Krugman explains the melt down in this opinion piece.
He misses a bit on Greece:
But then, American conservatives have long had their own private Europe of the imagination -- a place of economic stagnation and terrible health care, a collapsing society groaning under the weight of Big Government. The fact that Europe isn't actually like that -- did you know that adults in their prime working years are more likely to be employed in Europe than they are in the United States? -- hasn't deterred them. So we shouldn't be surprised by similar tall tales about European debt problems.
Let's talk about what really happened in Ireland and Britain.
On the eve of the financial crisis, conservatives had nothing but praise for Ireland, a low-tax, low-spending country by European standards. The Heritage Foundation's Index of Economic Freedom ranked it above every other Western nation.
In 2006, George Osborne, now Britain's chancellor of the Exchequer, declared Ireland "a shining example of the art of the possible in long-term economic policy making." And the truth was that in 2006-07 Ireland was running a budget surplus, and had one of the lowest debt levels in the advanced world.
So what went wrong? The answer is: out-of-control banks; Irish banks ran wild during the good years, creating a huge property bubble. When the bubble burst, revenue collapsed, causing the deficit to surge, while public debt exploded because the government ended up taking over bank debts. And harsh spending cuts, while they have led to huge job losses, have failed to restore confidence.
The lesson of the Irish debacle, then, is very nearly the opposite of what Mr. Ryan would have us believe. It doesn't say "cut spending now, or bad things will happen"; it says that balanced budgets won't protect you from crisis if you don't effectively regulate your banks -- a point made in the newly released report of the Financial Crisis Inquiry Commission, which concludes that "30 years of deregulation and reliance on self-regulation" helped create our own catastrophe. Have I mentioned that Republicans are doing everything they can to undermine financial reform?
What about Britain? Well, contrary to what Mr. Ryan seemed to imply, Britain has not, in fact, suffered a debt crisis.
True, David Cameron, who became prime minister last May, has made a sharp turn toward fiscal austerity. But that was a choice, not a response to market pressure. And underlying that choice was the new British government's adherence to the same theory offered by Republicans to justify their demand for immediate spending cuts here -- the claim that slashing government spending in the face of a depressed economy will actually help growth rather than hurt it.
So how's that theory looking? Not good. The British economy, which seemed to be recovering earlier in 2010, turned down again in the fourth quarter. Yes, weather was a factor, and, no, you shouldn't read too much into one quarter's numbers. But there's certainly no sign of the surging private-sector confidence that was supposed to offset the direct effects of eliminating half-a-million government jobs. And, as a result, there's no comfort in the British experience for Republican claims that the United States needs spending cuts in the face of mass unemployment.
Read more: Paul Krugman / The GOP's imaginary Europe
Paul Krugman / The GOP's imaginary Europe
He misses a bit on Greece:
Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.
Gary D. Cohn, president of Goldman Sachs, went to Athens to pitch complex products to defer debt. Such deals let Greece continue deficit spending, like a consumer with a second mortgage.
As worries over Greece rattle world markets, records and interviews show that with Wall Streets help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.
Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November three months before Athens became the epicenter of global financial anxiety a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.
The bankers, led by Goldmans president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greeces health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.
It had worked before. In 2001, just after Greece was admitted to Europes monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europes deficit rules while continuing to spend beyond its means.
Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Streets role in the worlds latest financial drama.
As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.
In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.
Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a countrys liabilities.
Some of the Greek deals were named after figures in Greek mythology. One of them, for instance, was called Aeolos, after the god of the winds.
The crisis in Greece poses the most significant challenge yet to Europes common currency, the euro, and the Continents goal of economic unity. The country is, in the argot of banking, too big to be allowed to fail. Greece owes the world $300 billion, and major banks are on the hook for much of that debt. A default would reverberate around the globe.
A spokeswoman for the Greek finance ministry said the government had met with many banks in recent months and had not committed to any banks offers. All debt financings are conducted in an effort of transparency, she said. Goldman and JPMorgan declined to comment.
While Wall Streets handiwork in Europe has received little attention on this side of the Atlantic, it has been sharply criticized in Greece and in magazines like Der Spiegel in Germany.
Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it, said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greeces accounting policies.
Wall Street did not create Europes debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt the Wall Street term for loans to governments is as unfettered as it is vast.
If a government wants to cheat, it can cheat, said Garry Schinasi, a veteran of the International Monetary Funds capital markets surveillance unit, which monitors vulnerability in global capital markets.
http://www.nytimes.com/2010/02/14/business/global/14debt.html?pagewanted=all
Let's keep it real, Bass
