While the Nobel jurists might think that US writers are insular and ignorant, the same can’t be said for US economists. Paul Krugman, a professor at Princeton and New York Times columnist, was awarded the Nobel Prize in Economics last night. He deserves it. He actually foresaw this current economic crisis and has been trying to warn us about it for years. In 2005, he made these comments:
These days Mr. Greenspan expresses concern about the financial risks created by “the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages.” But last year he encouraged families to take on those very risks, touting the advantages of adjustable-rate mortgages and declaring that “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.
How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China.
One way or another, the economy will eventually eliminate both imbalances.
Congratulations, Mr. Krugman. Maybe the next award you can get is the Cassandra one.
(For more prescient economists, you can read this article).