Innovating Our Way to Financial Crisis

[PAUL KRUGMAN]

December 3, 2007
Op-Ed Columnist
Innovating Our Way to Financial Crisis
By PAUL KRUGMAN

The financial crisis that began late last summer, then took a brief vacation in September and October, is back with a vengeance.

How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.

Before I get to that, however, let’s talk about what’s happening right now.

Credit — lending between market players — is to the financial markets what motor oil is to car engines. The ability to raise cash on short notice, which is what people mean when they talk about “liquidity,” is an essential lubricant for the markets, and for the economy as a whole.
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http://www.nytimes.com/2007/12/03/opinion/03krugman.html?_r=2&hp=&oref=slogin&pagewanted=print&oref=slogin