Rogoff: To see the universality of serial default, how few exceptions there were to countries defaulting on their debt again and again at some point in their history.
Reinhart: We had been thinking of about defaults in emerging markets without really being attuned to the fact that the advanced economies of today were once serial defaulters in their own right.
Another moment was when we were still at the Fund. We had wanted to look at a more comprehensive measure of debt, including domestic debt. If you talk about he U.S., that's all there is, but when you turn to open economies the data is exclusively is for external debt. Rogoff was chief economist of the Fund and we weighed on departments at the IMF to furnish data on domestic debt - which they simply did not have.
Which is fairly appalling when you consider that one of the key elements of the medium term outlook for the IMF is debt sustainability. Debt sustainability exercises were being done only looking at external debt without taking into domestic debt.
Rogoff: That was surreal, really. Here we are at the IMF and we're being asked if Argentina can pay its debts and can Turkey pay its debts and can Brazil pay its debts. Looking historically to find benchmarks, all we had was external debt. It just doesn't seem possible that governments can obfuscate so effectively.
You think it was obfuscation?
Rogoff: Absolutely. I have to believe somewhere in the history of the IMF the idea [to collect countries' domestic debt data] came up from time to time, and it was just, well, we can't supply that.
There was also this belief [among policymakers] that if there was debt owed to locals, who cares -- they'll just inflate it away, it's not going to affect sustainability because the government can do anything it likes to the locals. But if you step back and think about it, the locals own the government. Often the people holding the debt are very rich, powerful institutions and individuals. If you owe them a lot of money, of course it makes it harder to pay foreigners.
In part because of the regulatory arc our own government has followed during this crisis, the problem of entrenched power networks in the financial system is getting a lot more attention from economists. Rogoff and Reinhart talk about our government's handling of the crisis at some length, giving us high marks for fiscal and monetary response, but low marks for our restructuring of the financial system. With banks reporting record profits off their government bailout, this has a special sting.
By channeling Charles Dickens I have a better take on the whole mess:
Scrooge reformed kept Christmas well, of this we have been told.
He carved a splendid turkey and was open with his gold.
No beggar from his door was turned, no reveler reviled;
The iron winter evenings at his home were all beguiled
With festive songs and dancing and a bowl of red ripe punch.
At work he gave Bob Cratchit leave to dawdle over lunch.
Old Scrooge was now a merry soul; his bank in London town
Reflected his munificence and loaned, with nothing down.
His miser’s heart was dead and gone, and generosity
Made him want to share his wealth with all the bourgeoisie.
They flooded in to float a loan for homes and boats and carts;
For brewer’s yeast and all the latest maritime sea charts.
‘Collateral’ was not a word that Scrooge let pass his lips;
He treated all his customers to plates of fish and chips.
Soon other banks were taking heed and followed where he led;
They somehow thought it was all right when all their ink ran red.
And for a while it seemed that finance would turn topsy-turvy;
Cuz no one said bad credit was akin to rabid scurvy.
Finally the bubble burst and stocks and bonds deflated
And pension plans were swooning like they had been quite sedated.
Foreclosures blossomed like the rust on shut-up factories
And people wound up living in old boxes under trees.
A scapegoat was demanded and old Scrooge was still at hand;
The government decided he had had the whole thing planned.
Like the name of Ponzi, ‘Scrooge’ became a deep offense
And everyone did blame him for the loss of pound and pence.
He had to go to Downing Street and beg to be acquitted.
The Cabinet to New South Wales had him quick remitted.
Now Scrooge amidst the dingoes celebrates on Christmas Day.
He carves a roasted platypus for those at his soiree.
Thus we see how goodness can bring on deep complications
When it gives to people nothing but Great Expectations.