Carmen Reinhart on Financial Crises
Nov 23 2009

Carmen Reinhart of the University of Maryland talks with EconTalk host Russ Roberts about the ideas in her book This Time is Different: Eight Centuries of Financial Folly (co-authored with Kenneth Rogoff). They discuss the role of capital inflows in financial crises, the challenges of learning the right lessons, and what is generally true about financial crises over time and place. Reinhart applies these observations to the current crisis, discusses the possibility of the U.S. defaulting on its sovereign debt, and discusses the possibility of financial reforms that might make a difference.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Nov 23 2009 at 7:28am

I think I’m getting Econtalk Financial Crisis fatigue!

It’s all interesting stuff and I don’t know how others feel, but I’d certainly like to see a bit more variety in content like the old days.

Russ Roberts
Nov 23 2009 at 7:49am


I hear you. My next scheduled interview is with Pete Boettke on the Bloomington School, the insights of the Ostroms and others. (Elinor Ostrom just won the Nobel Prize in economics.) After that is Megan McArdle, talking about debt on a personal level. It will drift into the crisis, I suspect. But after that, we’ll take a break for a while, though I may do one more with just me, summing up what I’ve learned from these interviews and lots of reading.

I thought it was important to hear from Reinhart for a variety of reasons, one being her argument about foreign investment which we haven’t touched on in previous discussions. But I will do my best to get at a much wider range of topics in the coming weeks and months.

Nov 23 2009 at 8:08am

Thanks Russ, really look forward to your summing up.

Nov 23 2009 at 10:04am

Having had a little experience with insanity I hate to hear the expression “The definition of insanity is doing the same thing over and over again and expecting different results”. The best definition of insanity that I can come up with is loosing touch with reality enough to make it impossible to live a free life. I am probably being too picky.

Nov 23 2009 at 11:26am

i really like the financial crisis stuff, yet agree about mixing it up more and expected a change up.

BUT on the idea of “too much of a good thing”, maybe lining up a set of podasts with previous nobelists would be cool.

the topics will differ, so fatigue shouldnt be a problem even if u could line them up one after another.

Nov 23 2009 at 11:44am

After reading the above comments, I am somewhat hesitant to make a suggestion for another podcast about the financial crisis. But I heard a talk by Danny Quah on LSE’s website about China’s role (or, perhaps more precisely, lack thereof) in the financial crisis. I found his views very compelling and he seemed to provide a strong rebuttal against the “blame China” viewpoint that — at least to me — always seemed somewhat disingenuous. Even if ProfessorQuah did not speak about the financial crisis per se, I think he would make a great guest.

Thanks again for all that you do, Professor Roberts. You provide a great service. I always find your podcasts interesting, regardless of the subject matter.

Nov 23 2009 at 6:10pm

Agreed on the “financial crisis fatigue” — can’t I just retreat to my ivory tower and assume it all away?

Nonetheless, this was a much more informative podcast (and a good antidote) to the Posner-cast of last week.

Ray Gardner
Nov 23 2009 at 8:44pm

I enjoyed it actually.

Probably because it fits nicely into the more philosophical question of economics of why smart people latch on to foolish ideas.

But I have always disliked the insanity quote.

Nov 24 2009 at 12:56am

I have liked the crisis podcasts, including this one.

I was hoping you would get in deeper as to what extent current-account deficits matter. For a long time I’ve been on the Boudreaux school of thought (why should I care more about a trade imbalance between China and the US than I do about one between Colorado and Wyoming?) but over the past few months Peter Schiff in particular has started to convince me it is a sign of something unhealthy.

With the spectre of sigificant dollar inflation looming I’d be very interested in podcasts about historical currency crises. For instance, tracing the rise and fall of the British pound. Or Germany’s experience with hyperinflation in the early 1920’s.

Nov 24 2009 at 4:10am


i dont think this request takes you off topic

can we get a series about corporate anthropology. i feel this is an ignored area when looking at the failure of organizational structures.

companies start with diversity and trend towards homogeneity. as in populations this can only be unhealthy.

many thanks

Nov 24 2009 at 5:35am

I am fascinated with the financial crisis and really looking forward to this one (as I watched Ken Rogoff on Charlie Rose recently). Keep ’em coming (or switch topics – all of the podcasts are terrific)!

FWIW, I like the definition of insanity as apparently used in this podcast – it’s memorable and succinctly illustrates a key insight. So does “arrogance and ignorance” (a Rogoff theme).

Eric H
Nov 24 2009 at 6:17am

I too miss the “old days” with Dan Klein and Theory of Moral Sentiments. But I think the sum total of what Russ has done, and continues to do regarding the financial crisis, is spot on. Talk about a positive externality! The number of interviews you have done on the crisis alone represents a major aggregation of thought, and there might be a market for printed transcripts, or some kind of book collecting everything from your discussions of Keynes with Fazzari and CDSs, Fannie and Freddie with Kling(or a little before that, perhaps) to today, and beyond.

Also: it’s not like your discussions of the crisis don’t at least implicitly deal with the very core of economics. And mostly things are quite explicit, e.g. Russ’s repeated use of: Profits encourage risk taking–losses encourage prudence…

But it would be great to squeeze in another Econtalk book club!

Mort Dubois
Nov 24 2009 at 3:32pm

As long as the complaint window is open….what was your answer to the cup of coffee question? And I’ll add my vote to those who want more topic diversity. I particularly liked your podcasts dealing with real life business situations.


Nov 24 2009 at 3:56pm

BTW I have reading the Post-Keynesians lately to give them their due. How about interviewing Professor Paul Davidson University of Tennessee or Warren Mosler on the financial crisis and their proposals for solution.

Nov 24 2009 at 6:38pm

bgreen raises an interesting topic…have no clue about it, but sounds interesting.

the financial crisis deserves special attention.

im not saying there hasnt been enough attention, but in some ways the crisis is an indictment of economic/financial practice.

practice that clearly got too little criticism from the keenest observers…maybe crisis cant b prevented, but surely we can understand markets better than this.

LSE podcasts r sweet.

anyway…great job…topic/guest selection has been excellent….but get chomsky, he’s getting on.

Justin P
Nov 25 2009 at 4:36am

I personally love the CrisisCasts. Maybe take a bit of a break from them, like your going to do and come back in a few months to a year and see if all the new regs actually did anything. (I doubt it) Who knows, we might be knee deep in a W in a few months so there will be even more and different things to talk about in a CrisisCast.

That being said, I want more MungerCasts. You have a huge demand both here and at CafeHayek for more MungerCasts, Dr. Roberts. Please fill the supply!

Another thing, I would love another podcast with Dr. Williams on equality and race in the Obam-age. Or do a Hayek Use of Knowledge in Society and how it relates to Climate Change and ClimateGate?

Or like I mentioned on Cafe Hayek, get a sunday show on Fox Business with you, Dr. Munger and guests…

Nov 25 2009 at 8:10am

I like the “CrisisCasts” as well, but I also think that throwing a change up now and then is good.

Russ, you are doing yeoman’s work here. Keep it up. I learn so much from your podcasts.

Nov 25 2009 at 9:25am

I would be tired of the Financial Crisis interviews it they weren’t adding new insights to the issue. Since I have not found them redundant, I have no complaint about their frequency. I applaud Russ’s thoughtful and purposeful selection of guests on this topic over the last several months. Bloody good stuff!

After listening to all these Financial Crisis interviews, one thing is clear: the U.S. and the World had the collective knowledge to have averted the crisis. That being the case, the totality of the interviews has left me with two burning questions: Why was this collective knowledge not sufficient to avert a crisis, and how could this collective wisdom and experience be used to avoid the next crisis?

As an aside, is the U.S. Treasury nothing more than a “common” and it’s management nothing less than a tragedy? Have we not reached a point where the people, politicians, and institutions of the United States view the treasury as nothing more than an endless resource to be exploited for personal or institutional gain, without regard to the consequences?

Nov 25 2009 at 4:49pm

I could never read all the books on the crisis nor would I want to. I’m tired of hearing the term but I really love the way econtalk straddles the line between academic musing and real world decision making, hope that does not end. The opportunities for investigation will only grow as we – the ubiquitous “we” who’s identity I now always question – respond to the crisis.

Nov 25 2009 at 6:27pm


Great stuff.

Can I make a suggestion for a future EconTalk?

Perhaps you can interview Frederic Mishkin on Monetary Policy (like inflation targeting) and the current financial crisis.

Patrick Joyce
Nov 25 2009 at 9:50pm

Listeners may enjoy a related book that was published in 1931, Oh Yeah?, which was compiled from newspapers and public records by selected by Edward Angly.

Nov 26 2009 at 1:13am

I’m with Brian. Not bored at all. Just reviewed the list of the last 25 topics and guests and see great diversity. Some capture my attention more than others but not sure that anyone would be able to know which ones would do so ex ante.

Thought the Reinhart interview was particularly excellent and interesting.

Really liked Justin Fox, Ed Leamer, Wllingham, Taylor, Calomiris, Buchheit, Rebonato, Hitchens, Graham and, of course, I consistently enjoy your banter with Munger.

Am interested in the intersection of economics and theory with investing. Just heard an interesting interview with Mike Mouboussin about his new book, “Think Twice.”

Like Nathan, would love to hear about history of currency crises and speculation about our fate.

Nov 26 2009 at 12:46pm

On the Arnold Kling quote…. I disagree. They didn’t adapt to regulation they lobbied intensely to get things changed and overturned like Glas Steagal and privitization of Social Security.

Nov 26 2009 at 12:53pm

Thanks Russ for a guest contrasting well with your last guest.

So is it finacialization or preverse incentives that sets up these failures ?

I would just point out there was no too big to fail back in 1929… there WAS plenty of financialization.

Nov 28 2009 at 1:14pm

Thanks Russ for all the work; I certainly enjoy some of the interviews more than others. It is hard and uncertain work (ex ante).

I suggest you start a formal list thread on econtalk with suggestions of people to interview. We the audience know thousands of interesting people, but do not have the forum or interviewing skills that you have. I am not sure how it might be implemented,but I will give it some thought. I know that I am not alone in thinking of dozen or so people you should interview.

thanks Russ!

Mark Selden
Nov 30 2009 at 4:57pm

Russ, I have found your interviews on the current crisis extremely interesting, including this one, and I really hope you don’t let “Crisis Fatigue” play too large a role in your selection of future guests (unless it’s your own fatigue!).

Regardless, thanks for your expansive collection of excellent work; it has powerfully affected much of my world-view.

Nov 30 2009 at 5:53pm

Jeffrey Rogers Hummel wrote a piece arguing that we will default on our debt.

Russ Roberts
Dec 1 2009 at 9:21am


I meant to post that article. Thanks for the reminder.


Juan Carlos
Dec 9 2009 at 1:37pm

professor roberts, you should have pressed mrs reinhart more on the issue of the meaning of the current account deficit. i would have liked to hear what she had to say about the way the accounts are calculated (the story of the ipod being a deficit to the US and all) and what that means to the debt interpretation

Comments are closed.


About this week's guest:

About ideas and people mentioned in this podcast:Books:


Web Pages:

      • Wiki/TalkBenjamin Franklin. The catchy and memorable definition of insanity as "doing the same thing over and over and expecting it to come out different" has been variously attributed to Benjamin Franklin, Albert Einstein, and perhaps most documentably to sports players Tony Elliot or Fred Zamberletti, or writer Rita Mae Brown. The phrase may stem from the 1980s. Per a notation in Wikipedia's historical records, written by contributor Nowa123:
        I respectfully suggest that the quote "The definition of insanity is doing the same thing over and over and expecting it to come out different" is a misattribution to both Franklin and Einstein. According to Google news archive, the earliest news article attributing the quote to Franklin is from 2004 [4]. The earliest attribution to Einstein is 1998 [5]. By contrast, the earliest Google news article that attributes "time is money" to Franklin is 1849 [6]
        The earliest news article in Google's archives that has the quote "The definition of insanity is doing the same...." is 1991 to Zamberletti of the Vikings. He said "The definition of insanity is doing the same thing year after year and expecting different results" [7]
        The earliest reference to "insanity is doing the same thing over and over and expecting different results" is 1989 to david boswell [8]
        The earliest reference to "the definition of insanity is doing..." is 1986 to Tony Elliott of the New Orleans Saints when he said "the definition of insanity is doing over and over again things that can kill you" [9]
        A similar quote is from "Sudden Death" by Rita Mae Brown, from 1983.

Podcasts and Blogs:



Podcast Episode Highlights
0:36Intro. [Recording date: November 9, 2009.] Book ambitious research project. What's the goal of the project; summarize? Wanted to provide and analysis of crises that look for recurring patterns in a quantitative way. Big inspiration is Kindleberger's classic work on financial crises; narrative. What are the cycles that lead up to these big blowouts? Do countries start to borrow and live beyond their means? Do their asset markets develop bubbles? Do their consumer savings rates plummet? Look at a wide range of different kinds of crises, and try to categorize what they have in common within each category. Different varieties: the kind we just saw, financial, or in the old days, called banking crises. Currency crashes: collapses in the foreign exchange market, for example, Asia in 1997-1998, simultaneously had the banking crisis and a currency crash. Government debt crises--sovereign debt crises, when a government stops paying its debt to foreigners--good documentation of those episodes in the economic literature: involve powerful creditor, creditor in NY or in London. What is much less documented is domestic debt crises: What happens when the government defaults on the local citizens? Inflation crises. Also have currency crashes along the lines of what has recently been quantified by Barro and Ursua. Five big varieties, and stock market on top of that, so six; and they do share characteristics.
4:41What do crises involving the repudiation of external debt and domestic debt have in common? Any chance that the U.S. government might default on its obligations down the road? Most commonplace episodes since WWII have been largely in the domain of emerging markets, in which confidence has been lost very quickly. There are some advanced economies that had post-WWII defaults, for example Greece, which now sits at over 100% debt/GDP, was in a state of default till the mid-1960s, not that long ago. Generally what you see before a default on sovereign external debt is an inability of the government to service that debt. Usually because that debt is denominated in somebody else's currency. When Korea in 1997 came to the brink of default, it was because the debt was denominated in U.S. dollars and the Bank of Korea cannot print dollars. They can print won. The U.S. debts are denominated in U.S. dollars, so will probably be inflated away before you see an outright repudiation or default. You can just print the money. Inflation is a form of partial default. We won't default de jure, but we might default de facto. In the book, whole chapter devoted to issue of who is penalized or who gets defaulted on--external creditors, domestic creditors, or both? Domestic creditors, who are usually the ones holding the domestic-currency debt--that doesn't apply to the United States because foreigners also hold U.S. dollar-denominated debt; we are a reserve currency. In the majority of cases, it is domestic residents holding domestic-currency debt. Take into account both de jure defaults and also defaults through inflation and sometimes hyperinflation.
8:37Title of book: "This Time is Different." Meaning? Ironic, meant to capture the "we are geniuses" mentality that characterizes the boom prior to the crash. Look, those crises happen to other people and at other times, not to us; when you point out that other things are off kilter like price-to-earnings ratios or debt-to-income, reply is that the old rules of valuation don't apply; this time is different. Story varies from episode to episode but the common theme is that those rules just don't apply to us. We're smarter; we've gone as far as the Great Moderation suggests; those things happen in emerging markets; they don't happen here. It is that mentality that allows both policy makers and market participants to overlook what begins to be mounting evidence that red lights are blinking; indicators are showing--be it a bubble in the real estate market or an unsustainable current account deficit or household debt levels off the charts, or a combination. Book title: worked at the International Monetary Fund (IMF). Right after the Mexican peso crisis of 1994-1995, traveled all over Asia; Asian countries were running huge current account deficits and financing the current account with a lot of short term capital inflows. Yet perception was very complacent: in Mexico those indicators pointed to a problem, but those problems don't happen in Asia; we have high saving rates and Asian values. Major tipping point: that frame of mind is an endemic problem. Euphoria. Psychologically fascinating. Nassim Taleb podcasts. Different take on title: Can always argue that each one is different. Title applies to before the fact, but it also applies to after the fact. Have a tendency to say let's get the forensic equipment out and look deeply into what's special about this one. About this one people say it's a perfect storm; but maybe it's simpler. Book is a very forest-based approach. Example: "This time is different" applies at different points in the cycle. Have been emphasizing the psychology before the crisis, but now a different sort. Right now restructuring our banks, or more accurately not restructuring them--very similar to what Japan did in the 1990s; keep doing the same thing over again and expect a different outcome. Einstein quote, definition of insanity. Before the crisis is when it reaches its most ridiculous dimensions. Let's look at all the intricacies, develop new models, develop new regulation, and all kinds of new things to deal with the same old problem. Quote may not be Einstein's.
15:51Current crisis: set of general phenomena which precede banking crises--this is not a sovereign debt crisis or inflation crisis--yet. We are providing the same medicine to cure the disease that caused the disease, giving banks lots of easy credit and making it easy for people to continue to borrow money. Antecedents; different story about the cause: current account story. Role of the current account and the typical cause of these kinds of problems. Studying capital flows since the early 1990s, Guillermo Calvo; capital flows cycle. Paper with Vincent Reinhart: capital flow bonanzas, running large current account deficits and financing them by borrowing with the rest of the world. Right now, when witch hunts start to emerge after the crisis: is it the regulators? the Fed? Wall Street? But the fact of the matter is that one of the beauties of the work that went into the book is that it cuts across different exchange rate regimes, different political systems, different budgetary situations, more markets, less markets, financial markets--yet common factors emerge, and one is running large current account deficits. If you have a disease that is both a 16-year-old and an 80-year-old are affected by the disease, it manifests itself so that the two are not identical but there are common symptoms. Not just running a current account deficit in one year, but sustained, meaning that over time you are becoming increasingly indebted to the rest of the world.
19:43Confused: Don Boudreaux writes on this at Cafe Hayek. Background of book is showing how similar emerging market countries are to developed countries; poor countries compared to rich countries; hubris, rich countries tend to think they are different. Challenge claim that running a current account deficit is increasing indebtedness to the rest of the world. In the United States we ran large, persistent capital account surpluses, current account deficits, going back to the mid-1970s till the present. Those did not necessarily increase U.S. indebtedness to the rest of the world. If foreigners buy American equity, if they buy corporate debt that finances real productivity and factories and projects, isn't there a distinction between that and, say, the U.S. government borrowing money to live beyond its means? Is it really the case that a current account deficit means increasing debt to the rest of the world. Asians tried to convince of that prior to 1997. Current account statement encompasses both advanced economies and emerging markets. Asia prior to its crisis had huge current account deficits, a lot of which was foreign direct investment. Wouldn't call it just debt flows. Ex ante difficult to know how productive those investments are. Also ex ante difficult to know how those funds flowing in are going to have multiplier effects through the financial industry. In both emerging markets and advanced economies, there is a high correlation between current account deficits and credit availability. The actual type of inflow does matter in the issue of the abruptness of the reversal: short term lending can be brutal in how quickly it turns around--was true in Mexico and Asia; wasn't true in the United States because it wasn't primarily bank lending. The association between large current account deficits and availability of domestic credit is very strong. Earlier work with Graciela Kaminsky on the twin crises. Money is fungible. Ireland, Spain, and the United Kingdom all had huge capital flow bonanzas. How do you define a bonanza? Definition has to be country-specific: running a particularly large current account deficit relative to what you have historically have run. Big by your own standards. Spain. Those were countries that also had very large housing price appreciation. What's fascinating about crises in general, this one in particular, and economics is that there are many things going on at once, and it's very hard to understand that they are sometimes related; can't hold one constant while changing another. There is a tendency for people to look at the piece of the elephant they are focused on, leg, side, trunk, tail. Monetary policy is one story that people tell, housing policy problems; suggesting more underlying problem, which is an enormous increase in availability of credit that flows into asset prices, and through the banking sector often into housing prices. Examples: United Kingdom and United States have floating exchange rates, so they have independent monetary policy; but Ireland and Spain did not, part of the Euro zone. The inflow provides availability of credit which can be funneled into productive investments. That often happens in the early stages of the cycle. Run-up to the Asian crisis a really good example of that. As the inflow continues, more peripheral products. Move down the productivity chain. Many factors; don't want to downplay the importance of others.
27:42Key factoid often forgotten: consumer indebtedness. Run-up in housing prices in the 1998-2002-2003 period. In advance of the subprime explosion, housing policy, incentives, change in credit standards making it easier for people to borrow. Book: consumer indebtedness growing and savings rate falling for a very long period in advance of that. Coincides with the current account story. Goes back into the 1980s. Abstract time line or flow chart of the sequencing of events. Very often the process of the big credit boom, the seat of it starts with financial liberalization or financial innovation. That can come in waves. Often what you have during those episodes is innovation getting ahead of regulation and supervision. In the early 1980s: Regulation Q lifted. Financial liberalization and innovation facilitate credit availability. In some countries, like Mexico, the years before the crisis reserve requirements had been reduced to zero. Lots of regulations enforced; Fannie and Freddie; Basel I and Basel II; hard to know how much is lax regulation versus hubris. Date of financial liberalization--periods in which interest rate ceilings removed, directed credit removed--common theme is that during that period, wild wild west, regulation and supervision get very low marks. Anecdote: long extended capital markets mission in Indonesia in 1995. Regulators there were saying you can create banks overnight but you can't create bankers. Aware that there were problems brewing; but had gone from very few banks to dozens of banks in a short period of time. Latest round was the securitization of mortgages which made everyone very comfortable. Take the good with the bad. Worrisome part is the innovation happens but regulation and supervision lags way behind. In Mexican crisis, banks were using derivatives, which were supposed to reduce risk; regulators caught unawares. Common theme.
34:35Excessive 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.
41:08Calomiris podcast: Different story: look at the 1874-1913 period, increased capital flows, globalization, and compare it to the last 30 or 40 years, which had a similar flavor, there was a much larger number of banking crises in the more recent period. Different definition: bank crisis defined as large waves of bank failures with lots of losses. In the earlier period there was a handful of crises--Argentina, Australia--where there were serious loss of net worth; Norway, Italy. In all those cases, government had distorted risk-taking by subsidizing in; and in the recent period there's been an increase of that via "too big to fail." Guarantees. Two parts: first factual, document the crises for 66 countries in the book; incidence in the earlier period was huge. The only reason the number is higher for the more recent period is that we now have more countries--shouldn't say the only reason--a reason. They were colonies back then; and some countries that didn't have a banking sector have more developed banking now. The denominator is bigger. The share of crises is still somewhat higher; but issue of guarantees is very important. If you feel that in good states of nature you will get a great return and in bad states of nature you will be bailed out, your willingness to undertake risk and to borrow is going to be importantly affected by that. Look at post-WWII crises, what is private debt before the crisis often winds up being public debt afterwards. Public debt surges in the aftermath of all of these; and in the current situation part of it is deficit spending; but a large part of it is bailout. Bailout not just in the direct sense as in TARP, but assuming assets. Measure of rising indebtedness: central government indebtedness adjusted for inflation increases by about 86% in the three years following a crisis. Conservative estimate; a lot of new guarantees are not yet realized and are not included. Right now the Fed has about a trillion dollars of Fannie and Freddie on their balance sheet, and that's not going to turn out very well; hasn't been recognized. Implicit guarantees is a very important magnifier. The kind of fast innovation, moving capital mobility through the financial system, has been associated with incidence of banking crises. The dropoff in the incidence of banking crises in the period after WWII is a pretty marked one; plotted out from 1800 through 2008. Quiet period. Part of the world had been leveled after the war. When so much has been destroyed, though, a lot of what you are rebuilding is productive stuff; low-hanging fruit is very productive.
48:22Too 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.
54:36Marketplace is suggesting that there's not going to be a lot of inflation in the near term. What is the pattern of inflation after these banking crises? No clearcut aggregate pattern for the whole period. Divide it up: on the whole, banking crises had more inflationary consequences after WWII than before WWII. No association prior to WWII. After WWII, it's really predominantly accounted for by Latin America. Outside Latin America, not a strong link in the three to five years after a banking crises. After five years many things going on. Inflation not something imminent, but more on a 5-10 year horizon where you've been carrying a lot of debt for a long time. In inflation analysis, book extended it to five years. Pretty optimistic: speaks to the next three years; we have been two years into the crisis. Difficult and tenuous to link it back to the crisis. In America, the Fed has injected a lot of money into the economy as a response to the crisis. The inflation question becomes more pressing in a 5-10 year time horizon--not 5 years from now but from when the crisis started, which was two years ago. If we had a history of defaults, that horizon would be compressed. For other cases, you have more time. A lot of the world in this crisis turned to U.S. Treasury Notes, which would not be the case for emerging markets. VoxEU article, on too big to fail: Do you see a lot of people running into a burning building? Height of the crisis in 2008. Are the dollars' days numbered as a reserve currency? During the height of the crisis the alternatives to dollar assets were not there. You need a model to beat a model; need another currency to beat this one. Tallest pygmy theory. It wasn't irrational, but it was lack of alternatives. Debt issuance, issue by issue going back to the early 1800s in study. As early as the 1890s after Bering's crisis, you start to see emerging markets issue more debt denominated in dollars rather than British pounds; also see more linkage to the dollar than the U.K. pound. The pound had begun to have competition. After WWI, then NY was in, big time. By 1967 end of sterling zone, de facto it had already happened. That's a long period of time over which the dollar had emerged as an alternative. Central banks don't buy euros per se--they buy assets. In the euro market, still have German bonds, Greek bonds, Spanish bonds--and they are very different. Don't have the equivalent of the U.S. Treasury market. And China has a nonconvertible currency. People running into dollar assets in 2008 at the height of the crisis and the dollar even appreciating--very unusual--has to do with the dollar still retaining its role as reserve currency. If we continue to make policy mistakes that will change.
1:03:21Quote from Arnold Kling, in a study for Mercatus Center: "The lesson is that financial regulation is not like a math problem, where once you solve it, the problem stays solved. Instead a regulatory regime elicits responses from firms in the private sector. Those financial institutions adapt to regulations; they seek to maximize returns within the regulatory constraints...." Agree? Where might we make some progress? Share sentiment that the regulators are running behind the innovation; regulation can't be static, which makes it very challenging. Tendency for complacency to set in as time elapses from your last crisis. Not really confident that we are going to come up with the regulatory framework that prevents a major financial crisis from happening again. Not in the stakes now in the United States, but elsewhere they are brewing. As the awareness fades and financial markets move to something else, which they will, it will all happen again.

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