The Return of Depression Economics

The ghosts of the 1930s are once again walking the earth. The 1931 crisis of Austria's largest bank, Credit Anstalt, which collapsed as a result of Capital Flight depleting its reserves, is all too familiar a scenario today. Brazil, Malaysia and Japan have all experienced similar crises, and the US and Europe are not immune. Economic policy reforms by western governments have taken us back to a regime with many of the virtues of pre-depression, free-market capitalism, but with some key vices, notably a vulnerability to instability and sustained economic slumps. As a result of these reforms, depression economics has now emerged as a real concern, and Krugman believes that sooner or later we will have to return to regulation of financial markets, limits on capital flows and a recognition that low inflation is less dangerous than price instability.