Economic Rebalancing Acts
LONDON – We all know how the global economic crisis began. The banks over-lent to the housing market. The subsequent burst of the housing bubble in the United States caused banks to fail, because banking had gone global and the big banks held one another’s bad loans. Banking failure caused a credit crunch. Lending dried up and economies started shrinking.
So governments bailed out banks and economies, producing a sovereign debt crisis. With everyone busy deleveraging, economies failed to recover. Much of the world, especially Europe, but also the slightly less sickly US, remains stuck in a semi-slump.
So how do we escape from this hole? The familiar debate is between austerity and stimulus. “Austerians” believe that only balancing government budgets and shrinking national debts will restore investor confidence. The Keynesians believe that without a large fiscal stimulus – a deliberate temporary increase of the deficit – the European and US economies will remain stuck in recession for years to come.
We hope you're enjoying Project Syndicate.
To continue reading, subscribe now.
Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.
Already have an account or want to create one to read two commentaries for free? Log in