This is the Cato Daily Podcast for Thursday, December 9, 2010.

I'm Caleb Brown.

The financial crisis laid the groundwork for the government to turn a surge in consumer debt into a surge in government debt. The solution is either grow your way out

of it, inflate away the liability, or cut government. And good luck with growing your way out

of it. That from Carmen Rein your way out of it.

That from Carmen Reinhart, professor of economics and director of the center for international economics at the University of Maryland,

she is co-author of the book, This Time is Different.

We spoke at the Cato This Time is Different.

We spoke at the Cato Institute's monetary conference in November.

The big point I'd like to make is that our problem here in the United States and elsewhere

is a fiscal problem. It is a debt overhang problem of biblical

proportions. And if you will allow me the prototype of a financial crisis, I've looked at many

financial crises in my work over the course of many years and the prototype is a financial

innovation or liberalization occurs this leads to a boom in borrowing and during that boom period where

economic activity is strong where credit is is ample, acid prices boom.

And during that period is actually where monetary policy could sink teeth in to prevent the leverage problem.

I concur very much which what was said that the leverage problem is the essential problem more than the asset prices.

So that I would characterize that first leg as a surge in private borrowing.

Surge in private borrowing, the crisis occurs.

As the crisis occurs, fiscal finances deteriorate markedly,

irrespective of whether you have bailouts or

whether you have stimulus packages, revenues suffer a great deal.

...