The Return of Depression Economics

I’ve been reading “The Return of Depression Economics” by Paul Krugman.  It is an attempt to explain the financial crash of 2008 and why efforts by the Fed and Treasury were largely ineffective.

The book goes into the shadow banking system, the products created by investment banks that largely parallel the depositor banking system but avoids the regulatory aspects.  Paul makes the argument that the crash began as a currency crisis which precipitated a “run on the bank” of the shadow banking system.

He goes on to explain that most of the tools the Fed has are meant to shore up confidence in the depositor banking system. The shadow banking system is not at all backed by the Fed.  When the US Govt came up with special efforts, such as TARP and quantitative easing to add money into the economy, their efforts were thwarted by private investors pulling out money.

The author clearly explains that we are not heading into a depression. A lot of the monetary policy controls the Fed has become ineffective, we are exposed to the economic risks that existed during the era of the great depression.

Anyone interested in economics should read this book.  It provides an interesting explanation of what occurred in 2008.  It also lays out the risks we face in the current economy and those risks are largely not being addressed by the government.

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