Too Much Debt
We knew it really, but:
The Baseline Scenario – Causes: Too Much Debt
Menzie Chinn, one of my favorite bloggers, and Jeffry Frieden have a short and highly readable article up on the causes of the financial crisis. Chinn is not given to ideological ranting and is a great believer in actually looking at data, so I place significant weight in what he says.
Chinn and Frieden place the emphasis on excessive American borrowing, by both the public and private sectors.
This disaster is, in our view, merely the most recent example of a “capital flow cycle,” in which foreign capital floods a country, stimulates an economic boom, encourages financial leveraging and risk taking, and eventually culminates in a crash.
I used to drop comments at Marginal Revolution, telling Alex Tabarrok that he should write a “mea culpa on debt.” It was kind of tongue in cheek, but I think it’s also fair to say that even at the peak, mainstream economists “taught” that the debt was the result of rational choices. Obviously, not as much as they believed.