According to Professor Robert Hockett, the public debate surrounding our ongoing financial and macroeconomic difficulties focuses rightly on debt. It focuses wrongly, however, on public debt.
"It is private debt that most matters—both in bringing on bubbles and busts, and in protracting such post-crisis slumps as the one we're still living through," says Hockett. "Post-crisis public debt is merely a symptom of this underlying condition—a necessary but insufficient substitute for plummeting post-crisis consumer expenditure."
Hockett presented his new paper, Debt, Deflation, and Debacle: Of Private Debt Write-Down and Public Recovery, with Richard Vague, a Philadelphia banker and philanthropist, at the Second Annual Meeting of the Global Society of Fellows, organized by the Global Interdependence Center (GIC) in Philadelphia on April 9. In the paper, Hockett, a new Visiting Scholar with GIC, shows how private debt-to-GDP ratios prior to 2008 had reached levels far beyond any seen since 1929 in the U.S. and 1990 in Japan.
"Those levels, partly the consequence of misguided, non-macroprudential forms of financial regulation, both fueled the bubble and left massive debt overhang in its wake," said Hockett. "That overhang now hangs over macroeconomic recovery and renewed growth and employment by obstructing consumer expenditure—the reason for recently grown public debt itself."
The straightforward conclusions to be drawn from the data, Hockett argues, are: "First, to bring real, sustainable financial and macroeconomic recovery, massive private debt writedowns—in particular, mortgage debt writedowns—will be essential. And second, to prevent a renewal of the same bubble-to-bust-to-debt-deflationary dynamic, financial regulation going forward will have to be forthrightly macroprudential in character. Credit-fueled asset price bubbles can be spotted in the making, and must be preempted henceforth."
Among others speaking at the event were Paul McCulley, former managing partner at PIMCO, and Jeffrey Lacker, President of the Federal Reserve Bank of Richmond, who keynoted.