Transcript Is this time different?

This Time is Different Syndrome
Carmen Reinhart and Kenneth Rogoff
• Belief that financial crisis is something that happens
to other people in other countries at other times.
– We do things better
– We’re smarter
– We’ve learned from past mistakes
• Arrogance, and then the shock–the Minsky moment
• Short-term bias of politicians:
– borrow now...let the future pay
• Hidden debt, e.g., implicit guarantees of GSEs
This Time Ain’t Different
Prelude to crises: buildup of debt
• Public and private
• Foreign and domestic
•
Run up of debts accelerates as crisis nears.
Flavors of crisis
• Sovereign debt crises
•
•
Serial default is a widespread phenomenon across emerging
markets and several advanced economies.
Once debt is restructured, countries quick to releverage.
• Inflation crises...another way to “default”
• Banking crises...coincide or precede sovereign debt crises
• Currency crises
But Reinhart & Rogoff remind us: sovereign default
is an old story, including among advanced countries –
This Time is Different, updated in “From Financial Crash to Debt Crisis,” 2010
Sovereign External Debt: 1800-2009
Percent of Countries in Default or Restructuring
50%-
1830s
1870s
1930s
1980s
U.S. Debt
This Time Ain’t Different
Reinhart and Rogoff
• “Excessive debt accumulation, whether it be by the
government, banks, corporations, or consumers, often poses
greater systemic risks than it seems during a boom.”
• “Such large-scale debt buildups pose risks because they make
an economy vulnerable to crises of confidence, particularly
when debt is short term and needs to be constantly
refinanced.”
• Highly leveraged economies “can seem to be merrily rolling
along for an extended period, when bang! - confidence
collapses, lenders disappear, and a crisis hits.“
• Eight centuries of experience suggests this time is not
different.
Was it a surprise?
• Certainly some new elements
– Originate and distribute model
– Financial derivatives
– Shadow banking system
• But the basic mechanism is always the same
(described by Kindleberger and Minsky)
Was it a surprise?
• Policymakers did not do anything because the
operated under the assumption that markets
know best
– I made a mistake in presuming that the self-interest of
organizations, specifically banks and others, were
such is that they were best capable of protecting their
own shareholders and their equity in the firms. It
shocked me. I still do not fuIly understand why it
happened…
• They also thought that cleaning up the mess
was easy and cheap
Was it a surprise?
• Academic economists where seduced by
policymakers
– …we were in sync with policymakers… lured by ideological
notions derived from Ayn Rand novels rather than
economic theory. And we let their... rhetoric set the agenda
for our thinking and … for our policy advice. Acemoglu
(2008)
• Incentives also matter, both in business schools and
econ departments (Eichengreen, 2008)
This Time Ain’t Different
Consequences of banking crises
• Real GDP down – Unemployment up
• Government revenue down
• Government bailout of banks
• Government debt/GDP UP
• Prolonged slump
– Deleveraging
– Zero lower bound  Monetary policy weakened
Discrepancies across estimates of bail-out costs are
large and in, some cases, staggering
Country/beginning year
Argentina, 1981
Chile, 1981
Ghana, 1982
Japan, 1992
Norway, 1987
Philippines
Spain, 1977
Sweden, 1991
US (S&L), 1984
Estimated bailout cost as a percent of GDP
Upper bound
55.3
41.2
6.0
24.0
4.0
13.2
16.8
6.4
3.2
Lower bound
4.0
29.0
3.0
8.0
2.0
3.0
5.6
3.6
2.4
Reinhart and Rogoff
Difference
51.3
12.2
3.0
16.0
2.0 1
10.2
11.2
2.8
0.8
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Thus, the true legacy of financial
crises is more government debt…
Cumulative increase in public debt in the three years following
the banking crisis
Malasia
Mexico
Japan
Norway
Philippines
Korea
Sweden
Thailand
Average
Spain
Indonesia
Chile
Finland
Colombia
100
Index=100 in year of crisis
Average is 186.3
150
200
Reinhart and Rogoff
250
300
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A “Second Great Contraction”
Comparing Current Downturn with 1930s
Before
• Monetary expansion
• Stock market exuberance
• Huge household debt
• Overextended banking system
• Real estate bubble
After
• 1930s: Policy mistakes  Great Depression
• Now: Aggressive intervention  No Depression
– Europe in austerity funk – “Gold standard mentality”
After 3 years, the U.S. in 2011
finally achieved its pre-recession level of GDP
Slump
Obama
Inauguration
End of
recession
World Industrial Output
World Equity Markets
World Trade
Central Bank Policy
Eichengreen and O’Rourke
• “The world is currently undergoing an
economic shock every bit as big as the Great
Depression shock of 1929-30. Looking just at
the US leads one to overlook how alarming the
current situation is even in comparison with
1929-30.”
• “The good news, of course, is that the policy
response is very different. The question now is
whether that policy response will work. “
Lessons for Developing Countries
• Protect yourself
– Avoid appreciations
– Accumulate reserves
• But they are never enough
– Avoid currency and maturity mismatches
– Remember that it may be true that a fully open
capital account can deliver the goods with a wellregulated financial system
• But who has a well-regulated financial system?
Historic
Role Reversal:
Appendix
II: Historic
Role Reversal:
Publicfinances
financesininEmerging
EmergingMarkets
Markets
Public
havebecome
becomemuch
muchstronger
strongersince
since2000
2000
have
even while weakening in advanced economies.
World Economic Outlook, IMF, April 2012
US debt > big EMs
but < some other advanced countries
http://www.marketobservation.com/blogs/media/blogs/Statistics/DebtGDP.jpg
Country creditworthiness is now inter-shuffled
“Advanced” countries
AAA Germany, UK
AA+ US, France
AA
Belgium
AA- Japan
A+
A
ABBB+ Ireland, Italy, Spain
BBB- Iceland
BB+
BB
Portugal
B
SD
Greece
(Formerly) “Developing” countries
Singapore, Hong Kong
Chile
China
Korea
Malaysia, South Africa
Brazil, Thailand, Botswana
Colombia, India
Indonesia, Philippines
Costa Rica, Jordan
Burkina Faso
S&P ratings, Feb.2012 updated 8/2012
The fiscal role reversal,
• Many Emerging Markets countries have,
so far this century, achieved:
– Lower debt levels than advanced economies;
– improved credit ratings;
– lower sovereign spreads; and
– less pro-cyclical fiscal policies.
The historic role reversal
• Debt levels among rich countries (debt/GDP ratios > 80%)
by 2008 reached twice those of emerging markets.
• Some emerging markets have earned credit ratings
higher than some so-called advanced countries.
• Over the last decade some emerging market countries
finally developed countercyclical fiscal policies:
• They took advantage of the boom years 2003-2007
– to run primary budget surpluses and cumulate reserves.
• By 2007, Latin America had reduced its debt to 33% of GDP,
– vs. 63 % in the US.
– And so were able to respond to global recession of 2008-09 .
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