But Republicans, who under George W. Bush's leadership hatched the conditions of inattentive and lax regulatory attention that contributed significantly to the Great Recession of 2008-2009, decided to convince Americans that the nation's economic malaise was a product of Obama's massive government post-crisis spending. In a dangerous game of government debt limit brinksmanship, House Speaker John Boehner and his Tea Party-fearing Republican caucus took the nation to the brink of default.
Even though the crisis that had unfolded had been a function of behavior in private debt markets, the debate about what to do next has focused entirely on what level of debt the government should deploy or cut back.
The debt-hawks and uber-Keynesians may both be well meaning in their desire to steady the US economic ship and relaunch it towards growth -- but they are distracted by ideology and conventional economic thinking from looking at more compelling causes of major economic crises and more efficacious policy responses.
It's private debt that matters most.
There is about $24 trillion in consumer and business debt held in the United States today and this dwarfs the federal debt, money supply, and the nation's GDP.
In a short report (pdf) we are releasing today that explores the behavior of private debt before and after economic crises -- not only in the US, but in Japan as well as a number of European nations -- we have noted that (1) a fast run-up of private debt combined with (2) a level of private debt more than 150% of GDP were evident in both the Great Recession of 2008-2009 as well as in America's Great Depression.
Federal debt was inconsequential to these crises. Charts in the report (pdf) we are posting today make clear that Spain, economically beleaguered today, was in excellent federal balance sheet health before the recent Eurozone financial quakes started.
So as a predictor of future crises, we suggest that private debt growth rates combined with the absolute level of non-government, private debt are the two most important factors to flag.
Once a private debt-triggered crisis starts, attention turns typically to the government and whether it will reform through austerity programs and conditioned loans or whether the government will inject capital resources of its own to keep the economy primed and liquid.
What is interesting about the recent Great Recession and the American case is that while many economic pundits speak about post-crisis deleveraging, the private debt total only declined by 3% in the US and is now increasing again, essentially reaching today the pre-crisis level of private debt.
That's right. The private debt load in the US today is roughly the same as the private debt load held in early 2008. This is of enormous consequence as consumers and businesses that are overburdened with debt cannot lead an economy to higher growth. Government spending can provide some stimulus, but our analysis shows that this stimulus is significantly less efficient in stimulating GDP growth than re-jiggering and triggering private spending. And while private debt typically matters more than government debt, a total debt load for an economy does matter. Ask Japan.