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Krugman: Bubble, bubble, banking trouble

  • Brazil's President Dilma Rousseff, Russian President Dmitry Medvedev, Indian Prime Minister Manmohan Singh, Chinese President Hu Jintao and South African President Jacob Zuma, pose for a phote at the 2012 BRICS summit in New Delhi, India. (SAURABH DAS / Associated Press)

So, another BRIC hits the wall. Actually, I've never much liked the whole “BRIC” — Brazil, Russia, India, and China — concept: Russia, which is basically a petro-economy, doesn't belong there at all, and there are large differences among the other three. Still, it's hard to deny that India, Brazil and a number of other countries are now experiencing similar problems. And those shared problems define the economic crisis du jour.

What's going on? It's a variant on the same old story: Investors loved these economies not wisely but too well, and have now turned on the objects of their former affection. A couple of years back, Western investors — discouraged by low returns both in the United States and in the noncrisis nations of Europe — began pouring large sums into emerging markets. Now they've reversed course. As a result, India's rupee and Brazil's real are plunging, along with Indonesia's rupiah, the South African rand, the Turkish lira and more.

Does this reversal of fortune pose a major threat to the world economy? I don't think so (he said with his fingers crossed behind his back). It's true that investor loss of confidence and the resulting currency plunges caused severe economic crises in much of Asia back in 1997-98. But the crucial point back then was that, in the crisis countries, many businesses had large debts in dollars, so that falling currencies effectively caused their debts to soar, creating widespread financial distress.

That problem isn't completely absent this time around, but it looks much less serious.

In fact, count me among those who believe that the biggest threat right now is that policy in emerging markets will overreact — that their central banks will raise interest rates sharply in an attempt to prop up their currencies, which isn't what they or the rest of the world need right now.

Still, even if the news from India and elsewhere isn't apocalyptic, it's not the kind of thing you want to hear when the world's wealthier economies, while doing a bit better than they were a few months ago, are still deeply depressed and struggling to recover. And this latest financial turmoil raises a broader question: Why have we been having so many bubbles? For it's now clear that the flood of money into emerging markets — which briefly drove Brazil's currency up by almost 40 percent, a rise that has now been completely reversed — was yet another in the long list of financial bubbles over the past generation. There was the housing bubble, of course. But before that there was the dot-com bubble; before that the Asian bubble of the mid-1990s; before that the commercial real estate bubble of the 1980s. That last bubble, by the way, imposed a huge cost on taxpayers, who had to bail out failed savings-and-loan institutions.

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