Friday, March 2, 2007

The Big Meltdown: PAUL KRUGMAN - Financial Crisis

THE COMPLETE ARTICLE
THE NEW YORK TIMES
OP-ED COLUMNIST

The Big Meltdown

By PAUL KRUGMAN
Published: March 2, 2007

If we’re going to have a financial crisis, here’s how it will play out.

The great market meltdown of 2007 began exactly a year ago, with a 9 percent fall in the Shanghai market, followed by a 416-point slide in the Dow. But as in the previous global financial crisis, which began with the devaluation of Thailand’s currency in the summer of 1997, it took many months before people realized how far the damage would spread.

At the start, all sorts of implausible explanations were offered for the drop in U.S. stock prices. It was, some said, the fault of Alan Greenspan, the former chairman of the Federal Reserve, as if his statement of the obvious — that the housing slump could possibly cause a recession — had been news to anyone. One Republican congressman blamed Representative John Murtha, claiming that his efforts to stop the “surge” in Iraq had somehow unnerved the markets.

Even blaming events in Shanghai for what happened in New York was foolish on its face, except to the extent that the slump in China — whose stock markets had a combined valuation of only about 5 percent of the U.S. markets’ valuation — served as a wake-up call for investors.

The truth is that efforts to pin the stock decline on any particular piece of news are a waste of time.

Wise analysts remember the classic study that Robert Shiller of Yale carried out during the market crash of Oct. 19, 1987. His conclusion?

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