I am going to stipulate to Krugman's assertions of fact here.
Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. After all, they were consenting adults, and if they failed to understand the risks they were taking that was nobody’s fault but their own. But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.
Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses, even as revenues plunged, the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts.
Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.
In what way does the manner in which the debt was incurred matter here? Publicly or privately incurred, taxpayer debt is taxpayer debt and is a commerce-killer. I will also include here that this is little different (or maybe even no different) from the Wall St. bailouts, the bailouts of GM and Chrysler, the bailouts of underwater mortgagees and "cash for clunkers". I'm not seeing Krugman against these. In fact, I believe he is "for" these expenditures.
I also argue that it is not the austerity that is depressing the Irish economy, but rather the debt. That is, without the debt, there is no need for severe austerity measures.
The lesson for the US Economy is this: 1) Reduce the debt. 2) Avoid severe "austerity" measures (of course, reducing government spending is an achievable and desirable goal) and address the root cause by reforming entitlements. At 50%+ of the Federal Budget, they are unsustainable and will prevent the Feds from performing their Constitutionally required functions (National Defense and Interstate Commerce).