People don't suddenly wake up one day and become Paul Krugman.

By early 2007, the collapse of the U.S. housing boom had brought with it widespread defaults on subprime mortgages — loans to home buyers who fail to meet the strictest lending standards. Lenders insisted that this was an isolated problem, which wouldn’t spread to the rest of the market or to the real economy. But it did.

For a couple of months after the shock of Feb. 27, markets oscillated wildly, soaring on bits of apparent good news, then plunging again. But by late spring, it was clear that the self-reinforcing cycle of complacency had given way to a self-reinforcing cycle of anxiety.

There was still one big unknown: had large market players, hedge funds in particular, taken on so much leverage — borrowing to buy risky assets — that the falling prices of those assets would set off a chain reaction of defaults and bankruptcies? Now, as we survey the financial wreckage of a global recession, we know the answer.

Well, things always seem clearer with the benefit of hindsight. At the time, even pessimists were unsure of their ground. For example, Paul Krugman concluded a column published on March 2, 2007, which described how a financial meltdown might happen, by hedging his bets, declaring that: “I’m not saying that things will actually play out this way. But if we’re going to have a crisis, here’s how.”

Here's the reason why world markets dropped so dramatically this week. You can forget about all the other explanations you've heard. They're all just talk. This is the real deal.

The reason is that Sunday night Al Gore won an Oscar for his film "An Inconvenient Truth," the documentary purporting the threat of global warming.

Yes, there was a one-day lag. The award was given on Sunday night, and the global stock market crash didn't start until Tuesday. Picky, picky, picky. Give me a little rope, here.

On Monday morning, TXU Corporation, the Texas-based electric power utility, announced it would be taken private in a record-breaking $45 billion deal. Normally that kind of blockbuster would be bullish -- it demonstrates that stocks are cheap and that money to buy them is plentiful.

But by the end of the day the happy news flow about TXU had started to focus on an inconvenient truth. The company announced it was scrapping plans to build eleven coal-fired power generating plants, to head off lawsuits from environmental groups that would interfere with the $45 billion deal getting completed.

One such group, the National Resources Defense Council, bragged that TXU's decision proved "the business community…can't simply ignore global warming and come up with sound business strategies."

Yes, God forbid that business should come up with sound strategies. Better to come up with unsound ones, such as scrapping eleven coal plants. Never mind that those coal plants could actually have been run as cleanly as any other kind, and a lot more cheaply.

The NRDC went on to say, "It's an earthquake that happened in Texas but the shock waves will be felt in Wall Street and Washington."

Indeed. But the shockwaves were felt next, several hours later, in Shanghai, when the stock exchange opened for business on Tuesday. By closing time, stocks were down 9% for the day -- one of the biggest one-day drops on any stock exchange ever.

Why would China care what a bunch of Hollywood greens manage to pressure a Texas utility to do? They don't -- but stay with me here.

In China they're worried about a different kind of warming -- economic "overheating," the silly idea that there can be too much growth, too rapidly, for a nation's own good. The government agencies that try to shape China's economy are constantly talking about various measures to slow things down there a bit.

On Tuesday there were rumors about some new measures along those lines. In the past, such measures have always been just symbolic. But this time, the talk was of something very real -- the imposition of a 20% capital gains tax on stock transactions.

Think what that would mean to Chinese stock investors.

To compensate for the great risk of investing in speculative Chinese companies, investors require a larger than normal return on their money. If they buy a stock for 100 yuan, they need to think it will go to 200 yuan -- giving them a 100% return -- to make it worth the risk.

With the imposition of a capital gains tax, their actual after-tax profit in that transaction would only be 80% -- they'd have to pay away 20 yuan out of their 100 yuan profit in taxes. So if they're still looking for a 100% profit, they sure won't pay 100 yuan any more for that stock in the first place.

If you do the arithmetic, you'll find that if investors still need to earn a 100% profit after taxes to make it worth the risk, they'll only pay 89 yuan for that stock -- not 100. That's an 11% difference, which is pretty close to the 9% loss that Shanghai stocks took on Tuesday.

During the trading day on Tuesday in the US, investors not only had to deal with the risks to growth presented by heavy-handed interference by environmentalists in business deals, but with the risks to growth in Asia as well. That's a one-two punch, since US growth is closely tied to Asian growth, and vice versa.

But actually it's a one-two-three punch. Because the risk of higher capital gains taxes isn't just a problem in China. It's a problem in the US, as well.

Under current law, in the 2011 tax year, US capital gains tax rates will become 20% -- the same level the mere threat of which caused Chinese stocks to lose 9% in a single day.

In fact, under current law, tax rates not only on capital gains but also on wage income, dividend income, and estates are all set to rise. If something isn't done to stop it, 2011 will see the largest tax increase in US history. That's the stuff real recessions are made of.

And who is going to stop it? Leadership of the new Democrat-controlled congress has said over and over that it would like to repeal today's low tax rates right now, and not even wait until 2011.

Why? Because the Democrats want to raise extra tax revenues to fund all kinds of new government spending initiatives, which will take the place of the "sound business decisions" that the environmentalists so disdain.

The irony is that hiking taxes won't even raise revenues. The 1992 tax hikes didn't. Yet since 2003, when today's lows tax rates took effect, tax revenues have soared to record levels.

The same congressional leadership that wants to raise taxes also supports federally mandated controls on US businesses in the name of stopping global warming. They want to impose, by law, on a national level, the same kind of burdens TXU and its customers now face in Texas.

In China, government officials have denied that they intend to impose a capital gains tax. We haven't heard any denials from Democratic leadership in the US yet.

So that's why I say Al Gore's Oscar triggered a global stock market crash.

It will just be a brutal part of an overdue correction if the government turns away from the course it's on now -- to impose prohibitions against "sound business decisions" on the American economy.

If it stays on that course, then this is no correction. It's a bear market.

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