Nobel winner Krugman says world recession likely

PRINCETON, NJ (Reuters) - The world is likely headed for a deep recession despite the European-led plan to bail out banks hit by the credit meltdown, the U.S. economist who won the 2008 Nobel prize for economics said on Monday.

Paul Krugman, an economics professor at Princeton University and columnist for The New York Times, said the plan to recapitalize banks has the potential to heal financial institutions, unlike the U.S.-led plan to buy bad debt that preceded it.

The U.S. Treasury Department was expected to unveil on Tuesday a $250 billion plan to purchase equity stakes in financial institutions along with a three-year guarantee of bank-to-bank lending, according to a financial policy source familiar with the plan.

In his interview with Reuters, Krugman warned that the crisis has already inflicted serious damage on the world economy.

"There is a tremendous amount of downward momentum built into the real economy from this crisis," he said. "Even if we unlock the credit markets, we probably still have a nasty recession ahead of us."

Earlier on Monday he told reporters in Sweden: "We're going to have a recession and perhaps a prolonged one but perhaps not a collapse."

Krugman, an outspoken critic of the Bush administration in his newspaper columns, denied that he felt vindicated by the Nobel Prize because it was given for his professional work as an economist rather than for his commentary.

But he said he took some pleasure from polls suggesting many Americans are now equally critical of Bush's policies.

"I feel vindicated by the fact that when I was criticizing Bush, 80 percent of the public approved of him, and now it's more like 80 percent of the public disapproves. That's the vindication," Krugman said in a Reuters interview in Princeton, New Jersey.

Krugman praised the European-led plan that sparked huge rallies in world stock markets on Monday as having a good chance of fixing the credit crisis. But he said the market's euphoric reaction was not necessarily a signal it would work.

"I think we do have the potential now for a plan that will basically bulk up the financial sector to where it can start to function again," he said.

Krugman argued that the crisis signals a cultural shift away from the belief in the primacy of markets, as espoused by the Bush administration.

"The people who assured us that markets work, that the private pursuit of profit always leads to a good result have been rather massively wrong," he said.

The Nobel committee awarded Krugman the prize for work that helps explain why some countries dominate international trade.

The Royal Swedish Academy of Sciences said the award recognizes Krugman's formulation of a new theory that addresses what drives worldwide urbanization. "He has thereby integrated the previously disparate research fields of international trade and economic geography," the committee said.

(Additional reporting by Stockholm bureau, editing by Michelle Nichols and Cynthia Osterman)