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How ‘08 Happened

Paul Krugman

Lesson time 14:25 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.

Paul Krugman
Teaches Economics and Society
Nobel Prize-winning economist Paul Krugman teaches you the economic theories that drive history, policy, and help explain the world around you.


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...

Think like an economist

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.


Students give MasterClass an average rating of 4.7 out of 5 stars.

I have always found econ to be fun. To get Mr. Krugman's insight and perspective is quote great. I found his course enlightening.

I copyedit economic papers and books for some of the global organizations that Krugman mentions. Krugman's clear and calm approach to economics shores up my foundation and understanding of the topic. Many thanks!

I loved the human angle at the look at economics. Very informative.

Good explanation for economic principles behind major events. Course notes supported commentary well.


C.N. S.

"Students who come into the labour market almost never make up the lost ground." I was unemployed for ten years and I still don't have a "proper job". I do, however, have a Master's in political science from one of the highest ranked universities in the world. At present, I work in a pub as a cook next to a real trained chef. I turned 35 this year, but I haven't given up hope. However, I did feel like throwing up after hearing this.


It would great if Paul could elaborate a little further on the roles or rather contributions from the big boys in Wall Street in the sub-prime crisis, i.e. Solomon Brothers, Lehman Brothers, Maryl Lynch, etc.

A fellow student

Krugman still not acknowledging that banks create credit-money, ex nihilo, when they make a loan.


I was following along pretty well until the "subprime doomsday machine" part. The workbook didn't clear up my understanding 100% either. Maybe someone could explain in another way the connection between the shadow banks and subprime loans? Thanks!

Abigail R.

The "Crimeless Victims" section is a punch in the gut, oh my.......... Harsh times ahead... Millennial, centennial innovation and perspectives about life will have to come at handy faster that we all thought, completely changing basic concepts we dearly hold on to.


This lesson is really helpful in understanding what happened during 2008 financial crisis.

John E.

I've noticed as I've watched this Masterclass that the more that my knowledge grows, so too does the perimeter of my ignorance. There's so much I do not know.

Moira K.

As a non-economist, I really liked this lesson. In 2007 I moved to Africa, and rode out the 2008-2009 financial crisis at a great distance, in a place where the cash-based, basically subsistence economy was not really affected. I had a friend here, another there, who suffered, but I never understood the big picture. On one issue, the "crimeless victims" it illustrates the role of "amorality" in some of this finance. To sell someone a house or a car, knowing that represents 50% or more of their income, should be a crime, but it's not. Shows why we need to teach personal financial management at high school level, so kids about to enter the workplace have a "rule of thumb" range of acceptabilities for their financial encumbrances.

Sel B.

I find the normalisation of the subprime falacy in this lesson quite saddening. The fact is is that the deliberate creation of toxic assets was basically a crazy game of pass the parcel, while hedging bets that the bomb wouldnt go off while you were holding it. All the participants knew exactly what was happening.

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.