7894bdb0_brary_of_Economics_and_Liberty__ast_Highlights_HIDE_HIGHLIGHTS
[Time] 34:35
Excessive leverage. Sounding like Russ's father, born at start of the Great Depression: "It's obvious what we've learned from this! Debt is bad." Debt can be bad; but without debt life is a lot harder. Debt is both the lifeblood of finance but also can be the poison. Innovation and liberalization can be part of the problem. What do we learn from that? Determining what is excessive debt shouldn't be rocket science, but that's when we start bending the rules. Not all debt is bad; but reach certain thresholds, which can be quite low. Paper on debt intolerance. Emerging markets suffer from debt intolerance--get into trouble at seemingly low levels of debt. Half of the defaults since WWII on sovereign debt ratios that would have met the Mastricht Criteria of debt having to be lower than 60% of GDP. Tolerable debt thresholds can be extremely low, especially if you don't have a track record. Economics doesn't have much to say about what creates confidence or a loss of confidence. If you were to look coldly at a country that has a debt of 40% of GDP--not very high by international standards--but if you also know it had defaulted on its debt several times at comparable levels, you might start looking with greater scrutiny. What we created inside the United States was a developing country--the subprime market was a developing country inside the United States, where you had a lot of new entrants into credit markets with no credit history and often with no employment history. Like having the same credit standards that you apply to emerging markets applied to households here. Confidence shifts are critical in determining the timing of the crisis; but important issues during the boom stage often get shoved under the rug. Second part of remarks: what have we learned? More concerned with what we will forget. Think that we will have memories of this for a while but the next generation will not. The group of households that have lost their homes in this crisis, the memory will live much longer there; but on the whole, prediction: we will forget again.
Reinhart on Financial Crises | EconTalk | Library of Economics and Liberty