Wednesday, September 30, 2009

U.S. economic crisis was long time in the making

By Kevin G. Hall | McClatchy Newspapers

WASHINGTON — Americans have always assumed that financial crises happen in basket-case countries, not here. So how then did the U.S. follow the lead of Argentina, Mexico and Thailand by plunging into this one?

Economists Carmen Reinhart and Kenneth Rogoff answer that question in a provocative new book, "This Time Is Different."

The authors, both former top economists at the International Monetary Fund who're now teaching, respectively, at the University of Maryland and Harvard University, offer examples of mistakes made repeatedly over "eight centuries of financial folly."

In the preface, they offer a crystal-clear analysis of why we are where we are.

"If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom," they wrote.

"Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private-sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are."

Sound familiar?