Krugman on the Cause of the Crisis

Nobel Prize-winning economist Paul Krugman recently wrote an article in which he identified as one of the principle causes of the current economic crisis the glut of savings here in Asia. His argument is that, after the 1997 crisis, people and institutions here in East Asia were so disturbed that they resolved never to let it happen again and, to that end, started creating large amounts of savings so as to prevent further predatory attacks on their currencies.

That money could not just be left in the banking equivalent of a sock under the bed and so it was invested in countries around the world. The countries which most willingly accepted the investment were Iceland, Ireland and Estonia, as well as the US and the UK – those countries which now, of course, are suffering most badly after having been lauded as the leaders of the 21st century revolution. Deregulation, therefore, was the main cause of the problems now being suffered.

The IMF, meanwhile, observes that we are now entering the third phase or wave of the crisis and this is now more seriously affecting the poorer countries of the world, which are now more integrated into the global system than was previously the case (Vietnam is included in this category). The poor, in other words, suffer the most and receive the least assistance. It is the same story in Thailand: the migrant workers will be displaced, the informal workers get squeezed, the poorly-paid receive no assistance and so forth.