Is there hope for reform? Perhaps not, at least until we recognize a major source of the world’s government debt. When economists and politicians talk about the problem of unsustainable government debt, they often focus on the need to rein in government budgets and entitlement policies. But over the past four decades, for many countries, the most important source of government debt unsustainability has been something else: hidden guarantees for banks that behave a bit like icebergs — one can barely see them, and then all of a sudden, they sink the fiscal ship of state.

The United States saw a substantial bailout cost in 2008 with respect not only to the Troubled Asset Relief Program support for banks, but also the massive spending in support of Fannie Mae and Freddie Mac, which were rescued from insolvency by huge injections of taxpayer funds. However, this is not just a U.S. problem. According to Luc Laeven and Fabian Valencia of the International Monetary Fund, of the 117 nations with populations in excess of 250,000 — specifically, those not current or former communist countries and with banking systems large enough to consistently report data on private credit in the World Bank‘s Financial Structure Database — only 34 of those countries (29 percent) avoided a major banking crisis from 1970 to 2010. Sixty-two countries had one banking crisis. Nineteen countries experienced two. One country underwent three, and another weathered no less than four.