UPDATE 1-Nobel winner Krugman fears damage to economy

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STOCKHOLM, Dec 7 (Reuters) - Paul Krugman, winner of the 2008 Nobel economics prize, said on Sunday policy makers would be unable to prevent the global economic crisis from inflicting serious damage.

Speaking in Stockholm where he will collect his prize, U.S. economist Krugman praised the choice of Timothy Geithner to be Treasury Secretary in Barack Obama’s administration but said he faced a tough task.

“The simple mechanics of producing a rescue for the world economy are very hard. The pace at which things are getting worse is so great that it’s difficult to see how rescue measures can come,” the economics professor at Princeton University and columnist for The New York Times told a news conference.

“Even with the best of understanding it can’t come fast enough to prevent a great deal of damage... I’m very worried what next year will look like.”

Krugman, a fierce critic of the administration of President George W. Bush, said New York Fed president Geithner was the right man for the Treasury job.

“The soon-to-be Treasury secretary is very smart, very open-minded, was quicker to realise the vulnerability of the financial system than most people... But he faces an extremely daunting task.”

Krugman also said he doubted the U.S. auto sector would survive in the long run but that it was worth supporting it in the short term.

The struggling Detroit-based car giants -- General Motors GM.N, Ford F.N and Chrysler -- were victims of long-term trends as well as by the current financial crisis, he said.

Lawmakers and the White House are considering a deal to bail out U.S. auto makers, and Krugman said he expected at least a temporary rescue in light of the rapid wider economic decline.

“It’s...the unwillingness, I believe a correct lack of willingness, to accept the failure of a large industrial sector -- even if it’s an industrial sector in decline -- in the midst of a very very severe recession.”

“In the end these companies will probably disappear.”


Krugman had expected a bubble in U.S. house prices to cause problems, but the extent of the ensuing financial crisis which has rippled around the globe came as a shock.

“What I missed, and almost everyone else, was the extent to which the traditional banking system, which is fairly well protected, had been replaced by parallel banking -- by various kinds of institutions which are de facto banks but are not regulated like banks,” he said.

“The vulnerability, the fragility of this parallel banking system, was something that should not have been a surprise but in fact was.”

History has showed that government spending is the tool for fighting the crisis, Krugman said, pointing to analysis of the 1930s Depression and a more recent deflation scenario in Japan.

“The experience in Japan from the 1990s was that indeed government spending, while it may not produce a permanent cure, can greatly alleviate the pressures on the economy.”

Of concern is now how much governments can afford to spend to sustain their economies, Krugman said. “And I’m concerned about how quickly such programmes can be brought on line, given the speed at which the economy is declining.”

“The private sector cannot support itself at this point.”

Krugman is in the Swedish capital for the “Nobel Week”, when laureates attend news conferences and events culminating with the prize ceremony and a gala dinner on Wednesday.

He said he did not know what to do with the 10 million Swedish crowns ($1.2 million) award. He added that his favourite congratulatory email had read:

“‘Congratulations. I hope you can find a bank still standing’”. (Editing by Keith Weir)