Public debts in the advanced economies have surged in recent years to levels not recorded since the end of World War II, surpassing the heights reached during the First World War and the Great Depression. At the same time, private debt levels, particularly those of financial institutions and households, are in uncharted territory and are (in varying degrees) a contingent liability of the public sector in many countries. Historically, high-leverage episodes have been associated with slower economic growth and a higher incidence of default or, more generally, restructuring of public and private debts. A more subtle form of debt restructuring in the guise of “financial repression” (which had its heyday during the tightly regulated Bretton Woods system) also importantly facilitated sharper and more rapid debt reduction than would have otherwise been the case from the late 1940s to the 1970s. This lecture will argue that the pressing needs of governments to reduce debt rollover risks and curb rising interest expenditures in light of the substantial debt overhang are leading to a revival of financial repression—including more directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, and tighter regulation on cross-border capital movements.
Carmen M. Reinhart is the Dennis Weatherstone Senior Fellow at the Peterson Institute for International Economics. She was previously professor of economics and director of the Center for International Economics at the University of Maryland. She was earlier chief economist and vice president at the investment bank Bear Stearns in the 1980s and spent several years at the International Monetary Fund. She is a research associate at the National Bureau of Economic Research, research fellow at the Centre for Economic Policy Research, and member of the Congressional Budget Office Panel of Economic Advisers and Council on Foreign Relations. She has served on many editorial boards and has frequently testified before Congress. Reinhart’s work has helped to inform the understanding of financial crises for over a decade. Her numerous papers on macroeconomics, international finance, and trade have been published in leading scholarly journals. She is coauthor of A Decade of Debt (2011) and Assessing Financial Vulnerability: An Early Warning System for Emerging Markets (2000). Her best-selling book (with Kenneth S. Rogoff) entitled This Time Is Different: Eight Centuries of Financial Folly (Princeton University Press, 2009), which has been translated into 13 languages, documents the striking similarities of the recurring booms and busts that have characterized financial history. She received her PhD from Columbia University.