How This Financial Crisis Isn’t Different

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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: