[세계 경제금융 컨퍼런스] 폴 크루그먼-김인준 대담 영어전문
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2008 Nobel laureate Paul Krugman & SNU professor Kim， In-Joon
[Nobel Prize]
Kim； Let me extend you my belated congratulations on your Nobel Prize． I believe you will be the first person who receives both Nobel and Pulitzer Prize．
Let me ask some questions on the global financial crisis and world economic order after the crisis， and major economic issues both the United States and the Korean economy are now facing with．
[Global Financial Crisis and the World Economic Order] Kim； As you indicated in your New York Times column， global imbalances， the large and persistent US current account deficits financed by Asian saving， provided background to the current global financial crisis． Now the key question is， how global imbalances will unwind and who will pay the price？ In this regard， what do you think will happen to the value of the US dollar and the international monetary system？
Krugman； Well．． I think US deficit position is not sustainable． Right now we have peculiar situation in which the financial disorder makes people flock into US dollars because of the safe haven aspect， but that won't last． And so we are going to see a weaker dollar and the world， which means smaller U．S． deficit． And we will probably see the counterpart of that has to be smaller surpluses by Asian countries especially China． A lot of price for that will be paid by the Asian countries． China has 1．3 trillion dollars of USD reserves． That‘s going to be an asset that loses value． It’s a price that china should have thought about before acquiring 1．3 trillion dollars， but this is going to happen． I‘m not sure if the international order will change in a very fundamental way． This was kind of an aberration． We knew dollar standard won’t come back， but it doesn‘t change very much． We basically have a world that several major monetary powers all making their policy independently， and that’s not going to change．
Kim； So you mean the world economic order is not changing?Krugman； Yeah， people who think that the… there are nimbies are going to become the reserve currency． I think they are not thinking through what the reserve currency does． Currency has to be have an open capital market， has to be highly liquid． I don‘t see any real prospect for change in even for the Euro to displace the dollar， because the euro market is too fragmented， financial market is too fragmented． And stuff about having about new Brettonwoods， so we are having about a new agreement， have a new global reserve currency． I think they are fantasies． They are not actually．． they are not going to happen
Kim； The ’Great Moderation‘ - the low and stable global inflation led to the low interest rate environment， which in turn caused the US housing price bubble． In this context， what would be the implications for monetary policy？ Should the central bank be more concerned about asset prices？ If so， how can we reflect asset market situations into the formation of monetary policy？
Krugman； Yeah， this was an intense debate． We try to think it’s now been resolved． We used to say “well， maybe the central banks should just not worry about asset prices， because as long as the inflation rate is low there is no need to tighten． And then when the bubble bursts you can deal with that by relaxing monetary policy and you can protect the real economy． And we’ve just found out that when the bubble is big enough that doesn‘t work． We just found that when you have as major financial overreach as we had this time that the aftermath is beyond the ability of the Federal Reserve or the ECB or the Bank of Japan to deal with． So monetary policy is going to have to take as prices to take． Now what you do with that； it’s not going to be easy partly because there will be debates whether that really is a bubble． So I mean， at one level I look at this and say that there is housing bubble that we had in the United States was extremely obvious so there really was no problem identifying that bubble except that a lot of important people denied， a lot of people said there was no bubble． So what will happen next time？ If Alan Greenspan said there is no housing bubble in 2005， when will central bank is ever be willing to say there is bubble？ And the other problem is what do you do about， what do you do to burst the bubble． Raising interest rates when the economy is not experiencing inflation is going to be very unpopular． But I think the important thing is that we don‘t demand perfection here． We just say if it looks like it really is a bad bubble you probably should try to burst it； you can raise interest rates all of a sudden， you can use other tools of policy， you can raise marginal requirement， you can crack down on a regulatory way． But， yes， I mean this is the bubble that in the world economy． And it is become clear that you cannot adopt a policy of neglecting bubbles， because the after math would be really disastrous． Kim； Over the several years， the Korean government is taking inflation targeting policies． Do you think we should control asset prices in the formation of price index？
Krugman； I think… No not that way． But I think．．． I don’t think you can be that mechanical． I think you have to have an inflation targets． I think， that is actually I‘m in favor of inflation targeting． But I guess we have to say not completely rigid inflation targeting because there should be some asset prices concerns as well． So I think it would haven been wrong to say ”well， we have an inflation target where the inflation rate is an average of consumer price index and the price of housing．“ That would be a problem． But I think probably a 2 or 2．5% for the consumer price index， but the target not being told the regency． Say ”this is what we want．， but we are going to raise interest rates even it‘s below the target if it looks like the crisis of major coax of assets that go on completely out of line．
Kim； The current financial crisis clearly showed that the failure of Large and Complex Financial Institutions (LCFIs) like Lehman Brothers may jeopardize the whole financial system． Could you suggest general directions or principles of regulating those LCFIs？
Krugman； Yeah， I think there’s a fairly simple rule． And we have regulated conventional banks， we've regulated depository institutions since the 1930‘s． And precisely because we discovered that chain reaction of bankruns can be doing enormous errors in the economy． Now we found that their institutions that are not traditional banks， they are not depository institutions but their failure can have the same effect． The rule - this is not original with me， the rule is； anything that you need to rescue like a bank when there was a crisis， it’s something that you need to regulate like a bank when there was not a crisis． So you have to have， most obviously， need to have restrictions on leverage to identify any institutions that‘s likely be systemic important， and it has to have limits on leverage， on the capital requirement． That is probably on the order of ten percent of assets not zero which is base low that we have now． We probably need some formalized lender of last resort procedure for non-bank institutions， again same thing． And we need a mechanism for seizing these institutions， too． Right now we have in the US， a depository institution that appears to in we have regular procedure for sending inspectors， taking control of the institution． But something more complex like bank holding company． We don’t have． In a way you can say， Citibank， which is a commercial bank Citigroup， we have rules and plays to dealing with that． But， Citigroup， which is the bank holding company， which has insurance and invest banking as well as commercial banking， we don’t actually have a procedure． So we need to have that； so all of this． We basically need to create a 21st century version of the rules we instituted in the 1930‘s．
Kim； I see．
Kim； The G20 proposal on the reform of financial regulations emphasizes the ’macro-prudential‘ approach， in which， the endogenous nature of systemic risk is highlighted． Do you support this idea？ Before taking any measures against systemic risk， we have to first identify risk itself．
Krugman； Yeah， I mean we’ve got to think about the nature of the risk． I mean if there is nothing else to crises has been a great experiment in discovering all of the things in the world．
It was clear， four years ago， most people in positions of authority had a completely distorted view of what the systemic risk were． They thought， and I didn‘t, but， people thought that derivatives were actually helping to spread risk． In turns they are actually concentrating them． So we need to think about all of that． And I think we need to have very much a system of principles of regulation so that you don’t have a situation where by slightly rewriting of contracts． A financial institution can evade regulations designed to reduce systemic risks． You need a setup in which the regulator can say “yes， you use different words， but we know what you’re doing， and we know you can do that， yes we need that kind of system．“ So yes， all of this we really need to set up a system so that something like what happened with Lehman in the aftermath can’t happen again．
Kim； Also in this regard， various counter cyclical measures of prudential regulations are currently discussed． What do you think on the effectiveness of those approaches？
Krugman； I haven‘t made up my mind． The counter cyclical stuff appears to work pretty well in a few places that we looked at in Spain． And it seems to insulate their banks pretty well even though their economy is in dire straights． But， I’m not sure if it‘s easy to have a mechanical rule of counter cyclical, but it certainly wants to avoid having a strong pro cyclical that we have now． The rule was tightened precisely when you actually would prefer the banks not pull back． But I haven’t made up my mind how effective that is．
Kim； I see． How about the idea that giving regulators authority to convert debt into an equity in case of systemic risk？
Krugman； Yeah， I think that‘s part of our broader issue． We need to have… when the regulators need to have an authority to restructure or take into receivership， financial institutions that are in trouble． And sure， enlarging their setup tools so that forced that equity swaps are part of the kits certainly makes sense． You know we are doing this on ad hoc basis now． We are actually essentially taking force conversions of preferred shares into equity， which is basically converting debt into equity． So these are being done some very strange set of policies． The government doesn’t really need legal authority to do this． It‘s doing it by saying ”you‘d better do this or some bad things might happen to you．” But you really want a explicit set of rules that empowers the regulator to do the right thing．
Kim； You‘ve once criticized that Europe is not responding effectively to the financial crisis． What are the reasons？ Is there any change in the situation？
Krugman； Euro’s response is still ineffective． The Euro zone economies are going to contract more than the US economy it appears， even though the initial shock was nurtured in the United States． And， part of that reason is the ineffective response． And there are two things really； one is that the European Central Bank doesn‘t have that kind of freedom of action of the Federal Reserves does． Federal Reserves is being very aggressive taking a lot of risk by engaging an unconventional policy． But it can do that because it is being back stocked， guaranteed by the US Treasury． And this union of Europe is making it more difficult． The ECB can’t do the same thing． And fiscal policy has been uncoordinated and inadequate in Europe． So we have strong - not strong enough， but we have relatively strong fiscal stimulus plan in the US． In Europe， no one country is willing to do that because so much benefit spills over to other countries． So basically the political disunion of Europe is hampering the policy response． That said they could be doing more． So I think Trichet is not doing as good job as Bernanke is． Because the Europeans are being too conscious．
Kim； Dollar depreciated against the Euro by approximately 8% since its peak in early October． Do you see any signs of further depreciation？ Would this help the U．S． economy？ It might help U．S． exports， but the Obama Administration might have some trouble funding from Europe．
Krugman； I can‘t make up my mind with exchange rates where it is going． The dollar-euro rate， because it’s true in the United States has a substantial external deficit and the euro zone does not． And it‘s also true that I may kind of pushing power bases you are look rather strong against dollar． So I can’t． It‘s ambiguous I think， which way it goes from here． This is about the external funding． This is a great fallacy that is wide spread． This notion is that the United States needs to worry a lot about funding its deficits． Under normal circumstances that may be true， but we are now in a world where short term interest rates are up against zero bound． The interest rate is zero at short term debt． And that’s a way of saving， you can actually has ecxess desire of saving， the amount of American public wants to save or would want to save if your full employment is more than the amount of American businesses is going to invest． And that means we are not facing a need for the extra funding． Actually， or another way to put it is that we are facing a paradox of thrift． Well， it‘s a bad thing． I want to save because I want to improve my balance sheet． And I don’t want you to save because your saving makes me worse off - if you save there more there‘s less demand for my product， and vice versa． And one more to say is this that if foreigners， export capitals to us． They are here to affect savings． They are actually added in to the paradox of thrift． They’re actually making this worse off． So actually no， weaker dollar against euro, from the U．S． point of view, is a completely good thing - we‘d actually want them． The Europeans are meant for it was a bad thing． There is a real problem because people carry over． Habits of mind come from normal times to the current situation． But we're really in territory where normal rules do not apply．
[U． S． Economy]
Kim； I see． Let me ask some questions regarding US economy． Recently there seems to be high expectations in the market that US economy is bottoming out． Since early March， stock prices increased around 35%． Banks are reporting surprisingly good earnings． A number of economic indicators seem to show that things are getting worse at a slower rate than before． Has the storm passed？ Or is it just premature optimism？
Krugman； My guess is that the plunge， the free fall is almost over． We might actually get some growth most because of inventories in the month ahead． So that’s not illusion． We had this sensually housing collapsed， consumer spending fell because of sharp rise in the savings rate． Those are big shocks， but they are one time shocks． And that‘s probably almost behind us now． But， bottoming out， I think it’s the wrong term． Stabilizing might be the right term． If you ask where the actual recovery come from as a portion end in a plunge， there is no sign of that out there． No fundamental source of demand out there is on the rise． It‘s just they may have come close to the end of their thought． And it’s possible there would be another downward look． I don‘t think so， but there might be． But the main thing is you don’t want to think about this is being a situation that kind of crises where everything springs back once the acute phase is over． The analogy I can use is that this is like a patient in a hospital， and he‘s now off the critical list． But as far as we can tell it maybe years before he’s actually released back to his home． He‘s going to be in hospital for a very long time．
Kim； You have been warning that U．S． economy might turn into something like Japan in the 1990s． That is， facing years of deflation and stagnation． What is the basis of this judgment？ Do you have in mind the failure of sufficient bank recapitalization？
Krugman； I think there are several things． We have certainly not done they are all clean about the banks． And US bank policy in this crisis very much resembles Japanese policy in the 90’s． Again， we don‘t do a resolution with a lot of draft． But I think it’s more fundamental reason， which has… it‘s very difficult to see where the full recovery plan comes from． Consumer demand is going to stay depressed． We had an abnormal level of consumer demand because we had zero savings rate just two years ago． Now we have 4 percent rate， very likely we are going to go up to 8 percent， which is the historical norm． We had enormous housing bubble． We had housing， residential invenstment， which accounts six percent of GDP． Historical norm was around four， right now it’s under three， maybe it will come back up with… it‘s very hard to see really coming back to high levels． Partly because we overbuilt housing． And houses are very durable． Right？ I mean， houses can exist for a long time． Business investment is unlikely to… it will have to rise to super normal levels to offset the combination of consumer demand and the residential investment pros． So were does the real recovery plan come from？ In someways， I think it maybe worse than Japan， because when Japan finally did emerge from its lost decade， it was most because of export boom． Large increase in current account surplus． This time we’ve got a global crisis， and many countries are suffering same kinds of problems． It's very hard to see another export boom． So I think the overall picture very strongly suggest that the US will have Japan type very prolonged lost decade growth．
Kim； lost decade？
Krugman； Well… maybe lost decade, maybe more． Lost or extended period． Long stagnation．
Kim； The recent stress test results released by the US government show some signs of optimism． What is your view on the validity of these results？ Do you think the recapitalization requirements announced would be sufficient or we may need another round of bank capital injection？
Krugman； Yeah， the stress tests， there are some questions about the assumptions． And particularly for couple of the major institutions， we are giving credit for capital infusions that is not actually happened， yet． So there are some funny things about this, the whole results． When I say those mainly what we know is that while the US government sets criteria for capital adequacy． Those are not, umm， the real test is whether the institutions are function normally． And the answer is “no they are not．” There are still the large spreads of bonds in major banks． And whatever the US government says the market thinks it‘s a substantial risk of insolvency． They are not fulfilling their normal roles． So the US government set a criterion which was kind of arbitrary． So we are the banks meet the arbitrary criterion， which may or may not have been exactly true． And then we are like things are OK． But the reality is the banks are still too weak - too undercapitalized to actually do what the economy needs．
Kim； I see… The United States rescued Wall Street banks without nationalizing them． What is your view on the Obama Administration’s bank rescue plan？ Despite the stress test results， do you still think that major US banks are insolvent？ Do you still think that they should be nationalized？
Krugman； OK． I think the bank plan has it now… what they say the bank plan is what it really is not quite the same thing． So they say “we have these facilities， we have public and private investment program(PIFF)， let’s plan to clean out toxic assets．“ Realistically， that’s probably not going to do much． The real bank plan is to exercise forbearance and hope that the banks earn their way out of their problems． That could work． You have to say maybe there are 50；50 odds． But it might be a very slow process and won‘t really restore normal functioning of the banks for a while． What I think the nationalization， try to explain this a little bit more， nationalization is not a goal in itself． The real story is that are you going to do something that really makes the banks completely secure， and adequately capitalized． And the way that this is normally done is by guaranteeing all of the banks’ obligations or all of them except certain specified classes， but eliminate any future risk for people are lending to the banks． Then the question is how to create that without enormous moral hazard． And the answer is； that is the banks really adequately capitalized． If they are not adequately capitalized， you have to put in a lot of capital． But it‘s very difficult to put in a lot of capital without actually seizing the banks． What Sweden did in the 1990’s was it guaranteed all the banks‘ liabilities， and seized two weakest banks． Ideally， I’d like to see United States to do that． The nationalization might not take the form of complete cleaning out of stockholders． It might take the form of tender offer for existing stocks． So you would actually be buying out Citigroup shareholders for 17 billion dollars． And then once you are in that position you can clearly recapitalize the bank put money in without generating windfall game for some people， and you can create a truly functional institution． Now， they‘re not willing to do this． I’m not arguing very strenuously because this decision has been made they don‘t think they can make it through Congress． I would say that there’s a pretty good chance． Maybe a significant chance． Six months from now we will be looking at an economy that is still in trouble， financial system is still dysfunctional． But， I think the case for nationalization was very clear， still is very clear． It‘s also clear that right now policy makers are not ready to do it． I had those conversations． There is nothing more that I can say that they haven’t told． Well．． I will try and we will come back and have an argument probably in late fall．
Kim； I know that you have been arguing that we should make the banking business boring again， as it was during the period from the 1940s till the 1970s． Do you have specific measures in mind？ For example， do you think there should be serious attempts to make the banks smaller， so that we do not impose the probem of “too big to fail or to connected to fail？”
Krugman； Yeah， I think we should do what we can there． Realistically， “too connected to fail” is probably will happen anyway． But what you do is you… we probably need to re-impose by […] We need to break up these giant bank holding companies． Citibank and Bank of America are still probably going to be too connected to fail even if you force them to digest all of the non-traditional banking aspects． But there won‘t be quite as bigger problem． You probably try to break them up as you can． You have to have tighter regulation on leverage capital requirements． Probably more regulation on the way that banks can compete as well． Part of what made banking boring was combination of limits on the lines of business (LOB)． Actually interest rate controls， the positive interest limits． I think we need to think about that． I’m not sure in the end we decide to re-impose them， but that was part of them what made the story work． Just in general， I‘m much more circumscribed financial sector． Smaller institutions， more regulation， I want they can do．
Kim； Do you think that the financial innovations that took place during the past two decades are simply illusions？
Krugman； I know．． I ask people to come up with examples of financial innovation that are really was unambiguously good thing． And he just ended up with saying something like ETMs． And they usually end up with saying something let’s say… that‘s not at all， but all those people are being paid all that money on Wall Street to do． Bernanke gave a speech praising international innovation a few weeks ago， and his examples were credit cards， offer draft protection． And you guys come on… this is not what people are being paid to develop over 20 million dollars a year to develop． The other stuff， complex financial instruments are elaborate off balance sheet constructions， appears then overwhelmingly． Essentially complicated ways to evade regulations rather than ways could do anything productive． So I don’t see anything in there．
Kim； Is the Obama administration serious about reforming Wall Street？ Do you think that the administration is already captured or influenced by the Wall Street financiers？
Krugman； Well… I think they‘re influenced, 'captured' is too strong． I know the people． So we are not talking about anything as crewed． For some reason， Geithner and Obama are being in the pocket of the Wall Street Banks． But Wall Street has a lot of abilities to shape the question． There is a lot of communication． Basically， Goldman Sachs has the ear of the White House． People who can’t pay their credit card bills do not have the ear of the White House． Congress is even worse． In Congress， there are fair number of people who are already in the pocket of the Street． And， as I understand the administration is．． they still believe that the things are not so bad， that the system was not really fundamentally flawed． That‘s what comes from having a lot of friends on the Wall Street． So it’s not corrupt． This is an honest administration， and they are not stupid． But I think they are tilted towards the status quo in a way that makes me a little bit unhappy．
Kim； On the other hand， I understand that the Justice Department is attempting to strengthen its antitrust enforcement policy toward banks． Will this be stalled by Treasury？
Krugman； That‘s going to be an interesting question． I think．． to make the US political commentary， it’s a progressive administration in our terms． The people who make it up are drawn from the more progressive wing of upper Democratic Party， much more so than was the days during the Clinton years． The economic team probably is the most conservative part of this administration． But there will be pressure from the other parts． I think actually this is something with Justice Department might be able to actually pressure the Treasury Department to be more skeptical of the bankers． We‘ll see how this works out， but you should not assume that the Treasury Department is always will be in control of all the agenda． That’s the political colligation behind the administration contains elements that will demand at least some scrutiny of the banks．
Kim； I know that you view Obama‘s fiscal stimulus package not large enough． What are the bases of this judgment？ Do you see any sign that the fiscal stimulus is already helping the U．S． economy？
Krugman； OK． Very little of the stimulus package has actually arrived． It’s only the very beginning part． The only thing you can say is that the aid to state and local government which is important part of it． He‘s probably help the bruise and cuts that would have taken place． The state knows that the money is coming． So they have not cut things as badly as they would have． But a lot of stimulus just hasn’t happen． I think the point is the numbers． The stimulus will peak at about two and a half percent of GDP． The United States is already operating with an output gap of about 7 percent． Just for the quarter． Based on the numbers in the first quarter， we are already 7 percent below to capacity． So you have a stimulus plan that has a peak on about third， as big as the size about short fall． So it has a plan to mitigating， it is not enough to actually restore full employment． The whole plan counts on the revival of private sector demand． It‘s going to fundamentally do the job． So this is a mitigating measure rather than an actual solution． In my judgment it’s not going to be enough because I don‘t see any revival in private sector demand．
Kim； But some economists at Chicago say debt-financed government spending necessarily crowds out private expenditure．
Krugman； Yeah． It’s all very sad． We have all of these economists have managed to forget the things that the economists learned 75 years ago． It‘s just wrong． It’s their fundamental story of US economy right now， actually the fundamental story of the world economy right now is an excess desire of savings． This is a paradox of thrift world． So world where the amount in collectively that the world wants to see， and there is a more collectively that the world might have invest even at a zero interest rates． And zero is the lowest interest rate to go． So it‘s not the case in this kind of world that debt-financed government spending crows up private spending． Instead， debt-financed government expends the economy． And the expansion of the economy creates savings,the financed spending． It’s really said； you have famous economists saying things that your principles your economics 101 text books, explining wrong． It‘s been a shock actually．
Kim； And also some economist at MIT said that the Obama administration used too much money on fiscal stimulus leaving not enough resources for recapitalizing banks and addressing housing problem directly．
Krugman； I think we can afford to do all of this， in fact． We should be doing all of this． Now， the recapitalizing of the banks is， in terms of net budget cost， is relatively small． If you're putting another five hundred billion dollars to banks， we probably have net budget cost of only 150 billion dollars． It’s really not a constraint． Anyway， the problem of recapitalizing is Congressional approval and also a mechanism； you would need to have some way of taking the banks into receivership while you do it． The issue there is not the money． The issue there is technique． And， housing programs， I have to say we should do that but I think there only so much you can do． As mater of the fact， US home prices are still excessive． We are not fully back to the normal ratio of prices of rents and normal ratio of prices of income． And the stimulus， that is we know it will work． we are not sure how the housing prices will work， we are not sure that even recapitalize the banks will generate them a big recovery． But if we go out there and build infrastructure， I know that it will create jobs， I know that there‘s going to be better infrastructure． I think the stimulus is the prime element of policy．
[Korea Economy]
Kim； Let me ask some questions on the Korean economy． Despite the foreign exchange reserve well over 200 billion US dollars and the economy with much better fundamentals compared with those in the late 1990s， the Korean won lost its value against the dollar by 30% over a six-month period since the outbreak of the crisis - the collapse of Lehman Brothers． In terms of currency depreciation， Korea was hit the hardest． Why do you think this happened？
Krugman； Well．． First of all， you were hit very hard because you were a manufacturing exporter． All of the world’s big manufacturing exporters have been hit hard by the crisis； Korea， Japan， and Germany． You are at the type of the economy where the…． It‘s not the financial aspect of the crisis， but the impact of world trade． And one thing about this crisis has been that world trade has contracted much more than anyone expected． Actual decline in world trade in this crisis so far has been faster than the decline in the trade during the Great Depression． So the decline from 2008 to 2009 is bigger than the decline from 1929 to 1930． So Korea is very export dependent economy． Manufacturing export economy gets hit hard． Then I think this is the main explanation of fall in the won； because your government didn‘t use these Forex reserves to prop up the won， which．． so in the end， it didn’t look much different． I think what I have to say is the fall in the won is a good thing， right？ It is a good thing for Korea． You don‘t have a problem now of large foreign currency denominated debt． Economy is financially better off than it was in the late 1990’s． And the big decline in currency is helping your export competitiveness． So I think actually Korea… you know a lot of countries would like to depreciate their currencies right now． It would be helpful for beggar-my-neighbor policy ． This is classic depression logic． And， Korea has actually been able to get away with it because it‘s relatively small and everybody’s attention is focused on the bigger economies．
Kim； Over the last three month， we enjoyed a large amount of current account surplus． And we expect， I think about 20 billion current account surplus this year．
Krugman； Yes， a person in the states said "hey, now we have financial crisis and Korea is stealing jobs from western" it's not true but… you are probably… I think Korea has been relatively lucky in this respect． You are little bit like in the 1930‘s． The countries recovered first were the countries went off the gold standard and the currencies fall． We don’t have gold standard， but you know in a way Korea has done the same thing and crack this． And， it‘s…． I think the countries advantaged to see their currencies drop alone， and they are actually the ones to recover first． Korea， and I think Britton in Europe， same thing． The big drop in the pound was actually good thing for them even though it makes everybody very embarrassed it was a good thing．
Kim； Despite recent stabilization of the Korean won， the Korean economy remains ㅍㄷ교 vulnerable especially given its relatively large short-term external debt and private debts of households and small and medium sized corporations． Given those structural vulnerabilities， what would be an ideal macroeconomic policy mix？ Any suggestions？
Krugman； That’s what I get nervous with because I don‘t think I know the Korean economy well． So．．． I mean， my impression is that your big stimulus policy has been appreciation of the won． That’s a big favorable thing for your economy． Now that‘s for the rest．．．． it might be the fiscal stimulus has taken place ； will help mainly as a way of…helping the private sector to improve its balance sheets by sustaining the economy． But， I don’t know if I can say much more than there． For little bit a suggestions there， thanks to the currency Korea is actually a more effective， maybe by accident the de facto policy mix was actually not so bad．
Kim； Since 1997 Asian crisis， the Korean government has pursued a drastic capital account liberalization policy． However， there are also some criticisms that Korea relatively suffered more from the current financial crisis due to the wide open capital market and volatile capital flows． In this regard， what is feasible policy option toward capital account for countries like Korea？
Krugman； In general， best economies don‘t want to have capital controls on a sustain basis． You businesses too complex…the hassles of capital control really convene interference． And Korea is a fantastic economy now． Korea， by all the numbers， by everything what sees， is no longer… You don’t want to think it is a developing country anymore．
Kim； Korea is an emerging country right now．
Krugman； Well．． that‘s not your wage numbers looks like． That’s not what your GDP per capita looks like．
Kim； Do you believe that Korea is one of the advanced countries？
Krugman； It‘s for practical purposes． Yes， a little bit below the levels of Western Europe， but not that much． So… no． I think of Korea is a country that has graduated． And it is very highly traded dependent， which means you want few restrictions． It’s only emergencies when you want to have anything for capital control． Iceland has just imposed capital controls， and that‘s because they are in the worst crisis that anyone in that country have seen in generations． So I don’t think that‘s a big problem． And， from little bit I see， Korea is able to borrow some currency； it’s not any vulnerable in a way that it was in the 1990‘s． Even relatively small advanced countries can retain a lot of policy autonomy while having an open capital account． I think that Korea was actually bigger in some areas． If it’s sweetened… can managed to have policy autonomy with an open capital account with 8 million people． Korea has much larger population， you know the same thing．
Kim； Do you agree with the claim that the degree of capital market opening should be adjusted to the level of economic growth？
Krugman； Probably you can have development， I think． Yeah， I think in that sense， Yes． Really lower and middle income companies or low and middle income countries with…that have tried capital market opening had generally bad experiences． Whereas advanced countries， usually， do OK． You can have cases like Iceland where the capital accounts have led to enormous mistakes． But， that was exceptional． And anyway， you really don‘t think of countries… And then advanced countries seemed to have a lot of the way． They can have open markets while they can still being able to manage their economies． And， I think that’s right．
Kim； As you know， China accumulates foreign currency reserves of about 2 trillion dollars． But still controlling the capital flow． Do you think it is the reason why China be immuned to global financial crisis？
Krugman； Well， actually I… incomparability leaves them immuned to the financial crisis． We know， what we are seeing right is that economies that are not having financial crisis are still badly affected by the global economic crisis． So… Japan‘s banks are in relatively good shapes， but Japan is probably facing a five percent decline in GDP． Germany’s banks are in pretty good shapes， but Germany is facing probably 5 or 6 percent decline in GDP． Because they are major manufacturing exporters that are hit by the blow． And China is actually being hit reasonably hard． Even though， the financial side of it， there is no spill over at all， China is hit hard because of the export decline， which is affecting the economy． And， yes they‘re doing stimulus plan which is helping maybe， but it’s sort of incomprehensible． And foreign exchange reserves， I don‘t think they are helping them much at all． The second trillion dollars doesn’t seem to be doing them any good． So I don‘t think that’s the part of the story． And you really want to just bear in mind that China is still a relatively unsophisticated player in world trade who can handle having complex restrictions on foreign exchange than more advanced economies．
Kim； The Korean government has pursued a policy to transform itself into a financial hub in East Asia． Given that the current financial crisis has changed some of the underlying paradigm of the global financial sector， do you think that Korea should change its policy goal？
Krugman； Being a global financial hub can turn out to be not that much fun in the crisis as British that I‘ve just discussed… or Singapore． And， I think the whole world， we had just over grown financial sector worldwide． It is most obvious to me， because I know all the numbers in the United States． We went from finance being 4 percent of GDP in 1980 to being 8 percent GDP． And it’s not clear that the extra 4 percent GDP has served their purpose． So if you going to have this tighter regulations， that will do a lot to make banking boring again． Then， actually the global financial sector is going to shrink． So I would actually say that trying to make yourself a global financial hub is not a… turn out to be not a great strategy economically． It‘s little like the days when everyone was going to be a high-tech center， and before that everyone was going to be a leader in the steel industry． You know probably… at a certain point we ended up with too many steel producers． And I think we are in danger of end up with too many financial hubs． Kim； We have looked at various current economic issues that the Korean and the U．S． economy are facing． Thank you．
Transcribed by Jiyoung Kim
2008 Nobel laureate Paul Krugman & SNU professor Kim， In-Joon
[Nobel Prize]
Kim； Let me extend you my belated congratulations on your Nobel Prize． I believe you will be the first person who receives both Nobel and Pulitzer Prize．
Let me ask some questions on the global financial crisis and world economic order after the crisis， and major economic issues both the United States and the Korean economy are now facing with．
[Global Financial Crisis and the World Economic Order] Kim； As you indicated in your New York Times column， global imbalances， the large and persistent US current account deficits financed by Asian saving， provided background to the current global financial crisis． Now the key question is， how global imbalances will unwind and who will pay the price？ In this regard， what do you think will happen to the value of the US dollar and the international monetary system？
Krugman； Well．． I think US deficit position is not sustainable． Right now we have peculiar situation in which the financial disorder makes people flock into US dollars because of the safe haven aspect， but that won't last． And so we are going to see a weaker dollar and the world， which means smaller U．S． deficit． And we will probably see the counterpart of that has to be smaller surpluses by Asian countries especially China． A lot of price for that will be paid by the Asian countries． China has 1．3 trillion dollars of USD reserves． That‘s going to be an asset that loses value． It’s a price that china should have thought about before acquiring 1．3 trillion dollars， but this is going to happen． I‘m not sure if the international order will change in a very fundamental way． This was kind of an aberration． We knew dollar standard won’t come back， but it doesn‘t change very much． We basically have a world that several major monetary powers all making their policy independently， and that’s not going to change．
Kim； So you mean the world economic order is not changing?Krugman； Yeah， people who think that the… there are nimbies are going to become the reserve currency． I think they are not thinking through what the reserve currency does． Currency has to be have an open capital market， has to be highly liquid． I don‘t see any real prospect for change in even for the Euro to displace the dollar， because the euro market is too fragmented， financial market is too fragmented． And stuff about having about new Brettonwoods， so we are having about a new agreement， have a new global reserve currency． I think they are fantasies． They are not actually．． they are not going to happen
Kim； The ’Great Moderation‘ - the low and stable global inflation led to the low interest rate environment， which in turn caused the US housing price bubble． In this context， what would be the implications for monetary policy？ Should the central bank be more concerned about asset prices？ If so， how can we reflect asset market situations into the formation of monetary policy？
Krugman； Yeah， this was an intense debate． We try to think it’s now been resolved． We used to say “well， maybe the central banks should just not worry about asset prices， because as long as the inflation rate is low there is no need to tighten． And then when the bubble bursts you can deal with that by relaxing monetary policy and you can protect the real economy． And we’ve just found out that when the bubble is big enough that doesn‘t work． We just found that when you have as major financial overreach as we had this time that the aftermath is beyond the ability of the Federal Reserve or the ECB or the Bank of Japan to deal with． So monetary policy is going to have to take as prices to take． Now what you do with that； it’s not going to be easy partly because there will be debates whether that really is a bubble． So I mean， at one level I look at this and say that there is housing bubble that we had in the United States was extremely obvious so there really was no problem identifying that bubble except that a lot of important people denied， a lot of people said there was no bubble． So what will happen next time？ If Alan Greenspan said there is no housing bubble in 2005， when will central bank is ever be willing to say there is bubble？ And the other problem is what do you do about， what do you do to burst the bubble． Raising interest rates when the economy is not experiencing inflation is going to be very unpopular． But I think the important thing is that we don‘t demand perfection here． We just say if it looks like it really is a bad bubble you probably should try to burst it； you can raise interest rates all of a sudden， you can use other tools of policy， you can raise marginal requirement， you can crack down on a regulatory way． But， yes， I mean this is the bubble that in the world economy． And it is become clear that you cannot adopt a policy of neglecting bubbles， because the after math would be really disastrous． Kim； Over the several years， the Korean government is taking inflation targeting policies． Do you think we should control asset prices in the formation of price index？
Krugman； I think… No not that way． But I think．．． I don’t think you can be that mechanical． I think you have to have an inflation targets． I think， that is actually I‘m in favor of inflation targeting． But I guess we have to say not completely rigid inflation targeting because there should be some asset prices concerns as well． So I think it would haven been wrong to say ”well， we have an inflation target where the inflation rate is an average of consumer price index and the price of housing．“ That would be a problem． But I think probably a 2 or 2．5% for the consumer price index， but the target not being told the regency． Say ”this is what we want．， but we are going to raise interest rates even it‘s below the target if it looks like the crisis of major coax of assets that go on completely out of line．
Kim； The current financial crisis clearly showed that the failure of Large and Complex Financial Institutions (LCFIs) like Lehman Brothers may jeopardize the whole financial system． Could you suggest general directions or principles of regulating those LCFIs？
Krugman； Yeah， I think there’s a fairly simple rule． And we have regulated conventional banks， we've regulated depository institutions since the 1930‘s． And precisely because we discovered that chain reaction of bankruns can be doing enormous errors in the economy． Now we found that their institutions that are not traditional banks， they are not depository institutions but their failure can have the same effect． The rule - this is not original with me， the rule is； anything that you need to rescue like a bank when there was a crisis， it’s something that you need to regulate like a bank when there was not a crisis． So you have to have， most obviously， need to have restrictions on leverage to identify any institutions that‘s likely be systemic important， and it has to have limits on leverage， on the capital requirement． That is probably on the order of ten percent of assets not zero which is base low that we have now． We probably need some formalized lender of last resort procedure for non-bank institutions， again same thing． And we need a mechanism for seizing these institutions， too． Right now we have in the US， a depository institution that appears to in we have regular procedure for sending inspectors， taking control of the institution． But something more complex like bank holding company． We don’t have． In a way you can say， Citibank， which is a commercial bank Citigroup， we have rules and plays to dealing with that． But， Citigroup， which is the bank holding company， which has insurance and invest banking as well as commercial banking， we don’t actually have a procedure． So we need to have that； so all of this． We basically need to create a 21st century version of the rules we instituted in the 1930‘s．
Kim； I see．
Kim； The G20 proposal on the reform of financial regulations emphasizes the ’macro-prudential‘ approach， in which， the endogenous nature of systemic risk is highlighted． Do you support this idea？ Before taking any measures against systemic risk， we have to first identify risk itself．
Krugman； Yeah， I mean we’ve got to think about the nature of the risk． I mean if there is nothing else to crises has been a great experiment in discovering all of the things in the world．
It was clear， four years ago， most people in positions of authority had a completely distorted view of what the systemic risk were． They thought， and I didn‘t, but， people thought that derivatives were actually helping to spread risk． In turns they are actually concentrating them． So we need to think about all of that． And I think we need to have very much a system of principles of regulation so that you don’t have a situation where by slightly rewriting of contracts． A financial institution can evade regulations designed to reduce systemic risks． You need a setup in which the regulator can say “yes， you use different words， but we know what you’re doing， and we know you can do that， yes we need that kind of system．“ So yes， all of this we really need to set up a system so that something like what happened with Lehman in the aftermath can’t happen again．
Kim； Also in this regard， various counter cyclical measures of prudential regulations are currently discussed． What do you think on the effectiveness of those approaches？
Krugman； I haven‘t made up my mind． The counter cyclical stuff appears to work pretty well in a few places that we looked at in Spain． And it seems to insulate their banks pretty well even though their economy is in dire straights． But， I’m not sure if it‘s easy to have a mechanical rule of counter cyclical, but it certainly wants to avoid having a strong pro cyclical that we have now． The rule was tightened precisely when you actually would prefer the banks not pull back． But I haven’t made up my mind how effective that is．
Kim； I see． How about the idea that giving regulators authority to convert debt into an equity in case of systemic risk？
Krugman； Yeah， I think that‘s part of our broader issue． We need to have… when the regulators need to have an authority to restructure or take into receivership， financial institutions that are in trouble． And sure， enlarging their setup tools so that forced that equity swaps are part of the kits certainly makes sense． You know we are doing this on ad hoc basis now． We are actually essentially taking force conversions of preferred shares into equity， which is basically converting debt into equity． So these are being done some very strange set of policies． The government doesn’t really need legal authority to do this． It‘s doing it by saying ”you‘d better do this or some bad things might happen to you．” But you really want a explicit set of rules that empowers the regulator to do the right thing．
Kim； You‘ve once criticized that Europe is not responding effectively to the financial crisis． What are the reasons？ Is there any change in the situation？
Krugman； Euro’s response is still ineffective． The Euro zone economies are going to contract more than the US economy it appears， even though the initial shock was nurtured in the United States． And， part of that reason is the ineffective response． And there are two things really； one is that the European Central Bank doesn‘t have that kind of freedom of action of the Federal Reserves does． Federal Reserves is being very aggressive taking a lot of risk by engaging an unconventional policy． But it can do that because it is being back stocked， guaranteed by the US Treasury． And this union of Europe is making it more difficult． The ECB can’t do the same thing． And fiscal policy has been uncoordinated and inadequate in Europe． So we have strong - not strong enough， but we have relatively strong fiscal stimulus plan in the US． In Europe， no one country is willing to do that because so much benefit spills over to other countries． So basically the political disunion of Europe is hampering the policy response． That said they could be doing more． So I think Trichet is not doing as good job as Bernanke is． Because the Europeans are being too conscious．
Kim； Dollar depreciated against the Euro by approximately 8% since its peak in early October． Do you see any signs of further depreciation？ Would this help the U．S． economy？ It might help U．S． exports， but the Obama Administration might have some trouble funding from Europe．
Krugman； I can‘t make up my mind with exchange rates where it is going． The dollar-euro rate， because it’s true in the United States has a substantial external deficit and the euro zone does not． And it‘s also true that I may kind of pushing power bases you are look rather strong against dollar． So I can’t． It‘s ambiguous I think， which way it goes from here． This is about the external funding． This is a great fallacy that is wide spread． This notion is that the United States needs to worry a lot about funding its deficits． Under normal circumstances that may be true， but we are now in a world where short term interest rates are up against zero bound． The interest rate is zero at short term debt． And that’s a way of saving， you can actually has ecxess desire of saving， the amount of American public wants to save or would want to save if your full employment is more than the amount of American businesses is going to invest． And that means we are not facing a need for the extra funding． Actually， or another way to put it is that we are facing a paradox of thrift． Well， it‘s a bad thing． I want to save because I want to improve my balance sheet． And I don’t want you to save because your saving makes me worse off - if you save there more there‘s less demand for my product， and vice versa． And one more to say is this that if foreigners， export capitals to us． They are here to affect savings． They are actually added in to the paradox of thrift． They’re actually making this worse off． So actually no， weaker dollar against euro, from the U．S． point of view, is a completely good thing - we‘d actually want them． The Europeans are meant for it was a bad thing． There is a real problem because people carry over． Habits of mind come from normal times to the current situation． But we're really in territory where normal rules do not apply．
[U． S． Economy]
Kim； I see． Let me ask some questions regarding US economy． Recently there seems to be high expectations in the market that US economy is bottoming out． Since early March， stock prices increased around 35%． Banks are reporting surprisingly good earnings． A number of economic indicators seem to show that things are getting worse at a slower rate than before． Has the storm passed？ Or is it just premature optimism？
Krugman； My guess is that the plunge， the free fall is almost over． We might actually get some growth most because of inventories in the month ahead． So that’s not illusion． We had this sensually housing collapsed， consumer spending fell because of sharp rise in the savings rate． Those are big shocks， but they are one time shocks． And that‘s probably almost behind us now． But， bottoming out， I think it’s the wrong term． Stabilizing might be the right term． If you ask where the actual recovery come from as a portion end in a plunge， there is no sign of that out there． No fundamental source of demand out there is on the rise． It‘s just they may have come close to the end of their thought． And it’s possible there would be another downward look． I don‘t think so， but there might be． But the main thing is you don’t want to think about this is being a situation that kind of crises where everything springs back once the acute phase is over． The analogy I can use is that this is like a patient in a hospital， and he‘s now off the critical list． But as far as we can tell it maybe years before he’s actually released back to his home． He‘s going to be in hospital for a very long time．
Kim； You have been warning that U．S． economy might turn into something like Japan in the 1990s． That is， facing years of deflation and stagnation． What is the basis of this judgment？ Do you have in mind the failure of sufficient bank recapitalization？
Krugman； I think there are several things． We have certainly not done they are all clean about the banks． And US bank policy in this crisis very much resembles Japanese policy in the 90’s． Again， we don‘t do a resolution with a lot of draft． But I think it’s more fundamental reason， which has… it‘s very difficult to see where the full recovery plan comes from． Consumer demand is going to stay depressed． We had an abnormal level of consumer demand because we had zero savings rate just two years ago． Now we have 4 percent rate， very likely we are going to go up to 8 percent， which is the historical norm． We had enormous housing bubble． We had housing， residential invenstment， which accounts six percent of GDP． Historical norm was around four， right now it’s under three， maybe it will come back up with… it‘s very hard to see really coming back to high levels． Partly because we overbuilt housing． And houses are very durable． Right？ I mean， houses can exist for a long time． Business investment is unlikely to… it will have to rise to super normal levels to offset the combination of consumer demand and the residential investment pros． So were does the real recovery plan come from？ In someways， I think it maybe worse than Japan， because when Japan finally did emerge from its lost decade， it was most because of export boom． Large increase in current account surplus． This time we’ve got a global crisis， and many countries are suffering same kinds of problems． It's very hard to see another export boom． So I think the overall picture very strongly suggest that the US will have Japan type very prolonged lost decade growth．
Kim； lost decade？
Krugman； Well… maybe lost decade, maybe more． Lost or extended period． Long stagnation．
Kim； The recent stress test results released by the US government show some signs of optimism． What is your view on the validity of these results？ Do you think the recapitalization requirements announced would be sufficient or we may need another round of bank capital injection？
Krugman； Yeah， the stress tests， there are some questions about the assumptions． And particularly for couple of the major institutions， we are giving credit for capital infusions that is not actually happened， yet． So there are some funny things about this, the whole results． When I say those mainly what we know is that while the US government sets criteria for capital adequacy． Those are not, umm， the real test is whether the institutions are function normally． And the answer is “no they are not．” There are still the large spreads of bonds in major banks． And whatever the US government says the market thinks it‘s a substantial risk of insolvency． They are not fulfilling their normal roles． So the US government set a criterion which was kind of arbitrary． So we are the banks meet the arbitrary criterion， which may or may not have been exactly true． And then we are like things are OK． But the reality is the banks are still too weak - too undercapitalized to actually do what the economy needs．
Kim； I see… The United States rescued Wall Street banks without nationalizing them． What is your view on the Obama Administration’s bank rescue plan？ Despite the stress test results， do you still think that major US banks are insolvent？ Do you still think that they should be nationalized？
Krugman； OK． I think the bank plan has it now… what they say the bank plan is what it really is not quite the same thing． So they say “we have these facilities， we have public and private investment program(PIFF)， let’s plan to clean out toxic assets．“ Realistically， that’s probably not going to do much． The real bank plan is to exercise forbearance and hope that the banks earn their way out of their problems． That could work． You have to say maybe there are 50；50 odds． But it might be a very slow process and won‘t really restore normal functioning of the banks for a while． What I think the nationalization， try to explain this a little bit more， nationalization is not a goal in itself． The real story is that are you going to do something that really makes the banks completely secure， and adequately capitalized． And the way that this is normally done is by guaranteeing all of the banks’ obligations or all of them except certain specified classes， but eliminate any future risk for people are lending to the banks． Then the question is how to create that without enormous moral hazard． And the answer is； that is the banks really adequately capitalized． If they are not adequately capitalized， you have to put in a lot of capital． But it‘s very difficult to put in a lot of capital without actually seizing the banks． What Sweden did in the 1990’s was it guaranteed all the banks‘ liabilities， and seized two weakest banks． Ideally， I’d like to see United States to do that． The nationalization might not take the form of complete cleaning out of stockholders． It might take the form of tender offer for existing stocks． So you would actually be buying out Citigroup shareholders for 17 billion dollars． And then once you are in that position you can clearly recapitalize the bank put money in without generating windfall game for some people， and you can create a truly functional institution． Now， they‘re not willing to do this． I’m not arguing very strenuously because this decision has been made they don‘t think they can make it through Congress． I would say that there’s a pretty good chance． Maybe a significant chance． Six months from now we will be looking at an economy that is still in trouble， financial system is still dysfunctional． But， I think the case for nationalization was very clear， still is very clear． It‘s also clear that right now policy makers are not ready to do it． I had those conversations． There is nothing more that I can say that they haven’t told． Well．． I will try and we will come back and have an argument probably in late fall．
Kim； I know that you have been arguing that we should make the banking business boring again， as it was during the period from the 1940s till the 1970s． Do you have specific measures in mind？ For example， do you think there should be serious attempts to make the banks smaller， so that we do not impose the probem of “too big to fail or to connected to fail？”
Krugman； Yeah， I think we should do what we can there． Realistically， “too connected to fail” is probably will happen anyway． But what you do is you… we probably need to re-impose by […] We need to break up these giant bank holding companies． Citibank and Bank of America are still probably going to be too connected to fail even if you force them to digest all of the non-traditional banking aspects． But there won‘t be quite as bigger problem． You probably try to break them up as you can． You have to have tighter regulation on leverage capital requirements． Probably more regulation on the way that banks can compete as well． Part of what made banking boring was combination of limits on the lines of business (LOB)． Actually interest rate controls， the positive interest limits． I think we need to think about that． I’m not sure in the end we decide to re-impose them， but that was part of them what made the story work． Just in general， I‘m much more circumscribed financial sector． Smaller institutions， more regulation， I want they can do．
Kim； Do you think that the financial innovations that took place during the past two decades are simply illusions？
Krugman； I know．． I ask people to come up with examples of financial innovation that are really was unambiguously good thing． And he just ended up with saying something like ETMs． And they usually end up with saying something let’s say… that‘s not at all， but all those people are being paid all that money on Wall Street to do． Bernanke gave a speech praising international innovation a few weeks ago， and his examples were credit cards， offer draft protection． And you guys come on… this is not what people are being paid to develop over 20 million dollars a year to develop． The other stuff， complex financial instruments are elaborate off balance sheet constructions， appears then overwhelmingly． Essentially complicated ways to evade regulations rather than ways could do anything productive． So I don’t see anything in there．
Kim； Is the Obama administration serious about reforming Wall Street？ Do you think that the administration is already captured or influenced by the Wall Street financiers？
Krugman； Well… I think they‘re influenced, 'captured' is too strong． I know the people． So we are not talking about anything as crewed． For some reason， Geithner and Obama are being in the pocket of the Wall Street Banks． But Wall Street has a lot of abilities to shape the question． There is a lot of communication． Basically， Goldman Sachs has the ear of the White House． People who can’t pay their credit card bills do not have the ear of the White House． Congress is even worse． In Congress， there are fair number of people who are already in the pocket of the Street． And， as I understand the administration is．． they still believe that the things are not so bad， that the system was not really fundamentally flawed． That‘s what comes from having a lot of friends on the Wall Street． So it’s not corrupt． This is an honest administration， and they are not stupid． But I think they are tilted towards the status quo in a way that makes me a little bit unhappy．
Kim； On the other hand， I understand that the Justice Department is attempting to strengthen its antitrust enforcement policy toward banks． Will this be stalled by Treasury？
Krugman； That‘s going to be an interesting question． I think．． to make the US political commentary， it’s a progressive administration in our terms． The people who make it up are drawn from the more progressive wing of upper Democratic Party， much more so than was the days during the Clinton years． The economic team probably is the most conservative part of this administration． But there will be pressure from the other parts． I think actually this is something with Justice Department might be able to actually pressure the Treasury Department to be more skeptical of the bankers． We‘ll see how this works out， but you should not assume that the Treasury Department is always will be in control of all the agenda． That’s the political colligation behind the administration contains elements that will demand at least some scrutiny of the banks．
Kim； I know that you view Obama‘s fiscal stimulus package not large enough． What are the bases of this judgment？ Do you see any sign that the fiscal stimulus is already helping the U．S． economy？
Krugman； OK． Very little of the stimulus package has actually arrived． It’s only the very beginning part． The only thing you can say is that the aid to state and local government which is important part of it． He‘s probably help the bruise and cuts that would have taken place． The state knows that the money is coming． So they have not cut things as badly as they would have． But a lot of stimulus just hasn’t happen． I think the point is the numbers． The stimulus will peak at about two and a half percent of GDP． The United States is already operating with an output gap of about 7 percent． Just for the quarter． Based on the numbers in the first quarter， we are already 7 percent below to capacity． So you have a stimulus plan that has a peak on about third， as big as the size about short fall． So it has a plan to mitigating， it is not enough to actually restore full employment． The whole plan counts on the revival of private sector demand． It‘s going to fundamentally do the job． So this is a mitigating measure rather than an actual solution． In my judgment it’s not going to be enough because I don‘t see any revival in private sector demand．
Kim； But some economists at Chicago say debt-financed government spending necessarily crowds out private expenditure．
Krugman； Yeah． It’s all very sad． We have all of these economists have managed to forget the things that the economists learned 75 years ago． It‘s just wrong． It’s their fundamental story of US economy right now， actually the fundamental story of the world economy right now is an excess desire of savings． This is a paradox of thrift world． So world where the amount in collectively that the world wants to see， and there is a more collectively that the world might have invest even at a zero interest rates． And zero is the lowest interest rate to go． So it‘s not the case in this kind of world that debt-financed government spending crows up private spending． Instead， debt-financed government expends the economy． And the expansion of the economy creates savings,the financed spending． It’s really said； you have famous economists saying things that your principles your economics 101 text books, explining wrong． It‘s been a shock actually．
Kim； And also some economist at MIT said that the Obama administration used too much money on fiscal stimulus leaving not enough resources for recapitalizing banks and addressing housing problem directly．
Krugman； I think we can afford to do all of this， in fact． We should be doing all of this． Now， the recapitalizing of the banks is， in terms of net budget cost， is relatively small． If you're putting another five hundred billion dollars to banks， we probably have net budget cost of only 150 billion dollars． It’s really not a constraint． Anyway， the problem of recapitalizing is Congressional approval and also a mechanism； you would need to have some way of taking the banks into receivership while you do it． The issue there is not the money． The issue there is technique． And， housing programs， I have to say we should do that but I think there only so much you can do． As mater of the fact， US home prices are still excessive． We are not fully back to the normal ratio of prices of rents and normal ratio of prices of income． And the stimulus， that is we know it will work． we are not sure how the housing prices will work， we are not sure that even recapitalize the banks will generate them a big recovery． But if we go out there and build infrastructure， I know that it will create jobs， I know that there‘s going to be better infrastructure． I think the stimulus is the prime element of policy．
[Korea Economy]
Kim； Let me ask some questions on the Korean economy． Despite the foreign exchange reserve well over 200 billion US dollars and the economy with much better fundamentals compared with those in the late 1990s， the Korean won lost its value against the dollar by 30% over a six-month period since the outbreak of the crisis - the collapse of Lehman Brothers． In terms of currency depreciation， Korea was hit the hardest． Why do you think this happened？
Krugman； Well．． First of all， you were hit very hard because you were a manufacturing exporter． All of the world’s big manufacturing exporters have been hit hard by the crisis； Korea， Japan， and Germany． You are at the type of the economy where the…． It‘s not the financial aspect of the crisis， but the impact of world trade． And one thing about this crisis has been that world trade has contracted much more than anyone expected． Actual decline in world trade in this crisis so far has been faster than the decline in the trade during the Great Depression． So the decline from 2008 to 2009 is bigger than the decline from 1929 to 1930． So Korea is very export dependent economy． Manufacturing export economy gets hit hard． Then I think this is the main explanation of fall in the won； because your government didn‘t use these Forex reserves to prop up the won， which．． so in the end， it didn’t look much different． I think what I have to say is the fall in the won is a good thing， right？ It is a good thing for Korea． You don‘t have a problem now of large foreign currency denominated debt． Economy is financially better off than it was in the late 1990’s． And the big decline in currency is helping your export competitiveness． So I think actually Korea… you know a lot of countries would like to depreciate their currencies right now． It would be helpful for beggar-my-neighbor policy ． This is classic depression logic． And， Korea has actually been able to get away with it because it‘s relatively small and everybody’s attention is focused on the bigger economies．
Kim； Over the last three month， we enjoyed a large amount of current account surplus． And we expect， I think about 20 billion current account surplus this year．
Krugman； Yes， a person in the states said "hey, now we have financial crisis and Korea is stealing jobs from western" it's not true but… you are probably… I think Korea has been relatively lucky in this respect． You are little bit like in the 1930‘s． The countries recovered first were the countries went off the gold standard and the currencies fall． We don’t have gold standard， but you know in a way Korea has done the same thing and crack this． And， it‘s…． I think the countries advantaged to see their currencies drop alone， and they are actually the ones to recover first． Korea， and I think Britton in Europe， same thing． The big drop in the pound was actually good thing for them even though it makes everybody very embarrassed it was a good thing．
Kim； Despite recent stabilization of the Korean won， the Korean economy remains ㅍㄷ교 vulnerable especially given its relatively large short-term external debt and private debts of households and small and medium sized corporations． Given those structural vulnerabilities， what would be an ideal macroeconomic policy mix？ Any suggestions？
Krugman； That’s what I get nervous with because I don‘t think I know the Korean economy well． So．．． I mean， my impression is that your big stimulus policy has been appreciation of the won． That’s a big favorable thing for your economy． Now that‘s for the rest．．．． it might be the fiscal stimulus has taken place ； will help mainly as a way of…helping the private sector to improve its balance sheets by sustaining the economy． But， I don’t know if I can say much more than there． For little bit a suggestions there， thanks to the currency Korea is actually a more effective， maybe by accident the de facto policy mix was actually not so bad．
Kim； Since 1997 Asian crisis， the Korean government has pursued a drastic capital account liberalization policy． However， there are also some criticisms that Korea relatively suffered more from the current financial crisis due to the wide open capital market and volatile capital flows． In this regard， what is feasible policy option toward capital account for countries like Korea？
Krugman； In general， best economies don‘t want to have capital controls on a sustain basis． You businesses too complex…the hassles of capital control really convene interference． And Korea is a fantastic economy now． Korea， by all the numbers， by everything what sees， is no longer… You don’t want to think it is a developing country anymore．
Kim； Korea is an emerging country right now．
Krugman； Well．． that‘s not your wage numbers looks like． That’s not what your GDP per capita looks like．
Kim； Do you believe that Korea is one of the advanced countries？
Krugman； It‘s for practical purposes． Yes， a little bit below the levels of Western Europe， but not that much． So… no． I think of Korea is a country that has graduated． And it is very highly traded dependent， which means you want few restrictions． It’s only emergencies when you want to have anything for capital control． Iceland has just imposed capital controls， and that‘s because they are in the worst crisis that anyone in that country have seen in generations． So I don’t think that‘s a big problem． And， from little bit I see， Korea is able to borrow some currency； it’s not any vulnerable in a way that it was in the 1990‘s． Even relatively small advanced countries can retain a lot of policy autonomy while having an open capital account． I think that Korea was actually bigger in some areas． If it’s sweetened… can managed to have policy autonomy with an open capital account with 8 million people． Korea has much larger population， you know the same thing．
Kim； Do you agree with the claim that the degree of capital market opening should be adjusted to the level of economic growth？
Krugman； Probably you can have development， I think． Yeah， I think in that sense， Yes． Really lower and middle income companies or low and middle income countries with…that have tried capital market opening had generally bad experiences． Whereas advanced countries， usually， do OK． You can have cases like Iceland where the capital accounts have led to enormous mistakes． But， that was exceptional． And anyway， you really don‘t think of countries… And then advanced countries seemed to have a lot of the way． They can have open markets while they can still being able to manage their economies． And， I think that’s right．
Kim； As you know， China accumulates foreign currency reserves of about 2 trillion dollars． But still controlling the capital flow． Do you think it is the reason why China be immuned to global financial crisis？
Krugman； Well， actually I… incomparability leaves them immuned to the financial crisis． We know， what we are seeing right is that economies that are not having financial crisis are still badly affected by the global economic crisis． So… Japan‘s banks are in relatively good shapes， but Japan is probably facing a five percent decline in GDP． Germany’s banks are in pretty good shapes， but Germany is facing probably 5 or 6 percent decline in GDP． Because they are major manufacturing exporters that are hit by the blow． And China is actually being hit reasonably hard． Even though， the financial side of it， there is no spill over at all， China is hit hard because of the export decline， which is affecting the economy． And， yes they‘re doing stimulus plan which is helping maybe， but it’s sort of incomprehensible． And foreign exchange reserves， I don‘t think they are helping them much at all． The second trillion dollars doesn’t seem to be doing them any good． So I don‘t think that’s the part of the story． And you really want to just bear in mind that China is still a relatively unsophisticated player in world trade who can handle having complex restrictions on foreign exchange than more advanced economies．
Kim； The Korean government has pursued a policy to transform itself into a financial hub in East Asia． Given that the current financial crisis has changed some of the underlying paradigm of the global financial sector， do you think that Korea should change its policy goal？
Krugman； Being a global financial hub can turn out to be not that much fun in the crisis as British that I‘ve just discussed… or Singapore． And， I think the whole world， we had just over grown financial sector worldwide． It is most obvious to me， because I know all the numbers in the United States． We went from finance being 4 percent of GDP in 1980 to being 8 percent GDP． And it’s not clear that the extra 4 percent GDP has served their purpose． So if you going to have this tighter regulations， that will do a lot to make banking boring again． Then， actually the global financial sector is going to shrink． So I would actually say that trying to make yourself a global financial hub is not a… turn out to be not a great strategy economically． It‘s little like the days when everyone was going to be a high-tech center， and before that everyone was going to be a leader in the steel industry． You know probably… at a certain point we ended up with too many steel producers． And I think we are in danger of end up with too many financial hubs． Kim； We have looked at various current economic issues that the Korean and the U．S． economy are facing． Thank you．
Transcribed by Jiyoung Kim