Earlier this week, I received a copy of a paper co-authored by Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University, titled Is the 2007 U.S. Sub-Prime Financial Crisis So Different?. (alt source)
Each of these authors have rather distinguished affiliations. Reinhart is with the NBER, the group whose Business Cycle Dating Committee officially marks the beginning and end of Recessions. And Rogoff is an adviser to the John McCain, who has (almost proudly) professed his economic ignorance.
Yesterday, in the NYT, Paul Krugman linked this paper to an interesting and perhaps unique factor regarding the 2008 presidential contest. None of the remaining 3 contenders — McCain, Obama or Clinton — are economic ideologues. No supply-siders in this group, no one from the Democratic old school.
If it turns out that the candidates are pragmatic centrists, more focused on problem solving than ideological belief system, it would be a good thing.
This is especially true, if the authors of the paper are correct. Why? If the present situation plays out as they expect, we are going to need all of the problem solving skills available. You see, Reinhart and Rogoff draw parallels between the current U.S. financial woes and five previous financial crises. All five of these were “associated with major declines in economic performance over an extended period:”
– Japan (1992)
– Spain (1977)
– Norway (1987)
– Finland (1991)
– Sweden (1991)
Of course, none of these are identical to the present 2008 USA, economically, culturally, or politically. However, when one takes a closer look, some of the major parallels are a cause for concern.
The Chronicle of Higher Education did just that. In reviewing the Reinhart
and Rogoff paper, they focused on the parallels to the Japan crisis.
Like Japan et al., the United States has seen:
- A steep rise in housing prices during the four years preceding the crisis. (The U.S. rise was more than twice as large as the average of the other five.)
- A steep rise in equity prices. (Again, the U.S. rise was larger.)
- A large increase in its current account deficit.
- A decline in per-capita growth in gross domestic product. (In this case, the U.S. situation doesn’t appear as bad as in the five predecessors.)
- An increase in public debt. (Here again, the U.S. situation isn’t as bad as in the historical examples – but Reinhart and Rogoff add that “if one were to incorporate the huge buildup in private U.S. debt into these measures, the comparisons would be notably less
The authors’ conclusion:
“Given the severity of most crisis indicators in the run-up to its 2007 financial crisis, the United States should consider itself quite fortunate if its downturn ends up being a relatively short and mild one.”
UPDATE: October 1, 2009
The authors have assembled all of their data in a new book: This Time Is Different: Eight Centuries of Financial Folly. It is on my list to check out, as their paper was so insightful in advance of the full financial crisis.
Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International
Historical Comparison* (PDF)
Carmen M. Reinhart, University of Maryland and the NBER
Kenneth S. Rogoff, Harvard University and the NBER, January 14, 2008
A Long Story
NYT, February 8, 2008
Portents of Financial Doom
The Chronicle of Higher Education, February 8, 2008