Good article. Interesting comments on it, albeit some of them a bit strange. The article offers a good opportunity to refute Dr. Rajan's arguments, or to try it at least. Nothing convincing is offered to readers.
If bankers were the only problem, it could have been solved some time ago. If some nutty people are able to derail a whole economy, they should be prevented from it by proper regulation. Then the happy life could restart again after doing away with the legacy of too many debts.
I wonder for some time now, why prospects are not a lot better in the industrialized countries, more than four years after the crisis began. If all did it right, except those bankers, we should be in a better position than we are now. I think the author is right to put the blame on all actors involved, bankers, households, regulators and politicians. (It takes two to sign a loan contract.)
When I put finance aside and look at the “real” economy, I see a lot of overconsumption and a misallocation of resources prior to 2008, too many resources into housing. There has been too little emphasis on maintaining competitiveness. It was an unsustainable path that turned out not to could have been followed any longer.
In fact, I still suspect that the rise in commodity prices triggered the crisis. And the end of the crisis and the continuation of our former way of life is blocked by their very high prices still. It explains much of Africa's current economic rise, by the way. Maybe we have entered a period, where the growing purchasing power of the middle class in emerging economies and the relative scarcity of natural resources forces consumers in industrialized countries to change their consumption patterns.
Interesting article. Debt levels of several European countries might already be too large, you named some. If debt reduction is to be expected, creditors would not be wise to lend them anymore. The whole concept of saving now to be able to consume later is cast into doubt in the last years, because there seem to be not enough trustworthy borrowers.
Daniel, in your drive to accuse the messenger you fail to notice the message. If commodity prices remain where they are, the level of consumption of before the crisis cannot be regained. And banks will not finance it as they did before. Either southern Europeans get more competetive or they have to accept less consumption. Others will not pay their bills in the long run.
The nationality of those who tell you that is not important. The question is: "What can be done?", and not „What has happened?“ and „Who is to blame for it?“.
In earlier posts I have been quite critical of German behaviour, albeit for different reasons than you. It is nonsense to save like mad, have to few children and expect a rosy retirement. The right mix is important. The savings have been used to finance others debt, in other countries as well as in Germany itself. Entitlements here have been ever-increasing. Government debt via welfare payments is financing private consumption.
I believe that we will get serious problems in Germany by 2020 (2025 at the latest), when our demographic problems become very hard to manage. So wait, the right time to blame Germans for their behaviour will come.
Maybe there is no prospect of betterment offered because it is not a realistic outcome.
The questions which should be answered are: What happened and what went wrong in the past? How is the situation now? What can be realistically expected in the future?
Artificially low interest rates (due to improper risk assessments, partially induced by the lack of ownership capital requirements for public debt) led to too much debt in southern European countries (public debt in Greece, private debt in Spain - as well as in the USA for that matter). These debts financed overconsumption there.
The crisis then in 2008 was triggered by huge price increases for oil and other raw materials, when it became clear that the level of consumption could not be matched with those high oil prices. Financial markets were not ready to finance the level of consumption and credit became more expensive via higher interest rates. Households reacted by a decrease in consumption, voilà la récession.
The oil price on average stood at 25 $ per barrel in 2002, now it stands at around 100 $. Many other raw materials now have a price three times the level of 2003. For me, this leads to the conclusion that we are in some kind of resource crisis. We don’t have a physical scarcity of resources, though. We rather have a price increase, which is to be expected when goods become less abundant relative to demand.
These price increases (if they remain where they are) lead to a permanent transfer of income from European importers of raw materials to exporting countries. I expect higher prices to be permanent, given the increased purchasing power of developing countries. I guess, it might be something like 200 to 250 billion Euros a year for oil alone, about 8 to 10% of Germany's GDP. At these prices, the former level of consumption in southern Europe was not sustainable and cannot realistically be expected in the future.
People in Greece and elsewhere should therefore not be made false hopes of a happy end. If I had an unsustainable level of consumption for some time, which I cannot keep anymore, I could not expect my neighbours to pay my bills. I would either have to be more competitive to generate more income or I’d have to consume less.
On the other hand it is obvious, that Greece needs some kind of debt restructuring again. The problem is to explain it to voters in creditor countries.