The level of debt is not all that mattersby Martin Wolf / September 18, 2014 / Leave a comment
Published in October 2014 issue of Prospect Magazine
What lessons should we learn from the financial crises and subsequent economic malaise in high-income countries? These are not merely academic questions. They affect everybody. They are the questions I address in my new book, The Shifts and the Shocks, reviewed at length in the September issue of Prospect by the Harvard economist Kenneth Rogoff.
That essay is an important contribution to this debate, partly because it comes from one of the few academics whose research had suggested the possibility of such a crisis. In his masterpiece, This Time is Different, co-authored with Carmen Reinhart, now also at Harvard, Rogoff demonstrated the recurrence of fiscal and banking crises across the centuries. The review is also important because it highlights important areas of agreement and disagreement.
As Rogoff emphasises, my book attempts to place the origins of the crisis in the workings of the global economy. These include the entry of emerging economies, particularly China; soaring macroeconomic imbalances; and growing inequality. These underlying economic forces interacted with financial liberalisation to create the conditions for the crisis. We agree on this. We agree, too, that we need radical reforms.
Nevertheless, the review emphasises three areas of disagreement.
The first is where, in Rogoff’s view, “Wolf undercuts his important ideas on the need for radical reform by waffling on whether saving Lehman would have solved most of the problem.” On this topic, our differences are small. In the course of 2007, 2008 and 2009, there was a financial p…