'Depression Economics'

What was the problem with Greenspan, and where and when did he go wrong?
Greenspan is the real thing. He believes the Fed can be the designated driver, the one who takes you home safely after the party has gotten crazy. So he brushed aside any worries about regulating and taking precautionary measures. His belief in the perfection of free markets led us into the ditch we're in now.

How far does the comparison to the 1930s go?
I think in terms of functional analogies. We don't have dictators rising in central Europe or guys selling apples on the street—

—no, today they're selling iPods.
Or what claim to be iPods, anyway. But we do have a run on the banking system. Appearances are deceiving, because there weren't mobs in the streets outside buildings with FDIC insurance. Instead, it was mobs of people in cyberspace clicking on their mouses in a shadow banking system. So while it doesn't look like America during the Depression, we've got the same kind of underlying situation for economic policy.

I'm wondering what you think of Ben Bernanke at the Fed. He's a colleague of yours, a student of the Great Depression …
A student of Japan, also. One of the other people who found the Japanese experience deeply disturbing was Ben Bernanke, and he's thought a lot about how to not be like Japan. And he's tried. He's taken the Fed into unexplored territory. My wife jokes that next thing you know, they're going to start offering Federal Reserve Visa cards, because they're so far into the financial system. I can't think of anyone who could've done more or done better, but it still hasn't been enough.

And that's because of the magnitude of the crisis?
We basically had a $10 trillion shadow banking system shrivel up and die. Having the Fed add $700 billion to its balance sheet, or whatever it is by now, is not enough to make up for that.

One of the distressing things about this situation is how the problems have spread around the globe, even to countries not involved in our financial system. But in the last decade before this went down, there was a great deal of growth around the world. How much of that was part of the credit bubble?
Most of it was solid stuff. A lot of real growth was coming out of China, and that wasn't being driven by hedge funds. I think the point was not that the growth was phony, but that there was a lot of crazy risk taking. My mind is boggled that Hungary is in deep trouble because people were borrowing Swiss francs to buy houses. You think, what were they thinking? And yet you hear stories like that all over the world. So, it's not just the United States, but there was this widespread belief that bad things only happen to other people.