Private sector debt, anda failure of observation


However, Mr. Irwin does seem to go slightly astray at one point: “The biggest difference this time around,” he wrote in his March 16 article (here), “is that private companies, not governments, have incurred debt in a currency not their own.”

Actually, this time is not different. The Asian and Argentine crises were also about private sector debt, with Asian public debt, in particular, quite low before the crisis hit. And a number of economists, myself included, independently developed models of leverage, currency mismatch and balance sheet effects to make sense of the Asian crisis.

This point matters, I think, for a couple of reasons. On one side, if you paid attention to Asia in 1997-1998 you were inoculated against the temptation to fiscalize crisis narratives – to see everything that goes wrong as a result of budget deficits. (This is one reason I reacted to Mr. Irwin’s piece; there’s already been a huge effort to retroactively fiscalize the euro crisis, and we need to push back against attempts to do the same to the Asian crisis.)

On the other side, I sometimes hear people declaring that until the 2008 financial crisis, economists paid no attention to private debt as a source of economic problems. But everyone who worked on Asia in 1998 was well aware of the problems that debt and leverage could create. If we didn’t realize how vulnerable the rise in household debt made America, that was a failure of observation, not a deep conceptual problem.

As I’ve tried to explain on a number of occasions, the 2008 crisis came as a surprise but not, at least for me, as a shock – I realized almost immediately that what was happening fit quite well into existing frameworks. We knew about bank runs, and once you realized that something essentially the same as a bank run could happen in some forms of shadow banking, it took about 30 seconds to make sense of the post-Lehman Brothers funk. We also knew about balance sheet effects, and it wasn’t hard at all to transfer that understanding to the aftermath of the housing bubble.

I mean, I wrote a book titled “The Return of Depression Economics” in 1999. It wasn’t too hard to take on board that it was coming true.

A Tough Business

Quartz recently published an article about the panel that brought me to the South by Southwest Music and Media Conference in Austin, Texas (read it here: As you might expect, the Butler brothers from Arcade Fire, who served on the panel with me, are really well-spoken and interesting; basically, I’m pretty sure they could do my job, whereas there’s no way I could do theirs.

There was also an interesting discussion with Tatiana Simonian of Nielsen about the role of data-driven decisions by record companies. She and I agreed that while the data on what audiences are drawn to are highly imperfect, the gut feelings of executives are often worse, so that on balance the data make for better music. My parallel is with the news business: The list of most-emailed articles is a deeply flawed metric, but still a very useful corrective to the inside-baseball instincts of longtime newspaper people.

I was also glad to have direct confirmation of what I’ve said before, drawing on work by the economists Marie Connolly and Alan Krueger: For the artists, it has always been about live performance, not record royalties. Yes, there have been a few exceptions – the Beatles, Michael Jackson – but live performance is the norm. One questioner from the panel audience raised some doubts, but Will Butler silenced them, telling us that Arcade Fire makes about as much from one European festival as it does in all royalties from a record.


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