The Central Issue of Debt: Understanding Debt Intolerance

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Determining what is successive debt shouldn't require rocket science, but sometimes we bend the rules. Not all debt is bad, but reaching certain thresholds can be a problem. Emerging markets suffer from debt intolerance, often defaulting at low debt to GDP ratios. They would have met the European Master Criteria, but still defaulted.

Carmen Reinhart of the University of Maryland talks with EconTalk host Russ Roberts about the ideas in her book This Time is Different: Eight Centuries of Financial Folly (co-authored with Kenneth Rogoff). They discuss the role of capital inflows in financial crises, the challenges of learning the right lessons, and what is generally true about financial crises over time and place. Reinhart applies these observations to the current crisis, discusses the possibility of the U.S. defaulting on its sovereign debt, and discusses the possibility of financial reforms that might make a difference.