The US Debt Crisis according to a Harvard Professor (Part 2)

Renowned professor of Public Policy and Economics at Harvard University, Kenneth Rogoff, served as an economist at the International Monetary Fund, and at the Board of Governors of the Federal Reserve System. He later served as Economic Counsellor and Director, Research Department of the International Monetary Fund from August 2001 to September 2003.

In the following interview given to the French newspaper Libération, Rogoff explains his perspective on the current global financial crisis. From the United States situation to the responsibility of the Rating Agencies, the economist answers all the most commonly asked questions about the unfolding Debt Crisis.

Here is the second part of the Interview:

Let’s talk about the US economy: what worries you the most in the current situation of the US?

We also have a lack of leadership. In the wake of the Debt Ceiling negotiations, both the President and the Congress appeared very weak. The Federal Reserve is the only recourse left to us. What we need now is a very aggressive policy of quantitative easing (as the Fed has already done twice since November). In announcing very clearly that the goal is to increase inflation, the Fed will do anything to achieve it. This time we should not give a maximum of 200, 700 or 900 billions of dollars, because it is not clear how much will be needed to achieve the desired level of inflation. The Fed will probably say that its objective is an inflation of 2% or slightly more. I think it should be 4 to 6%. I understand what it will cost to have a high inflation for years. But the seriousness of the situation may force us to do things we never imagined. In Europe too, inflation would be by far the best policy. It would be better for Germany to have inflation rather than deflation in the peripheral countries of the euro. If the U.S. does it alone, the dollar will drop and this will put a lot of pressure on the Europeans.

Do rating agencies share responsibility for the current crisis?

About the US Debt Rating, Standard & Poor’s was absolutely right to downgrade. If the other rating agencies have not followed yet, it is because they are afraid, they see how much flak Standard & Poor’s has taken for their decision. Moody’s and Fitch will eventually follow, since this degradation is quite deserved. The rating of many other countries, including France, also deserves to be downgraded. We have to admit that the world has become more dangerous, and ratings are very overvalued. Even the AAA of Germany could be called into question: in the worst case scenario, Germany would be forced to help Italy, Spain or even France. When a united European tax system exists, the average rating of Europe will probably be more AA than AAA.

Click HERE to go back to the first part of the interview.

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