In an interview on ABC News, Krugman, a professor of economics and international affairs at Princeton University, said the government "can probably borrow another $5 trillion."
"Hard to believe, but we can probably get away with that if we have to," he said.
Krugman said the politically expedient move would be to help the economy first and banks second.
"If (President-elect Barack Obama) has a stimulus program that's helping the economy, it will be easier to say: 'And we also need to help the banks,'" he said. "If nothing seems to be working, the public might just say, 'Hell no, we don't want to do any of this.'"
Krugman said freight rail was a plausible place to spend money. "Freight rail is a success which is hindered by small but extreme bottlenecks," he said.
He also said bailout funds given to companies need "more strings attached."
There should be more "demands that the banks have to do more with the money," he said.
"We're not just handing them checks," he said.