How This Financial Crisis Isn’t Different

Harvard economist Kenneth Rogoff gave a fascinating guest lecture at MIT earlier this week -- looking at commonalities in a number of financial crises. Rogoff, who recently coauthored a new book, This Time is Different: Eight Centuries of Financial Folly with Carmen M. Reinhart, is a former chief economist of the International Monetary Fund. Together, Reinhart and Rogoff compiled a database looking at financial crises in 66 countries over a period of 800 years.

The biggest surprise that data revealed, according to Rogoff? The universality of financial crises. More specifically, Rogoff in his talk compared the current financial crisis in the U.S. to a number of other post-WW-II financial crises. (Interestingly, he pointed out, there's little difference in the frequency of banking crises in advanced economies and emerging ones.)

Here are some of the features of the aftermath of a typical post-WW-II financial crisis, according to Rogoff:

• From peak to trough, housing prices go down a historical average of 35.5% in a financial crisis -- and the duration of the downturn in housing prices is an average of 6 years.

• Similarly, peak-to-trough real equity prices drop an average of 55.9% -- and the average duration of the downturn in equity prices is 3.4 years.

• The unemployment rate in the aftermath of a financial crisis goes up an average of 7 percentage points -- and the duration of the employment downturn is an average of 4.8 years.

• In the aftermath of financial crises, central government debt often "explodes" in amount, Rogoff noted. On average, central government debt increases 86%.

Not a cheery picture overall. But Rogoff pointed out that it could be worse. Six to eight months ago, he observed, you could have worried with a straight face that we might have another Great Depression. But, Rogoff indicated, he thinks the chances of that happening now are small.

For more on Rogoff and Reinhart's findings and analysis, check out this recent segment from The NewsHour with Jim Lehrer:

6 Comments On: How This Financial Crisis Isn’t Different

  • How This Financial Crisis Isn’t Different – Improvisations – MIT Sloan Management Review « Creative Evolution | November 5, 2009

    [...] How This Financial Crisis Isn’t Different – Improvisations – MIT Sloan Management Review How This Financial Crisis Isn’t Different – Improvisations – MIT Sloan Management Revi…. [...]

  • MOHD MATEEN | November 13, 2009

    Mr. Kenneth Rogoff & Carmen Studies just support the conclusion drawn by Mr. John Kenneth Galbraith in the book “A short history of Financial Euphoria.

    However I am keen to read their book for analytical approach to the subject.

    With regards,

  • sloanya | December 4, 2009

    This is the same of the 2001 but our population get bigger

  • BILL SPOHRER | January 13, 2010

    This time maybe somewhat different.

    Government debt began exploding long before the 2008 financial crisis began.

    The government continues expand, to borrow money at near zero cost to finance that expansion and continues to raise taxes on the job creators thereby eliminating their ability to create jobs. (True unemployment is now 17.1% and growing)

    The government also thinks that the answer to our financial problems is government expansion. This is a mistake.

    At some point the purchasers of US debt will demand a higher yield and at that point we will likely slide into a prolonged recession of maybe depression because the government will not be able to satisfy the demands of the debt holders and to pay for the out of control government expansion that we now see.

    Many states are broke., e.g. California and the federal government is trying impose more unfunded mandates on the states. This is a receipe for financial disaster.

    The stats may indicate similarities between the current financial crisis and those in the past, but I suggest that the circumstances that exist in the economny today are profoundly different than we saw in previous times.

    We are a long way from seeing the end of our financial problems. Taking control of the spiraling debt is mandatory to bringing the current problems to an end.

  • james | June 15, 2010

    We will never see the end to our debt nation wide and worldwide ever. just new ways to write it off and sweep it under the rug.

  • glidoco | June 10, 2011

    “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.”
    Thomas Jefferson 1802

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