Understanding the Second Great Contraction: An interview with Kenneth Rogoff

Alguns excertos da entrevista de Kenneth Rogoff ao McKinsey Quarterly (meus destaques)

The historical experience gives a very clear view that the aftermath of a financial crisis brings slow and halting growth, sustained high unemployment, and surging public debt—with the overhang of public and private debt being the most important impediment to a normal recovery from recession. (…)

In 2008, policy makers placed too much confidence in the Keynesian idea that you can jump-start the economy with a big temporary stimulus and then step back and watch the private sector take over. Of course, Reinhart and I argued otherwise, based on the results of a seven-year research project, and our results  certainly were acknowledged by practitioners, academics, and policy makers. Nevertheless, most policy makers and markets still insisted, “Well, yes, maybe that is how things always were in the past, but this time it’s different because the policy response was so aggressive.” In fact, the policy response is always very aggressive. Every country does everything it can to claw its way back from a deep financial crisis.

So, unfortunately, there is no easy out. Perhaps the best chance would be to find a way to get ahead of the mortgage defaults—that is, to have restructurings and debt forgiveness, albeit with some kind of quid pro quo. That is very hard to do. But if there were a way to write down and forgive some of the mortgage debt, that would be money well spent. In ten years, we will probably end up forgiving a big chunk of it. As Carmen has noted, this is a little like Third World debt that was carried on the books forever, even though it was a joke.(…)

By any historical benchmark, Greece, Portugal, and probably Ireland are way over the line. Their debts should be dramatically reduced—for Greece by at least 60 percent or 70 percent. Portugal probably 40 to 50 percent. Ireland is more complicated because it’s difficult to disentangle what’s government debt and what’s bank debt. The big problem is Ireland’s bank debt. But the government has guaranteed it.

Had the eurozone officials done all this a year ago and, importantly, cast an ironclad safety net over the remainder, perhaps we would be looking at this in the rear window.(…)

I don’t expect unemployment to come down again to 4 or 4.5 percent until the next time the economy overheats. That level was never normal. More likely, when this is all over, unemployment will settle down at around 6.5 or 7 percent. Until we’ve seen unemployment come down to a level like that, things will remain precarious. I should note that the most reliable measure, though, isn’t unemployment; it’s employment. In addition to unemployment rising, the participation rate in the economy has fallen, and that too needs to come back.

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