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Policymakers in "Denial" About the Banks, Carmen Reinhart Says

Posted Oct 26, 2009 07:30am EDT by Aaron Task in Newsmakers, Banking
Related: XLF, SKF, FAS, FAZ, EWJ, BAC, C
In "This Time Is Different," economic professors Kenneth Rogoff (Harvard) and Carmen Reinhart (Maryland) examine eight centuries of financial crises, demonstrating how the credit crunch of 2008 wasn't so unique, after all. That's the good news.

The bad news is Prof. Reinhart believes the current environment most closely resembles the Great Depression, specifically because of the global nature of the downturn and its severity. To keep the nascent recovery alive and avoid a similarly prolonged economic malaise, policymakers must refrain from "declaring victory prematurely" and reign in the stimulus too soon, says the former IMF economist. "That's a real danger here."

As to the question of whether policymakers really have learned the lessons of financial history, Reinhart gave a two-part answer:

  • Monetary policy: She gives high marks to Ben Bernanke's Fed for acting aggressively in responding to the crisis - at least after Bear Stearns' collapse in March 2008. (As an aside, Reinhart was Bear's chief economist in 1985-1986.)
  • Bank restructuring: Here, Reinhart gives policymakers "low marks" for failing to deal head on with toxic assets. There's "a lot of denial" in the approach to the banks, she says, seeing comparisons to Japan's post-bubble policies of delaying write-downs, which created zombie banks. "I'm not seeing a great deal of learning," the professor says, suggesting the policy response recalls Einstein's definition of insanity: Doing the same thing over and over and expecting a different outcome.
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