Transcript Is the 2007 U.S. Sub-Prime Financial Crisis So Different?

Is the 2007 U.S. Sub-Prime Financial Crisis
So Different?:
An International Historical Comparison
Carmen M. Reinhart
University of Maryland and NBER
Kenneth S. Rogoff
Harvard University and NBER
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Is the US Subprime crisis a new
kind of financial crisis?
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One plausible diagnosis
“Overindebtedness simply means that debts are
out-of-line, are too big relative to other economic
factors. It may be started by many causes, of
which the most common appears to be new
opportunities to invest at a big prospective
profit… such as through new industries… Easy
money is the great cause of over of overborrowing.”
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This diagnosis . . .
Comes from Irving Fisher (1933).
There are quantitative parallels as
well.
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Quantitative Parallels to Post-War
Banking Crises in Industrialized
Countries
• Leading indicators:
–
–
–
–
Sharp Housing and Equity Price Run-ups
Large Capital Inflows
Marked rise in indebtedness
Inverted V-shaped growth trajectory
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The “Big Five” Post-War Industrialized
Country Financial Crises
COUNTRY (Start date)/ Fiscal cost (% GDP)
Spain (1977)
Norway (1987)
Finland (1991)
Sweden (1991)
Japan (1992)
16.8
4
8
6
20
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Milder Industrialized Country
Financial Crises
Australia (1989), Canada (1983),
Denmark (1987), France (1994),
Germany (1977), Greece (1991), Iceland
(1985), Italy (1990), New Zealand
(1987),
United Kingdom (1974, 1991, 1995)
United States (1984, 2007).
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Figure 1: Real Housing Prices and Banking Crises
135
130
125
US, 2003=100
120
Index
115
110
Average for banking crises in
advanced economies
105
100
Average for the "Big 5"
Crises
Index t-4=100
95
t-4
t-3
t-2
t-1
T
t+1
t+2
t+3
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Figure 2: Real Equity Prices and Banking Crises
135
130
125
US, 2003=100
120
115
110
Index
105
100
Average for banking crises in
advanced economies
95
90
85
Average for the "Big 5"
Crises
Index t-4=100
80
t-4
t-3
t-2
t-1
T
t+1
t+2
t+3
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Figure 3: Current Account Balance/GDP on the Eve of Banking Crises
t-4
t-3
t-2
t-1
t
0
-1
percent of GDP
-2
-3
-4
-5
U.S.
-6
-7
Average for banking crises in
advanced economies
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Figure 4: Real GDP Growth per Capita and Banking Crises
(PPP basis)
5
4
Percent
3
US
Average for banking crises in
advanced economies
2
1
Average for the "Big 5" Crises
0
-1
-2
t-4
t-3
t-2
t-1
t
t+1
t+2
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Figure 5: Public Debt and Banking Crises
250
230
210
190
Index
Average for banking crises in
advanced economies
170
150
Average for the "Big 5" Crises
130
US, 1997=100
Index t-10=100
110
90
t-4
t-3
t-2
t-1
T
t+1
t+2
t+3
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A different kind of recycling
• During 1970s, US banks “recycled”
Petrodollars to developing countries
• During 2000s, US recycled Petrodollars and
Asian Surpluses to a developing country inside
the United States
• Is the result the same?
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Is the United States different?
• Looks similar or worse by most standard run-up
indicators (Kaminsky and Reinhart, 1999),
• Yet inflation is better.
• What’s in store for the United States? Will it
– Experience a “mild financial crisis” (with a sustained
slowdown), or
– Suffer a severe “Big Five” recession
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Looking ahead
• The bailout costs are estimated at around $1
trillion (about 7 percent of GDP)
• Monetary policy stimulus is keeping real
interest rates negative
• The last time we had a combination of a
sliding dollar, high commodity prices, and
negative real interest rates
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Looking ahead
• Was the late 1970s—when US inflation
reached its post-war high
• According to the IMF’s World Economic
Outlook, two-thirds of the countries it covers
reported higher inflation in 2007
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