CERAWeek: What caused the recession?

It’s a boom-bust world, Harvard University economics and public policy professor Kenneth Rogoff says.
When asked what caused the worst recession to grip the globe in decades, Rogoff said history shows the pattern. Recessions follow booms.
“We had a huge boom. It was aggravated by the fact that the U.S. was ground zero. We can point at deregulation of subprime mortgage market” as well allowing investment banks to leverage three times as much as they did in 2004.
“But at the end, it was occurring in an environment of incredible borrowing by the United States. It was borrowing two-thirds of the world’s net savings year after year,” Rogoff said.
He was among the voices warning that the boom would snuff out as far back as 2001 when he was with the International Monetary Fund.
“When housing prices shoot up and there’s huge borrowing, the country borrows a lot, all the red lights are blinking and it ends in tears,” Rogoff said.
In 2004, he spoke alongside then-Federal Reserve Chairman Alan Greenspan during an event at the Cato Institute, a free-market oriented think tank in Washington. He said of many who were in “utter denial” about the pending downturn, “Greenspan carried the most gravitas about it” as he maintained low interest rates that further fed the housing boom.
“I’d have small debates with him. I say small because I was debating and he wasn’t,” Rogoff said.
At the Cato event, Greenspan said housing prices were fine, U.S. financial markets were deep, and raised no red flags. Rogoff was next up, but three-fourths of the audience cleared out and “there was a lot of noise with the cameras closing and everything.”
“We lost perspective of what was real and what was fueled with these low interest rates,” he said.

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