Quote of the day: Though Mr. Krugman doesn't ask, I wonder what the presidential hopefuls think about our financial crisis. "What crisis?" you say?

"At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs."
--Paul Krugman, in his NYT column today, "Innovating Our Way to Financial Crisis"

"The financial crisis that began late last summer, then took a brief vacation in September and October, is back with a vengeance," writes Krugman. He goes on:

How bad is it? Well, I've never seen financial insiders this spooked--not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

This time, market players seem truly horrified--because they've suddenly realized that they don't understand the complex financial system they created.

"Liquidity has been drying up," he says. The whole complex system of raising money by borrowing is grinding to a halt, threatening a recession, "possibly a nasty one." And it's basically owing to "a collapse of trust: market players don't want to lend to each other, because they're not sure they will be repaid."

The immediate cause, Krugman says, is the bursting of the housing bubble.

The run-up of home prices made even less sense than the dot-com bubble--I mean, there wasn't even a glamorous new technology to justify claims that old rules no longer applied--but somehow financial markets accepted crazy home prices as the new normal. And when the bubble burst, a lot of investments that were labeled AAA turned out to be junk.

"But what has really undermined trust," he says,

is the fact that nobody knows where the financial toxic waste is buried. Citigroup wasn't supposed to have tens of billions of dollars in subprime exposure; it did. Florida's Local Government Investment Pool, which acts as a bank for the state's school districts, was supposed to be risk-free; it wasn't (and now schools don't have the money to pay teachers).

How did things get so opaque? The answer is "financial innovation"--two words that should, from now on, strike fear into investors' hearts.

Krugman allows for the possibility of beneficial innovations. "I don't want to go back to the days when checking accounts didn't pay interest and you couldn't withdraw cash on weekends."

But the innovations of recent years--the alphabet soup of C.D.O.'s and S.I.V.'s, R.M.B.S. and A.B.C.P.--were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead--aside from making their creators a lot of money, which they didn't have to repay when it all went bust--was to spread confusion, luring investors into taking on more risk than they realized.

Which brings us to the heart of the matter: "Why was this allowed to happen?"

At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs. We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich [right], who was a member of the Federal Reserve Board, about a potential subprime crisis.

And free-market orthodoxy dies hard. Just a few weeks ago Henry Paulson, the Treasury secretary, admitted to Fortune magazine that financial innovation got ahead of regulation--but added, "I don't think we'd want it the other way around." Is that your final answer, Mr. Secretary?

I confess once again that I haven't been paying close attention to the presidential campaigns, so perhaps I've missed the spirited debate about how we got into this mess, how bad it's likely to get, and how we might get out of it, or at least ease the pain.

If by chance there hasn't been any such discussion, well, that's one reason I haven't been paying close attention to the sound-bitten campaigns.

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