Debt and Systemic Risk: The Contribution of Fiscal and Monetary Policy

The story of the financial crisis will be retold endlessly as one of widespread corruption and incompetence, enabled by a policy agenda fixated on deregulation. But to accept this story, one would have to believe that if the marketplace had been confined to ethical and informed individuals, and if their activities had been carefully scrutinized by diligent regulators, we would have avoided a major financial boom and bust. While we cannot rule out such a proposition a priori, we can state with overwhelming empirical support that the history of financial crises teaches us either that it is not so or that we are, in any case, incapable of imposing such structures on anything approximating a free society. The historical evidence has been meticulously compiled, filtered, and explicated in Carmen Reinhart and Ken Rogoff’s new study This Time Is Different: Eight Centuries of Financial Folly (Reinhart and Rogoff 2009).

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