Economists See Crisis Response as Risky

That is the title of a WSJ article from 1-6-2010, p. A2. Here is the link: Economists See Crisis Response as Risky . Here are the key exerpts:

"...some suggest governments' response has increased the chances of a repeat, making the banking system more crisis-prone, putting new strains on institutions such as the Federal Reserve and stretching government finances closer to the breaking point."

""Our response has made us more vulnerable to a bigger crisis," said Tom Sargent, a New York University economist."

"By providing massive bailouts to commercial banks and securities firms, the logic goes, governments have given bank executives a sort of catastrophe insurance -- and an incentive to take even greater risks than they did before the crisis."

""If the banks really feel that they are insured, then we have a dangerous situation," said Stanford University's Robert Hall, the association's president. "The incentives are to take a very risky position. They get to pocket it if they win and it's the federal government's problem if they lose."" (Hall is the president of the American Economic Association)

"In the next few years, for example, the gross government debt of both the U.S. and the U.K. will exceed 90% of their annual economic output, an event that could both spook investors and seriously impair economic growth.

When advanced countries cross the 90% threshold, their annual growth tends to be about one percentage point lower, said Mr. Rogoff and Carmen Reinhart of the University of Maryland."