Business, Politics & Society

How ‘08 Happened

Paul Krugman

Lesson time 14:26 min

Learn about the market patterns and unregulated financial activities that led to our worst financial crisis since the Great Depression, and how to prepare yourself for the uncertain economic future.

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Paul Krugman
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Nobel Prize-winning economist Paul Krugman teaches you the economic theories that drive history, policy, and help explain the world around you.
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There was a period not that long ago, when people were very complacent about things like financial crises. There's an infamous address to the American Economic Association saying the problem of the business cycle has been solved-- that was in 2003. Well, actually, no. It turns out recession crises still happen. And we haven't found it that easy to deal with them. When did they begin? No one really knows, but there was, in fact, a recognizably modern banking crisis in Scotland, in the 1770s. Scotland had led the way in the introduction of paper money, which was, at that time, issued by private banks, which had gold and silver in reserve. But it could go bad. You could have bank runs. You could have a crisis of confidence. And left to themselves, banks can create risks that can then spread out and disrupt the economy as a whole. [MUSIC PLAYING] Banking is a very clever institutional thing that, like many clever institutional arrangements, is extremely useful. But sometimes goes really wrong. The trick about banking is that the bank takes your money. And from your point of view, your money is sitting at the bank and I can withdraw it whenever I want. But the bank doesn't actually keep your money there. They put it to work. They lend it out. They make it available so it can be used to build businesses. Or finance other people's purchases of homes. And that's good. You want wealth to be put to work, but how can they do that? Because since I'm free to take my money out of the bank, how can they guarantee that when the money isn't actually there? And the answer is there's a lot of customers. And on any given day, only some people will be withdrawing money. But suppose I have reason to suspect that my bank has actually lost a lot of money? Suppose I have a reason to think that they've made a lot of bum loans. Then I might want to pull my money out while it's still there. So will everybody else. And if everybody tries to take their money at the same time, well, the bank doesn't have the money. And if they try and raise it by selling their loans to somebody else, it's going to be fire sale. They're going to be trying to sell it at speed and they're go lose a lot of money. Which means that if people believe that a bank is going to fail, that can be a self-fulfilling prophecy-- that's a bank run. Everybody is trying withdraw their money at the same time. That actually dries the bank out of business, even if it was fundamentally sound. [MUSIC PLAYING] The Great Depression was, pretty much-- it started as a recession, which was bad. It turned into the Great Depression because of a wave of bank runs. As each bank failed, that made people nervous about the next bank. And so over the course of 1930, 1931-- huge numbers of banks failed. There was panic. People wanted to put cash under their mattresses. The banks that survived pulled back from lending and just accumulated big reserves of cash, just in case. And that is re...


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For Nobel Prize-winner Paul Krugman, economics is not a set of answers—it’s a way of understanding the world. In his economics MasterClass, Paul teaches you the principles that shape political and social issues, including access to health care, the tax debate, globalization, and political polarization. Heighten your ability to read between the lines and decipher the underlying economics at play.



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Thank you, I always found it hard to understand economics. This really helped.

I don't think I ever quite had an interest in Economics until recently. Having a perspective from Paul Krugman turned on some light bulbs along the way! I feel I'm beginning to see how the Economic "thinking process" engine works - though it's just a beginning.

I got confused about some things, but loved the class. Perhaps disclosing political ideals up front might have put things in a little more context. I want to re-watch the first few videos to understand things like the babysitting co-op.. that was a bit lost on me. Thank you!

This has been a great introduction to the real world of economics, and a good foundation of how to think and interpret day to day events.


Comments

Michael B.

Getting dropped into the job market during the crisis I completely understand how some people never recovery. If there is a think tank I would like to participate in the study. This is resulting in people getting married later, fewer births and a declining population growth rate.

Tapan P.

This was a great one. Talked a good perspective on the 'macro' of it all in regards to banking. However, I came in with also intent on the Micro here- to understand the investment perspective and how that drove panic to the floor.

Dev K.

Excellent lessons. It was crystal clear to an Economist with 41 years' experience. My worry is that parts of its were a bit dense for non-economists. But, I am not sure how Paul's explanations could have been further elucidated. He touches upon some real difficult topics such as the 2008 financial crisis. I would perhaps have dwelt on the role of wrong ideology--markets know best. That resulted in the regulatory bodies like the Treasury, the FDIC, OCC, and the Fed caught sleeping at their wheels. After all, why exercise strict oversight when markets know best? Well, as it turned out, they don't! Regulatory agencies have to do their job. We all paid the price when they failed to do so.

Bogdan I.

Paul Krugman says in this class that the crisis of '08 brought down all the shadow banks but how come that big banks have also fallen ?

RJane @.

In my perspective, the process of the 2008 recession begun during Bush, Jr.’s or Clinton’s presidency. Obama and the federal government may have contributed to the recession.

Pisko

Paul, ur work has earned u a great reputation as an economist, please help me understand why don't u tell 2008 the way it was!! People here is paying 2 learn, n u come out with "crimeless victims", what!!! We do live in a strange world, where a nobel prize missinforms people that is investing on their education, on a major subject: Bank boards at wall street are responsible, they created the CDO's, they deliverately dodged regulation n created da bubble, n they have the power 2 force the government 2 rescue them with the taxpayers money, works, savings n even lives. That's one lesson people actually has 2 learn from 2008. This is not my opinion but a fact, anybody can learn more by watching the "Inside job" documental or even "The big short" movie. U r one of the few instructors at Masterclass with zero replies, so PAUL PLEASE ANSWER

Mark B.

I would assume all of the folks at the NY financial firms and government and private economists who were looking at the US economy during this time put together are very, very, very, smart people. So why were the factors listed below so hard to grasp: 1. Mean wages had been stagnate since 1973 2. First, families first coped by having both spouses working in dramatically greater numbers than in the 50's and 60's 3. Second they coped by increasing personal debt mostly in form of credit card debt. 4. Finally they used their house as an ATM by refinancing etc, This of course worked as long as as housing values increased. But has there ever been a period in the history of the country where housing prices never dipped? So it is hard to imagine that the brilliant folks described above could not see the storm clouds gathering as we entered the new millenium. I have thought for awhile that a lot of folks did see the storm clouds but just did not have an answer as to how to avoid them and just hoped they would dissipate before they reached our shores. Can someone smarter than me explain why this scenario is not true? Mark Brown, MD

Jan C.

The true cause of financial bubbles is commercial banks ability to create money "out of thin air" when lending to households and businesses. I have Masters in Economics but for some reason, our professors never taught us the truth about how MONEY IS CREATED EVERY TIME COMMERCIAL BANKS ISSUE A LOAN and destroyed when loans are repaid. I'd love to hear Paul explain money creation process and bust the myth of "money multiplier" still taught at universities! Here's how the money system really works POSITIVE MONEY ORG London, U.K. www.positivemoney.org If you want to get involved, find money reform organization in your country https://internationalmoneyreform.org/members/ Thanks.

Norm C.

I love it. This is a very kind, no fingers pointed, generous to the guilty explanation of what happened. It is an explanation people can kind of grasp. I would love to hear Paul explain why the US went off the gold standard and why mortgage interest rates in Canada went to 20% in the late 70's early 80's. Even more I would love to hear why the Canadian government insisted high interest rates were necessary to "protect the Canadian dollar" even though unemployment was high. My opinion is the interest rates were kept extraordinarily high to protect the Canadian banks who had lost mega bucks on bad domestic and overseas loans and the average Canadian was made to pay for it. Once the bad loans were wrote off, interest rates fell.

kristi K.

Where is the workbook? I see the pdf, but it's simply a print version of the lecture. I'm thinking there's more??????