I wonder if the Spanish Hapsburgs knew how much government debt was bad before it went bankrupt?
Mr. DeLong inferring that he or anyone else knows when government debt is risky through analysis when the collected body of economists didn't know when the housing market was risky leaves me with little confidence in his or their abilities to foretell the future.
The truth of the matter is we won't know if the stove is hot until we touch it. I'm sorry Mr. DeLong, but I'll take the side of caution and since the stove isn't hot right now, we don't have too much debt already hopefully, I won't keep reaching my hand out for it.
I'll also trust the economic reasoning of Dr. Robert Mundell whose fiscal and monetary policy mix that called for a strong dollar and deficits created through tax cuts for the private sector worked much better in my lifetime that Obama's use of LBJ's failed Big Government Liberalism to promote economic growth.
All government debt is not the same and this seems to escape Mr. Delong.
Might I suggest he read "Econoclasts" and get some economic history instead of relying on just theoretical economics.
I disagree with the Professors first premise, that the failure was caused by excessive bank lending.
An alternative explanation is that legislation that set quotas for sub-prime loans led to banks exploiting a new territory of predatory lending. Fannie Mae and Freddie Mac kept buying these sub-prime loans so banks to write more. Then Clinton and the Republican Congress exempted real estate sales from capital gains taxation and turned domiciles into speculative investments that coupled with the sub-prime mortgages created a bubble fed by weak dollar policy at the Fed.
Banks are lending again, but only to the most sound borrowers. Prudent policy after a decade of poor underwriting.
The real problem is government interference in the market and flawed public policy ideologies that believe government is capable of social engineering without detrimental unforeseen consequences.
Dr. Skidelsky strikes me as an adherent to the ideology that the government is capable of successful social engineering.
I do not share his faith in a limited number of government bureaucrats and "experts" crafting solutions for 300 million Americans.
So the basic choice is between the unforeseen consequences of government bureaucrats advised by "experts' running the housing sector or the unforeseen consequences that result from self-interested individuals freely buying and selling homes in a transparent free market.
I'll reject Skidelsky's policy of making reduction of inequality a priority because I see inequality all the time among human populations. Inequalities in talent in basketball (Lebron James), baseball (Derek Jeter), Football (Tom Brady) Entrepreneurship (Mark Cuban) Software (Bill Gates), work ethic, discipline, self-control, intuition, creativity, ect. etc.
I'll take the unforeseen consequences of self-interested freedom over government bureaucrats and their "experts" any and every day.
I love the fictions of liberal professors of government. According to them FDR's New Deal is the best thing since sliced bread as long as you ignore the fact that all that taxing and spending never reduced unemployment below 14%. LBJ's Great Society and the liberal Democrats that controlled Congress throughout the 1970's produced the stagflation decade with their policies, but you need catch liberal professors of government owning up to that failure of Statism. Finally the Obama stimulus, cash for clunkers, the General Motors bailout and Obamacare were supposed to spur a dramatic recovery until they didn't and then the excuses flowed.
Excuse me Dr. Frankel, but you are trying to put lipstick on the liberal Statist economic pig when you start attacking fiscal conservatism.
All Americans have to do is look at France, Spain, Greece, Portugal, Ireland, and Italy to get a smell of what you are shoveling.
Are you professors of government supposed to know what works?
Why wouldn't the policy prescription pioneered by Robert Mundell work now? Raising interest rates to attract foreign investment capital that is searching for a sound return under every rock on the planet, and lower marginal tax rates that provided incentives to engage in productive enterprise because producers would keep more of what they produced with lower marginal rates.
This would provide the investment funds we need and increase the utilization of productive capacity without risking inflation or punishing savers mercilessly as low interest rates do.