"There need to be more strings attached. Part of the problem is: we backed into this massive socialization of finance in the hands of an administration that basically didn't believe that the government should be dictating anything. So there have been very few strings attached," Krugman said. "One hopes that with the remainder of the bailout money, that it will be used with strings attached. That there will be demands that the banks have to do more with the money."
That said, Krugman noted that "we're not just handing them checks."
"We're actually buying shares. So, you, the public is getting an ownership stake in the banks," he said. "Were not going to make money on this thing, but it doesn't cost quite as much as it looks like."
That message hasn't been conveyed properly to the public and "there is a real problem of trust."
"We need some fireside chats, or whatever the YouTube equivalent is, from the new president to convince people that we are, in fact, having policy in the public's interest," Krugman said.
There is one bright side to this mess.
"I say thank God we did not privatize Social Security; the one rock of our retirement system that is still there. At least we have that. It's a reminder that's it's a good policy introduced 70 years ago," Krugman said. "People have lost their portfolios. There's not much Uncle Sam or anybody can do about that."
To solve the problem, Krugman said, the administration needs "to move fast and massively."
"My great fear is not that we're going to fall into a Great Depression in the next year," he said. "My fear is that we're going to have a lingering, major slump for two, three years."
So what can be done to fix the economy?
Letting home mortgages be treated the same as other debts in bankruptcy is something Krugman favors because it "will give lenders a very strong incentive to renegotiate, to help people get their mortgages down."
"There's only so much you can do," he added. "If somebody bought a house that's really twice what they can afford, no process on Earth is going to make this thing work."
But by reducing some people's mortgages, it will help the economy, he said, "and it will also create a little bit more sense of justice here that we're helping real people here, not just Wall Street."
Americans aren't panicking, Krugman said, but finally becoming rational.
"And that's the problem," he said. "People have been living in a dream world for a couple of decades and now they're suddenly saying they should start saving for retirement and that's very difficult to deal with."
Krugman describes the realization of the current crisis as a "Wile E. Coyote moment." For years, we had been supporting our economy on a housing bubble. Then one day, Americans woke up and realized that our homes weren't worth what we thought and we fell off the cliff.
"Now, we basically have to gradually climb back up the cliff. We can't walk on air," he said. "Over time, we need to build an economy on more solid stuff: actual exports, producing stuff, not just moving assets back and forth."
So what is Krugman's financial advice for Americans?
"They should be doing exactly what is creating the problem for the economy, which is save more, put more money aside, don't take big risks … I can't in good conscience give other advice. That's what people need to do."