7894bdb0_brary_of_Economics_and_Liberty__ast_Highlights_HIDE_HIGHLIGHTS
[Time] 48:22
Too big to fail, implicit guarantee issue: how does it fit in with the rest of the story? Go 30,000 feet up and criticize own story: Implicit guarantees, excessive leverage on the part of financial institutions, homeowners, government-sponsored enterprises--everybody is playing with a other people's money. But is that just the trees? If you go back to the forest, the current account deficit, it's the giant pool of money theory. Skeptical, but it runs through a lot of the stories. What's driving that current account deficit? Is it implicit guarantees? No. What they do is magnify the effects. If you don't have credit availability the issue of moral hazard is--wouldn't say moot, but you are not going to borrow. Seeds have to be sown by credit availability. Then the moral hazard story amplifies it because it creates for the government hidden debts, which don't take into account the fact that huge chunks of the economy are borrowing on the expectation that they will be bailed out by the government. It amplifies the demand for credit. How much of it is the lack of incentive to invest money carefully? China buying Fannie Mae bonds in the hundreds of billions of dollars and not worrying if it's going to be safe because they will be bailed out if they get into trouble. Very lethal amplifying: makes boom larger and displaces quality of lending toward the lower end. Historical footnote: England ran a current account surplus for close to a century--is that true? That it lent to the rest of the world. Emerging markets of the day--all that money was coming from England. Cycles of debt fueled at the time by England as the lender. Huge cycles in which they were the biggest lender. You can run deficits or surpluses for extended periods of time; may not be unusual for your standards. England as the reserve currency had its own cycle in which if you looked at it relative to Australia or Brazil, you'd say what a deficit! But it wouldn't qualify as a capital flow bonanza.
Reinhart on Financial Crises | EconTalk | Library of Economics and Liberty