Saturday, June 30, 2012

Economics:  The Great Abdication

Suddenly normally calm economists are talking about 1931, the year everything fell apart.

It started with a banking crisis in a small European country (Austria). Austria tried to step in with a bank rescue —- but the spiraling cost of the rescue put the government's own solvency in doubt. Austria's troubles shouldn't have been big enough to have large effects on the world economy, but in practice they created a panic that spread around the world. Sound familiar?

The really crucial lesson of 1931, however, was about the dangers of policy abdication. Stronger European governments could have helped Austria manage its problems. Central banks, notably the Bank of France and the Federal Reserve, could have done much more to limit the damage. But nobody with the power to contain the crisis stepped up to the plate; everyone who could and should have acted declared that it was someone else's responsibility.

And it's happening again, both in Europe and in America.

For more, see The Great Abdication by Paul Krugman, June 24, 2012 at NYTimes.com.

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