FIU alumna and economist warns now is the time for U.S. to rein in debt


As part of FIU’s Ruth K. and Shepard Broad Distinguished Lecture Series, Carmen Reinhart ’78  discusses economic lessons learned from past crises

After studying eight centuries of economic crises and working in the financial industry for more than 20 years, economist Carmen Reinhart ’78 says this time is no different.

Although the scope of the financial crisis of 2009 had not been experienced since the Great Depression, the cause was the same and the recovery will be the same as other major financial crises in history. Debt, says Reinhart, has to be reduced. Seldom do countries simply “grow” their way out of deep debt burdens.

Photo courtesy of Gloria O'Connell

Reinhart shared the findings in her best-selling book, This Time Is Different: Eight Centuries of Financial Folly, co-authored by Kenneth Rogoff, with FIU students, faculty and staff March 21 as part of the Ruth K. and Shepard Broad Distinguished Lecture Series. She is the Dennis Weatherstone senior fellow at the Peterson Institute for International Economics.

“We are not talking about unprecedented events,” she says. “We just forget. You have to have a long view for perspective.”

Poor regulation, worse supervision and unfettered expansion in credit are what make for boom-bust cycles.

The seeds of a crisis are usually the same, says Reinhart: It starts with innovation. Everyone is a genius in a bull market. A boom is fueled by easy money and debt in households, financial industries and government. As those debts start to go sour, you get a crisis.

The FIU alumna, who The New York Times has called the most influential female economist in the world, says the build-up of government debt in the United States is enough to make a person lose sleep.

‘The aftermath is like Jaws

So what can we expect in the next few years?

Says Reinhart, “The aftermath is like Jaws: When you think it’s safe to go back in the water you see a fin again.”

Recessions associated with a financial crisis are not run of the mill. They last significantly longer. Housing cycles, for instance, are much more protracted. The average decline for housing prices in the worst financial crises is 35 percent lasting six years.

After studying 15 of the worst financial crises since World War II, Reinhart found the decade following each crisis was characterized by Gross Domestic Product (GDP) growth about one percent lower, unemployment rates about five percent higher, and housing prices that remained lower than pre-crisis levels.

Photo courtesy of Gloria O'Connell

When a country’s public debt surpasses 90 percent, as is the case now in the United States, growth rates are lower.

“We found there is very little relationship between public debt levels and growth at lower debt levels, but once you reach 90 percent or higher, the relationship between debt and growth becomes negative.”

The current crisis is unfolding the same way. The private sector built up huge amounts of debt. Now we’re in the deleveraging phase. It takes between seven and 10 years to work down debt to something that is more consistent with long-term trend.

“It’s a sobering picture,” she says. “But I think that looking for quick fixes in a situation like this is not realistic.”

Three things reduce debt, according to Reinhart. You can default or restructure debt; raise taxes, cut government spending or both; or have a steady dosage of modest inflation.

She said a default in the United States is not probable at this juncture, but Americans will see prudential regulation meant to quietly liquidate debts.

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