Do budget surpluses cause private sector indebtedness?

Marshall Auerback (h/t Naked Capitalism) doesn’t quite say, but strongly implies, that the Clinton era budget surplus caused the rise in private sector indebtedness that has caused so many problems.

I think there’s a sense in which this is true, but  that the underlying problem is excessively high growth targets (i.e. expectations of economic performance).  The politicians wanted declining budget deficits and strong growth in an economy where the banking system was already undercapitalized.  In order to square the circle, the regulators changed the rules so that more debt could be issued with lower levels of capital — that is, the regulators approved the growth of the shadow banking system and the use of “hybrid capital” (=debt masquerading as equity) — because there was no other way to square the circle.

And here we are.  I just hope it’s possible to learn from history.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s