Professor Krugman has been a strong critic of the austerity policies introduced in crisis-hit countries in the Euro Zone. Yet Ireland is now no longer dependent on help from the International Monetary Fund. It also seems that the Spanish economy is on the mend. Last autumn's figures showed that the economy is growing again following several years of decline in the country's value creation.

Doesn't this suggest that the austerity measures in Europe have worked?

"It reminds me of a comedy in which an idiot is standing and hitting his head against a wall, while another asks him why he is doing it. "It's because it feels so good when I stop," answers the man beside the wall. What happened in Ireland was that they have had strict austerity measures. They haven't reversed these, but are not going to tighten them to any further degree. So the economy picks up again when you stop pounding it. There's a cautious rise in Spain."

"Unfathomable catastrophe"

Professor Krugman maintains that people in Ireland and Spain would not have believed early 2014 unemployment rates of 23 and 26 per cent, respectively, would have been possible if they had been asked the future five to six years ago.

"They would have called it an unimaginable disaster that just couldn't happen. The policy that led to these figures would then have been described as catastrophic. It's impressive that Ireland can now fetch money in the market. It's more a vote of confidence in Ireland's current policy. This does two things: One is that the market believes that Ireland will service its debt, and the other is that European Central Bank Governor Mario Draghi will do what is possible to ensure liquidity," concludes says Paul Krugman.

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