Spying software blamed after crook changed password and email address

PayPal emailed to tell me my account had been accessed, a new email address added and a different password substituted. PayPal's records showed I had logged into my account the day before to change the details and security questions. I hadn't.

PayPal couldn't tell me which of my details had been used by the "spoofer" to verify my identity and said there could have been a system glitch that made my account temporarily insecure. I asked for the result of its investigation but heard nothing. SJU, London

PayPal found this fraudster had used the password recovery tool to reset your password and security questions. You replied to the confirmation email PayPal sent before damage was done. It says the person who accessed your account must know your credit card number and PayPal password as it can find no evidence that its system was compromised nor any glitches.

I am pleased that, instead of blaming you for being careless, it suspects the person obtained these details by "scraping" the information from your computer with data-stealing software (spyware). This is one of the main ways crooks obtain identity information. Make sure you have up to date anti-virus, anti-spyware and a firewall.

• Email Margaret Dibben at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or write to Margaret Dibben, Your Problems, The Observer, Kings Place, 90 York Way, London N1 9GU and include a telephone number. Do not enclose SAEs or original documents. Letters are selected for publication and we cannot give personal replies. The newspaper accepts no legal responsibility for advice.

Staff in a muddle about what it takes to move bank accounts

In March I moved my bank account from NatWest to Nationwide, which meant my mum had to set up a new standing order from her Lloyds TSB account for the money she pays me regularly. The first payment to Nationwide was returned and Lloyds cancelled the standing order. Lloyds now says she must get a reference number from Nationwide because it is a building society and not a bank, otherwise she will have to give me a cheque each month. Nationwide says my Flexaccount is a bank account and the sort code and account number are all Lloyds needs. All I want is my money. PB, Portsmouth

When your mother organised the standing order mandate, two numbers in the sort code were transposed and that stopped the April payment going through. Lloyds confirms that it does require a reference number for standing orders which are set up to send money to building society savings accounts, but not when money is going to current accounts. Staff at the branch should have known this. The bank has sent your mother a partially completed standing order form to fill in and a cheque for £25 to apologise.

• Email Margaret Dibben at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or write to Margaret Dibben, Your Problems, The Observer, Kings Place, 90 York Way, London N1 9GU and include a telephone number. Do not enclose SAEs or original documents. Letters are selected for publication and we cannot give personal replies. The newspaper accepts no legal responsibility for advice.

Lender takes money off a Barclaycard to cover pay-day loan repayment

I stupidly borrowed £800 from The Money Shop as a pay-day loan, guaranteed against my cheques. I wrote 16 cheques for £50 each but four of them bounced because of insufficient funds in my bank account. I wanted to extend one of the cheques for another month and I used my Barclaycard to pay The Money Shop's £8.99 charge.

But then The Money Shop took another £50 from my Barclaycard to cover one of the cheques that had bounced. The contract says money can be recovered from my debit card or my bank account but that any other repayment mode must have my consent. I had not given consent to use my Barclaycard.

When I complained, Barclaycard credited my account and sent me a new card with a new number. But it then reinstated the charge, saying I had signed a contract allowing The Money Shop to take the money. SR, London

Pay-day loans are to be avoided. I assume you needed the money desperately to agree to a 212% interest rate. The Money Shop persuaded Barclaycard it was entitled to take money from your credit card, beyond the £8.99 you had agreed to, which is why Barclaycard put the charge back on your account. Now Barclaycard has looked at your account again and it has come to the conclusion that, probably, your version of events is correct and that certainly the moral argument is in your favour. It believes you are entitled to the £50 and has refunded your account.

I also spoke to The Money Shop. It assured me it would never take money from a credit card without the customer's consent and said that, if only you had spoken to the company directly, it could have sorted this out quickly and refunded the charge. I pointed out that you had tried to do exactly that, last October and again in January, but it couldn't find any record of your calls.

That might be because it logs calls when customers phone the customer care line but not if they try to sort out their problems with anyone else. The Money Shop then explained its staff can see only the last few digits of card numbers so cannot tell if they are credit or debit cards. 

It says it had intended taking the money from your debit card but used the credit card in error. If it had used the debit card, you would have no grounds for complaint but, because of the mistake, The Money Shop has refunded the £50 and deleted your credit card details. Barclaycard says you can keep the £50 it gave you.

• Email Margaret Dibben at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or write to Margaret Dibben, Your Problems, The Observer, Kings Place, 90 York Way, London N1 9GU and include a telephone number. Do not enclose SAEs or original documents. Letters are selected for publication and we cannot give personal replies. The newspaper accepts no legal responsibility for advice.

Mistake meant I failed to get higher interest rate

At the end of March 2008, I sent £3,600 to Birmingham Midshires to open an Isa, with a request to transfer in £3,000 from my NS&I Isa. On 4 April, I applied to transfer the whole Birmingham Midshires Isa to NatWest. I calculated this would be around £7,000. I experienced various problems but received a final letter which I believed resolved the issues and showed an opening deposit of £6,812. But Birmingham Midshires sent only £3,815 to my NatWest account. The rest of my money is lost. If the transfer had gone smoothly, I would have been eligible for a higher interest rate at NatWest. HC, Oldham

Birmingham Midshires has different products – one for new Isas and another for transferred Isas – paying different rates of interest. After your call, it set up an account to receive the money transferred from NS&I. You sent a completed application form with £3,600 for a new Isa. When Birmingham Midshires realised it opened another Isa for the money, unknown to you.

The money from NS&I then arrived but, instead of going to the transferred-Isa account, it went into the new-Isa account. If that wasn't bad enough, the cheque, says Birmingham Midshires "appears to have bounced" and the money was returned to NS&I. Then NS&I sent a replacement but again this was paid into your new-Isa account.

After an internal report, the mistake came to light and the transferred money was sent to the correct account.

When you asked to move the money to NatWest, you quoted only one account number because that is all you knew about, but it is why only half the amount went over.

When you queried this with Birmingham Midshires, it wrongly sent you a transfer form, whereas the clerk should have told you to get the form from NatWest. This has now been sorted out.

Birmingham Midshires is sending you £50 to apologise and £4.74 for the interest you lost by not having a higher balance with NatWest from the outset.

• Email Margaret Dibben at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or write to Margaret Dibben, Your Problems, The Observer, Kings Place, 90 York Way, London N1 9GU and include a telephone number. Do not enclose SAEs or original documents. Letters are selected for publication and we cannot give personal replies. The newspaper accepts no legal responsibility for advice.

Do you dream of running a bed and breakfast in the countryside? We've chosen five on the market around the country

Privatisation may be defeated, but that won't solve Royal Mail's many problems, writes Tim Webb

Royal Mail is braced for further industrial unrest, with unions expected to ballot more regions for strike action as early as this week. It follows the vote last week by postal workers in London to stage a 24-hour walkout this Friday.

With plans to privatise the state-owned group in disarray, Jonathan DeCarteret, from the consultancy Post-Switch, is predicting that the London vote will prove to be the "starting pistol in a long summer of industrial strike action".

Both sides blame each other. The Communications Workers Union, which represents most of Royal Mail's 150,000-strong workforce, says the company is making "arbitrary cuts" without its agreement. Royal Mail, in turn, argues that the union keeps resisting changes under its modernisation programme.

Industrial disputes at Royal Mail are nothing new. In the autumn of 2007, the CWU organised a series of national strikes in protest over changes in pay and working conditions. But this latest round of action comes at a critical time for Royal Mail. The government has drawn up a controversial plan to part-privatise the group by selling a minority stake to a private sector competitor. Indeed, for ministers, one of the big attractions about the sell-off is that it would make the difficult industrial relations someone else's problem. The idea was that a private sector operator would be immune to the kind of political pressure being brought to bear on the government and would be more able to push through radical changes - and huge job cuts.

Now the plan looks likely to be ditched under political pressure. But even if ministers back down, they will have to come up with an alternative plan to turn Royal Mail into a viable business. While it made an operating profit of £321m last year, its estimated £10bn pension deficit means it is technically bust.

The company is desperately inefficient compared to its rivals. For example, its postmen and women spend about two hours a day sorting their letters - by hand - into the right order for delivery. Privatised European companies - themselves mostly former state-owned monopolies - use sequencing machines to automatically order most of their mail.

The government, which has promised to plug the pension deficit, will demand big changes in return for doing so, even if it stops short of privatisation. The question now - for the union and Royal Mail - is whether they can bury the hatchet and agree a cost-cutting modernisation plan as a viable alternative to privatisation. If they can't, it is likely that a restructuring plan will be forced on them instead, which could be more painful.

Judging by the events of last week, the chances of a genuine rapprochement do not look good. At the CWU's annual conference early last week, the union passed a motion offering Royal Mail's management, led by the former Football Association boss Adam Crozier, a three-month "moratorium" on industrial action. In return, the union demanded a temporary halt to the modernisation programme to allow for more talks. Following the news on Friday of the London strike, one Whitehall source observed: "That was the shortest moratorium in history."

Royal Mail has made some strides to cut costs and modernise, and it would not be true to say that all efforts were being blocked by the CWU. The government has loaned the company £1.2bn to buy sorting machines and other equipment. Half the money has been spent, and the union says it is keen for all the money to be invested quickly.

As mail volumes decline, Royal Mail has already cut about 40,000 jobs in recent years, by not replacing people leaving the business or offering generous voluntary redundancy packages. It has promised the union not to make any compulsory redundancies. But one industrial relations expert claims that behind union resistance to modernisation is a fear that as the company becomes more efficient, it will run out of people prepared to take voluntary redundancy, and compulsory job losses will result. "The gulf between Royal Mail management and the CWU is pretty wide," he says. "It's very hard to see them being able to find a compromise."

The CWU has run a highly effective campaign against the privatisation plan. But if, as expected, the plan is thrown out, it could turn out to be a pyrrhic victory for the union. If industrial relations continue to deteriorate, it will only strengthen the argument of business secretary Lord Mandelson that some other type of harsh medicine is needed to cure Royal Mail.

Regulator proposes to end audits for subsidiaries

Controversial reforms of major companies' accounts threaten to unleash a new wave of financial calamity, experts have warned.

Proposals by the Financial Reporting Council, the regulator responsible for promoting confidence in corporate governance and reporting, have raised the possibility that the accounts of wholly owned subsidiaries of major banks need not be audited.

The plans appear to indicate that the financial community is intent on returning to the days of light-touch regulation. The City is also resisting demands to create a European financial regulator.

The FRC is asking the financial industry whether subsidiaries should be required to file audited accounts with full disclosures. "Is a more simplified reporting regime more appropriate? Would it be desirable to eliminate the UK requirement to prepare, have audited, and file wholly-owned subsidiary accounts in the case of a parent company guarantee?" it asks.

Critics point out that it was a subsidiary of Northern Rock, Granite, that contained the liabilities that led to the collapse of the bank: Granite owned £49bn of mortgages that were sold by Northern Rock and moved offshore to the tax haven of Jersey. Likewise, a series of banks crashed last year because their subsidiaries loaded up on asset-backed securities that plummeted in value.

Richard Murphy, an influential forensic accountant, said: "We have seen how subsidiaries have led parent companies into liquidation. HMRC and the public should have a right to get high quality audited information on every company. If this goes through, it will mean complex financial transactions will become harder to detect, so tax avoidance will increase."

A senior City figure said: "On the one hand, we're aware of the size and complexity of report and accounts. But on the other, if we abandon audits of wholly owned subsidiaries we are potentially not getting access to important information. We need investors to think carefully which side of the argument we're on, but I don't think we've reached a view."

The proposals are contained in a 16-page document from the FRC entitled, "Louder than Words - principles and actions for making corporate reports less complex and more relevant".

An FRC spokesman said, if adopted, the proposals would require government legislation. He said the FRC was attempting to reform company accounts to make them simpler and easier to understand.

Meanwhile, there are many in the City who are taking comfort from the recent declaration by a leading thinktank, the National Institute for Economic and Social Research, that the recession is over. This, combined with banks paying billions of pounds of bailout money back to governments, and rising equity markets, has buoyed confidence.

Earlier this week, US treasury secretary Tim Geithner rowed back on limiting bankers' pay after he was persuaded that the initiative would see an exodus of Wall Street financiers to Dubai.

A senior fund manager said: "Entrenched vested interests are putting up a sufficiently good rearguard action that they're forestalling any significant changes in the regulatory environment. The general improvement in financial markets is possibly covering up the cracks."

The big news at the Apple Worldwide Developer Conference last week was that Steve Jobs is apparently still away on sick leave. So the limelight fell on subordinates. They announced a new version of the iPhone, drastic price reductions on the old model, a new operating system for old and new iPhones and the next version of the company's OS X operating system.

But widely-touted expectations that the company would launch a "tablet' computer were not realised. Which makes sense, really: a tablet would represent a major change in direction for Apple and it's hard to imagine Jobs leaving such an announcement to a mere underling. As far as unveiling tablets is concerned, Steve's only peer is Moses.

Since hardware is what turns report ers on, it's not surprising that the new iPhone received the lion's share of attention. It's finally got a decent camera, for example, can now record movies and has a digital compass, whatever that is. And so on. But far more interesting is the new version of the phone's operating system, which significantly expands its capabilities - and thus the potential for developing new applications that will run on it.

At the launch, Apple's vice-president, Scott Forstall, said that the 3.0 software developers' kit now includes access to more than 1,000 APIs (geekspeak for application programming interfaces), thus providing software developers with a set of tools that allow them increasingly deep access to the phone's hardware.

So stand by for an even bigger upheaval in an unprecedentedly explosive marketplace. There are now something like 50,000 apps (applications) for the iPhone, and Apple has long passed the billionth download point for these small programs, creating a seismic shift in the conception and marketing of software.

It also heralds the possibility of an unprecedented extension of corporate control on people's behaviour. To understand why, we need to understand how this new software ecosystem works.

At present, anyone can write an app for the iPhone. But to get it distributed they have to get it on to the App Store on the iTunes site. Nothing gets on to iTunes without being explicitly approved by Apple. The company's rationale is that it doesn't want unsavoury or tasteless applications being distributed via its site. Second, and more importantly, it doesn't want programs that might screw up the key functions of the phone.

So far, so reasonable. But something happened recently that caused your columnist to sit up. A smart young developer named Jamie Montgomerie created an app called Eucalyptus which enables an iPhone user to search the vast (20,000-volume) collection of public-domain books that have been digitised over many decades by the wonderful Gutenberg Project - and to download selected texts to the iPhone. It seemed a lovely idea whose time had come.

But out of the blue, Apple rejected Eucalyptus. Why? Well, according to Montgomerie's blog, the App Store reviewer used Eucalyptus to search for The Kama Sutra of Vatsyayana , which was apparently enough to disqualify the application because it "contains inappropriate sexual content". And at this moment, alarm bells began to ring.

The key point is that Eucalyptus does not provide any content. It is simply a tool that enables users to search a repository of books. Yet here was a computer company saying customers should be denied use of the tool because they might use it to access content some anonymous reviewer considered inappropriate. You don't have to be George Orwell to see where this logic might lead.

Which underscores a more fundamental point. The wildfire success of the iPhone heralds a world in which the mobile phone will become most people's prime gateway to the internet. But the iPhone is tightly controlled; nothing appears on it unless Apple gives it the nod. Anything Apple dislikes can be removed next time the user synchronises the phone with a personal computer. So its control of the gateway is total.

To its credit, Apple spotted the idiocy of the Eucalyptus ban and the decision was reversed. Your columnist downloaded the app (at a cost of pounds 5.99) and has been using it ever since. In fact, he's now wandering around with a copy of James Joyce's Ulysses in his shirt pocket. Which is appropriate since next Tuesday is Bloomsday.

As analysts and media hailed the tentative emergence of green shoots last week, Nobel Prize-winning economist Paul Krugman caused international shock with a prediction that the world economy would stagnate just as badly, and for just as long, as Japan's did in the 1990s. In an exclusive interview, he talks to Will Hutton about his anxiety for the future - and how Gordon Brown might have saved Britain from the blight that hangs over the West

Will Hutton: You are warning that what happened to Japan could happen to the whole world. Japan's GDP at the end of this year will be no higher than it was in 1992 - 17 lost years. You are saying that this is an ongoing risk, certainly for the North Atlantic economy - maybe the world economy.

Paul Krugman: Yes. It's not that the risk of the Japan syndrome has receded very much. The risk of a full, all-out Great Depression - utter collapse of everything - has receded a lot in the past few months. But this first year of crisis has been far worse than anything that happened in Japan during the last decade, so in some sense we already have much worse than anything the Japanese went through. The risk for long stagnation is really high.

WH: So what is the heart of your pessimism? The bust banking system? A critic would say: "Hold on, Paul Krugman. Japan is a special case. It had an overblown export sector that had become too large for an American market it had saturated. The yen was very, very overvalued. And this interacted with a credit crunch and bust banking system. Its policy response was consistently behind the curve. That's not the story of the United States or the United Kingdom."

PK: The thing about Japan, as with all of these cases, is how much people claim to know what happened, without having any evidence. What we do know is that recessions normally end everywhere because the monetary authority cuts interest rates a lot, and that gets things moving. And what we know in Japan was that eventually they cut their interest rates to zero and that wasn't enough. And, so far, although we made the cuts faster than they did and cut them all the way to zero, it isn't enough. We've hit that lower bound the same as they did. Now, everything after that is more or less speculation.

For example, were the problems with the Japanese banks the core problem? There are some stories about credit rationing, but they are not overwhelming. Certainly, when we look at the Japanese recovery, there was not a great surge of business investment. There was primarily a surge of exports. But was fixing the banks central to export growth?

In their case, the problems had a lot to do with demography. That made them a natural capital exporter, from older savers, and also made it harder for them to have enough demand. They also had one hell of a bubble in the 1980s and the wreckage left behind by that bubble - in their case a highly leveraged corporate sector - was and is a drag on the economy.

The size of the shock to our systems is going to be much bigger than what happened to Japan in the 1990s. They never had a freefall in their economy - a period when GDP declined by 3%, 4%. It is by no means clear that the underlying differences in the structure of the situation are significant. What we do know is that the zero bound is real. We know that there are situations in which ordinary monetary policy loses all traction. And we know that we're in one now.

WH: So your point is that the crisis in Japan was about excess debt, excess leverage and lack of demand - reinforced by the fallout from the asset bubble collapsing. They didn't have credit contraction on anything like our scale, but even so, zero interest rates were just unable to turn the economy around.

PK: That's right, that's right.

WH: But an optimist would say that there are signs all around of the traction that you say doesn't exist is working. The stockmarkets in London and Wall Street - along with most world markets - are up a solid 20% to 25%. You've got all these improving business confidence indicators. You've got the first signs of the housing market bottoming in both the UK and the United States. This is what the optimists would tell you.

PK: But all of that points to levelling off, rather than an actual recovery. Britain's looking the best among the major European economies because it's got a PMI [purchasing managers' index, a key measure of economic sentiment] that's just above 50. In other words, Britain actually may have stopped contracting - that's the most positive thing one can say.

Who knows if the stockmarket makes sense or not? It was pricing in the possibility of an apocalypse a few months ago. That possibility seems to have receded, so it makes sense for the markets to come up, but that's not saying that the economy is going to be great. If you do the comparison not with where they were three months ago, but where they were two years ago, then the markets still seem awfully depressed.

I hope I'm wrong but the question you always have to ask is: where do we think that this recovery's going to come from? It's not an easy story to tell.

WH: In your lectures, you drew attention to the importance of stressed balance sheets holding back consumers and business alike in their likely spending ambitions - and thus dragging back economic activity. Is this going to be a balance-sheet-constrained recovery?

PK: It's probably true that households have been impoverished a lot by the fall of the housing and stock prices. And that it's likely that households, with all of this debt, are going to have trouble spending. And yes, the North Atlantic economy was supported quite a lot by gigantic housing booms. Here in the UK you have had the house price surge without very much construction. Economists have a well-developed theory about how balance-sheet problems can cause financial and economic crises, but we thought of it in terms of third world countries with foreign-currency debt. We didn't realise that there were lots of other ways in which that can happen.

WH: So, one way to think about it is that self-reinforcing financial crises rooted in overstretched, overborrowed companies and governments in less developed countries - like those in Argentina and Indonesia, which were amazingly destructive in the 1990s and 2000s, but localised - are now playing out in the developed world?

PK: There are really two stories. One is the Japan-type story where you run out of room to cut interest rates. And the other is the Indonesia- and Argentina-type story where everything falls apart because of balance-sheet problems.

WH: So in a nutshell your story is ...

PK: The "Nipponisation" of the world economy with a bunch of "Argentinafications" playing a role in the acute crisis. But even after those are over, we have the Nipponisation of the world economy. And that's really something.

WH: What was the heart of the Japanese problem? What was at the heart of their 17 years of going nowhere?

PK: Well, my guess is that it was that the balance-sheet problems took a very long time to resolve. And it is difficult to get enough demand in an economy where you have really very adverse demography ...

WH: So, which countries look closest to being Nipponised - combining balance-sheet problems and ageing populations?

PK: Well, the US doesn't have the same combination. But in Europe, Germany and Italy look comparable. France is better and Europe as a whole is considerably better.

WH: Germany matches Japan to an uncanny degree. You talk about the Nipponisation of the world economy: I'm not so sure. But I would talk about the Nipponisation of Europe via a German economy at its centre in the grip of the same problem - and that starts to be a global problem.

PK: Germany has huge inadequacy of domestic demand. Their economic recovery in the first seven years of this decade rested on the emergence of gigantic current account surplus.

How is it possible that Germany, which did not have a house price bubble, is having a steeper GDP fall than anyone else in the major economies?

The answer is that they depended upon exporting to the bubble regions of Europe, so they actually got side-swiped by the loss of those exports worse than the bubble regions themselves got hit.

It's Germany on a global scale that is the concern. We worry about the drag on world demand from the global savings coming out of east Asia and the Middle East, but within Europe there's a European savings glut which is coming out of Germany. And it's much bigger relative to the size of the economy.

WH: And on top there is an unique and unaddressed huge potential banking crisis. The Germans pride themselves on their three-legged banking system, but it is incredibly interlinked. The IMF warns that Germany could have to take at least $500bn of writedowns, which its banks have not begun to recognise. German banks hold a trillion dollars - maybe more - of maturing collateralised debt obligations that can only be refinanced by crystallising the losses. We've had RBS and you've had Citigroup. Germany's GDP will fall 6% this year - before the banking crisis has hit it.

PK: Yeah, that's the financial view. Its important to keep track of the financial state of the banks. But one always has to keep track of the real side of the economy, too. It is a hypothesis that the problem is essentially financial. But it is by no means a hypothesis that we know is true.

WH: So even after what we've gone through, you say it's just a hypothesis that the cause of the crisis is financial?

PK: That the cause is primarily financial. Certainly, Lehman and all of that alerted us all. And it did trigger an immediate drop in demand. But the housing bust was going to happen regardless.

The fall in business investment is at least to a large degree a response to excess capacity, which is the result of falling consumer demand and the housing bust. So we don't know.

WH: I think we know more than that. The links between bank capital, loan losses, credit availability and economic activity and asset prices have never been clearer. That was why there was a threat of Depression.

PK: Clearly, re-establishing stability in the financial markets is a necessary condition for recovery. But we're not sure it's sufficient.

WH: That's very scary.

PK: Well, that is part of the reason why I am so depressed.

WH: In one of your lecture charts you seemed to be suggesting that we're 12 months into what you think could be a 36-month period of downturn, albeit at a slower rate.

PK: Easily.

WH: It's quite shocking that you think it will be that severe.

PK: If we measure the 2001 US recession by when the labour market finally started to turn around, it was a 30-month recession. It was really 30 months in before you started to see the unemployment rate come down.

WH: In Britain, there is now a new consensus forming that the government's economic forecasts, which were roundly mocked at the time of the April budget for being wildly optimistic, could be right - that is, growth will start to resume in 2010, albeit at a very low rate.

PK: Well, the UK has achieved a lot of monetary traction in the way that no one else has through the depreciation of the pound. In effect, you've carried out a successful beggar-my-neighbour devaluation.

WH: So, the United Kingdom might actually get through this in reasonably good shape?

PK: Yeah. That's why I've been watching with an outsider's slight puzzlement, your bizarre political circus.

WH: Darling and Brown deserve more credit than they're given?

PK: If the government can hold off having an election until next year, Labour might well be able to run as "we're the people who brought Britain out of the slump".

WH: So your advice to the Labour Party is: hold steady.

PK: Probably.

WH: Probably?

PK: I don't know enough about the other aspects of politics, but I would guess that the option value is quite high that the economy might actually have turned a corner. That's unique. That's a uniquely British thing. None of the other G7 countries has anything like that.

WH: And that's a combination of our big beggar-our-neighbour devaluation, aggressive monetary policy, successfully recapitalising our banks and our fiscal policy.

PK: There hasn't been very much discretionary fiscal expansion when all's said and done.

WH: Well, there was a £20bn temporary cut in VAT.

PK: Yeah.

WH: Which is non-trivial.

PK: Non-trivial. But not much [other spending], as I understand.

WH: Well, there was bringing forward £3-4bn of capital spending. Perhaps together in a full year the stimulus was 1.5% GDP. Maybe 2% at the outside.

PK: Monetary policy has been more aggressive - though maybe less than the Fed - and the depreciation of the pound is a nice thing from a UK point of view.

WH: So you remain committed to the key role of fiscal policy?

PK: Yeah. Fiscal policies are best; certainly something to do to mitigate recession. People say that the Japanese fiscal policy on all that infrastructure was wasted. But it did help sustain the economy and avoid a collapse. Fiscal policy can certainly do that: it gives the credit sector time to rebuild its balance sheets. There's every reason to be expansive around the fiscal side now because even if you're not sure that it provides a long-term solution, avoiding catastrophe is a big thing to do.

WH: If you believe that, is Obama doing enough on fiscal policy?

PK: Well we have a stimulus which is a little over 5% of one year's GDP but some of it is not real - something that was going to happen anyway and not very stimulative. So it's really about 4% of GDP of genuine stimulus, but spread over two and a half years. So, it's actually quite a lot less than what I was arguing for.

WH: So, will it be sufficient?

PK: Well, sufficient to actually restore full employment would probably have to be 5% or more. More than we have would certainly be a good thing. It actually might happen. You know, the buzz I'm getting is that a second-round stimulus might well come on the agenda.

WH: Really? When you say "the buzz you're getting", have you been asked?

PK: Well, it's what you hear from people who talk to people who talk to people.

WH: Who would argue for that? Would it be Larry Summers [director of the US National Economic Council]?

PK: I think Larry. I'm not sure Tim Geithner [US treasury secretary] would be opposed to it. Nor would Chrissie [Christine Romer, director of the Council of Economic Advisers] I'm sure they would be making similar judgements. It is actually a little spooky.

WH: They're all people you know pretty well, who look at the world the same way, use the same tools and framework ...

PK: Yeah. They may be sitting where they are, having some differences. Larry's always more conventional than I am. Sometimes rightly. Sometimes wrongly. But they do operate in the same framework.

WH: How seriously do you take the argument that the growth of public debt on this scale will crowd out the spontaneous amount of growth of corporate and private debt? Is this already happening with the rise in long-term interest rates in the US?

PK: The thing about long-term interest rates is that they are a weighted average of future expected short-term interest rates. Movements in long-term rates are mostly about what people think the short rates are going to be. Look, real rates are barely up at all. What seems to have moved up is the expected rate of inflation, which is still below the Fed target. So it's more like what the markets are doing is reducing their discounting of deflationary catastrophe. WH: how do you see the politics working out in the States and in the UK now? Your praise of Gordon Brown after the banks in October were recapitalised was front-page news. Are you still as well disposed?

PK: I still think his economic policies have been pretty good. They really kind of lost their nerve on fiscal policy, but I do understand it's harder to do it here. I think the UK economy looks the best in Europe at the moment. I have no position on all of the crazy stuff. But I think the policies are intelligent. The fact of the matter is that Britain did manage to stabilise the banking situation. I'm not ecstatic, but I'm not sure I know what I could have done better.

WH: So where are you on the debate about various shape recoveries? V-shaped? L-shaped ? A W-shaped recovery?

PK: There is a possibility that we get some perk-up as the stimulus dollars start to flow and an almost mechanical bounceback in industrial production as inventories are built up. But then we slide down again. The idea that we sort of bounce along the bottom is all too easy to imagine.

WH: Is it just a story about the right dose of fiscal policy? What structural change would you advocate in the economy, to support recovery?

PK: Financial regulation. Rein in that monster. The huge increase in general private-sector leverage is at the core of how we got so vulnerable. We went for 50 years after the Great Depression without any major financial crises, and that, I think, was because we had a financial sector that didn't let people get as deeply into debt as they have now.

WH: So rein in the financial monster and give a fiscal stimulus. So you would leave the American way of doing capitalism untouched?

PK: I'm not that cosmic in this stuff. But it is true that Gordon Gekko [the anti-hero of Oliver Stone's film Wall Street, motto: Greed is Good] went hand in hand with the wave of financialisation. Corporations got more brutal and fiercer.

WH: But it is all connected. Without the leverage, there would have been no Gordon Gekkos. And leverage meant that predator companies had the firepower to launch contested hostile takeovers. The only way to fend off attack, or to make the sums work after an attack, was for companies to be more brutal and fierce - often breaking the promises to staff and suppliers that kept commitment and trust.

PK: All of that is true. I have a more mundane view about what we do. I just want a stronger welfare state and a little bit more social democracy. And some restoration of the labour movement as a counterweight.

I'm not sure - maybe I'm just not thinking about it deeply enough. I guess I've got the same attitude Keynes had, which was he was looking for almost technical fixes. You're looking for ways to fix the parts that have gone wrong rather than replace the whole thing.

You know the human cost of this crisis is vastly worse in America than it is on this side of the Atlantic. So this is a good time to push for a better US social safety net too.

WH: And lastly - you've been critical about Obama. Your view now?

PK: I'm increasingly happy with him. I was unhappy; I think they could have gotten a bigger stimulus coming out the gate. But they've become more forceful. I would have been more aggressive on the banks; we'll see if we need to re-fight that battle later on.

Healthcare is looking really good. I'm getting increasingly optimistic on healthcare reform. Climate change looks like it's going to happen. So my odds that this will in fact be the kind of New Deal I was hoping for are rising. I had my scepticism, but he is smart. He's impressive. And it is such a relief to have somebody whom you can respect in the White House.

The CV

Name Paul Krugman

Born 1953, New York

Education 1974: BA, Yale University; 1977: PhD, Massachusetts Institute of Technology

Career 1982-3: senior international economist for US president Ronald Reagan's council of economic advisers; 1999: appointed professor of economics and international affairs at Princeton, having previously taught at MIT, Yale and Stanford; 1999 to present: columnist, the New York Times. Most recent books include The Conscience of a Liberal (2007) and The Return of Depression Economics and the Crisis of 2008 (2008). October 2008: awarded the Nobel prize in economic sciences, for his work on international trade and economic geography.