Ebook Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison by Carmen M. Reinhart

The first major financial crisis of the 21 st century involves esoteric instruments, unaware regulators, and skittish investors. It also follows a well-trodden path laid down by centuries of financial folly. Is the “special” problem of sub-prime mortgages this time really different? Our examination of the longer historical record, which is part of a larger effort on currency and debt crises, finds stunning qualitative and quantitative parallels across a number of standard financial crisis indicators.

To name a few, the run-up in U.S. equity and housing prices that Graciela L. Kaminsky and Carmen M. Reinhart (1999) find to be the best leading indicators of crisis in countries experiencing large capital inflows closely tracks the average of the previous eighteen post World War II banking crises in industrial countries. So, too, does the inverted v-shape of real growth in the years prior to the crisis. Despite widespread concern about the effects on national debt of the early 2000s tax cuts, the run-up in U.S. public debt is actually somewhat below the average of other crisis episodes. In contrast, the pattern of United States current account deficits is markedly worse.

At this juncture, the book is still open on the how the current dislocations in the United States will play out. The precedent found in the aftermath of other episodes suggests that the strains can be quite severe, depending especially on the initial degree of trauma to the financial system (and to some extent, the policy response). The average drop in (real per capita) output growth is over 2 percent, and it typically takes two years to return to trend. For the five most catastrophic cases (which include episodes in Finland, Japan, Norway, Spain and Sweden), the drop in annual output growth from peak to trough is over 5 percent, and growth remained well below pre-crisis trend even after three years. These more catastrophic cases, of course, mark the boundary that policymakers particularly want to avoid.

Download Ebook Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison by Carmen M. Reinhart