Krugman Warns of Chinese Bubble

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There's not one big bubble but there are probably many more bubbles out there.

Does the US need another stimulus package?

Oh yes. If you believe the original estimates, the stimulus package will have added, let's say three million jobs, to what we would otherwise have had. The fact is that we have lost 6-7 million. And it is getting worse. This package is not big enough to close the gap by a long shot and it's limited by time. So yes, we need another package and it has to be largely spending-oriented.

Now that the worst is probably behind us, should we still worry about things like liquidity trap?

We're in a liquidity trap because interest rates are close to zero. I think we're going to be in a liquidity trap for at least a year, probably till the end of next year. But there are expectations in the US of inflation coming

back in future. I think it's crazy. In Japan, the monetary base increased by 80% in 10 years after 1997 and prices continued to fall. When you are in a liquidity trap, it just doesn't matter.

You say in your book that financial globalisation has turned out to be even more dangerous than we had imagined. Would you like to expand on that?

Think about Iceland. Did anybody truly understand that possibility? We thought before the crisis, the risks of financial globalisation were primarily to emerging markets. But the problem was simply the high leverage and exposure to foreign assets. We have seen that Germany had no housing problems. Nonetheless, German banks can be caught in deep trouble because of the fallout from the US or the Spanish housing problems.

Markets as self-adjusting, self-correcting god-like mechanisms. Do you think that dogma is out of the window now?

There's a great seductiveness to efficient markets here. So, efficient markets have been very hard to kill. And, I think, it may survive even this. The Asian crisis, the dotcom bubble, all of those should have severely shaken faith in self-regulating markets and yet that faith persisted pretty well. So, I'm not sure that even this will kill it.

What will be your advice to India as our budget balance is fairly scary, but the FM has said: I'll worry about it later and play for the growth now?

I think that's right. You do have to have a plan in place to restore a healthy budget but not this year. Not with the world economy still so fragile, not with so much excess capacity still out there.

What kind of financial regulations would you want to emerge out of this crisis?

We need to have something like traditional bank regulation extended to any financial product if it is capable of generating a crisis. We need to have some central regulatory authority being given the freedom to designate certain institutions systematically important and subject those to capital requirements with limits on leverage first of all and then other kinds of potential regulations as well.

Andy Markowitz is the multimedia editor of Transitions Online.

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