Carmen Reinhart on Debt Crises
University of Maryland economist Carmen Reinhart recently published a book with co-researcher Kennet Rogoff presenting several hundred years of data on financial crises. The title This Time Is Different alludes to the mentality that often develops during unsustainable booms–namely the belief that the old rules of valution does not apply anymore because of some technological breakthrough, financial innovation or better and smarter regulators and policymakers, beliefs which were predominant during the boom years of the two last decades (the tech and subprime bubbles).
In this video interview Reinhart speaks on the dynamics of unsustainable booms and debt crises, “the common signs tend to be a feast-famine kind of pattern” in which unsustainable debt levels are built up in the boom phase, leading to a debt crisis in the bust phase.
Reinhart and Rogoff have also looked at what happens in the aftermath of financial crises, and find that severe banking crises usually are followed by public debt rising more than 80 percent. At the same time, recessions triggered by these kind of crises tend to be longer and deeper, as commented upon in this video.
In a third video Reinhart critcize the monetary policy regime of the last couple of decades:
“You focused on short term interest rates […] You focused on price stability and output gap from potential. And whether credit was soaring and whether leverage was sky-rocketing was really outside of that picture.
She predicts a much more eclectic conduct of monetary policy in the future in which the central bank too a larger degree reins in lending booms.
In a fourth video Reinhart comments upon the Greek crisis. She does not believe that Greece will be able to avoid a restructuring of debt.
