Quote:
Originally Posted by Double Eagle
Sigh. You seem pretty sure of this. What were you sure of back in 2008?
What if because of a particular set of circumstances, the best solution to our private debt crisis is an increase in public debt? What assumptions would you have to make to make that statement true? Try thinking of debt as a tool absent the moral judgment that assumes that debt is bad. As Krugman is wont to say "Economics is not a morality play."
This is certainly the wrong answer. Private bondholders, howl as they may, should take losses. Compare Iceland and Ireland. Iceland just had an epic banking crisis, and when the politicians tried to nationalize these debts (and consign their taxpayers to decades of debt slavery), the voters told them to piss off. Because the government rightly refused to back debt that could never be paid back, Iceland had a sharp, swift recession and is now recovering nicely. Ireland, on the other hand, stupidly decided to bail out French and German bankers holding Irish bank debt. The people now have to bear that burden of servicing a mountain of debt that can never be paid back, and suffer austerity as a result. Which leads me to what I can generalize as the Austrian position on austerity:
Austerity, in the sense of running balanced budgets and having very low, easily serviceable public debt is a good thing. Governments should
generally only spend what they take in, and not spend beyond their means (this generally but unfortunately seldom happens). Austerity, as we've come to know it in Europe (huge tax hikes/slashing essential services) to bail out bank bond holders is a disaster. The right answer again goes back to Iceland: Yes, they've had their own version of austerity, having to greatly reign in public expenditures. But austerity here is clearly worth it, as taxpayers are helping get the government's finances in order without having to backstop private bondholders.