Explaining Richard Koo to Paul Krugman

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A sud­den erup­tion, and the sur­prise of real­is­ing that the world he under­stands is not the one he actu­al­ly inhab­its. – Pao­lo Baci­galupi, The Windup Girl

This time real­ly is dif­fer­ent.

Stock mar­kets are crash­ing after a run­away boom. Again. And the finan­cial sec­tor is ped­dling com­plex deriv­a­tive prod­ucts. Again. (Check out the US satir­i­cal rag The Onion’s bril­liant take on this: “Finan­cial Sec­tor Thinks It’s About Ready To Ruin World Again”)

But where­as pre­vi­ous peri­ods of Wall Street may­hem have been pre­ced­ed by a Main Street boom, this one hasn’t. We’ve re-entered a peri­od of finan­cial mar­ket volatil­i­ty with unem­ploy­ment still with­in cooee of its peak dur­ing the 1990s reces­sion (see fig­ure 1– which doesn’t fac­tor in the changes in the def­i­n­i­tion of unem­ploy­ment since 1990, and the fall in the par­tic­i­pa­tion rate dur­ing this down­turn).

Fig­ure 1: A Wall Street boom with­out a Main Street recov­ery

Read more: http://www.businessspectator.com.au/article/2013/6/24/economy/gasping-krugman%E2%80%99s-ocean-theory#ixzz2X7BUcGTL