Unfettered capitalism sure is a good thing

But if you feel as though you don’t have a clue what’s going on, Paul Krugman assures you that you’re not alone:

Will the U.S. financial system collapse today, or maybe over the next few days? I don�t think so � but I�m nowhere near certain. You see, Lehman Brothers, a major investment bank, is apparently about to go under. And nobody knows what will happen next.

To understand the problem, you need to know that the old world of banking, in which institutions housed in big marble buildings accepted deposits and lent the money out to long-term clients, has largely vanished, replaced by what is widely called the �shadow banking system.�

…

And as the unknown unknowns have turned into known unknowns, the system has been experiencing postmodern bank runs. These don�t look like the old-fashioned version: with few exceptions, we�re not talking about mobs of distraught depositors pounding on closed bank doors. Instead, we�re talking about frantic phone calls and mouse clicks, as financial players pull credit lines and try to unwind counterparty risk. But the economic effects � a freezing up of credit, a downward spiral in asset values � are the same as those of the great bank runs of the 1930s.

And here�s the thing: The defenses set up to prevent a return of those bank runs, mainly deposit insurance and access to credit lines with the Federal Reserve, only protect the guys in the marble buildings, who aren�t at the heart of the current crisis. That creates the real possibility that 2008 could be 1931 revisited.

Apparently the only thing that may be worse than a bailout is not-a-bailout, which apparently really is a bailout after all.

It really is the economy, stupid.

Update: One more Krugman blog post here.