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Read Advisor Perspectives’ analysis of this study in today’s issue.
If history is a good guide, the U.S. economy will stay in the doldrums much longer than we’d like—a minimum of two years. That’s the scary implication of “Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison” by Carmen M. Reinhart of the University of Maryland and the National Bureau of Economic Research (NBER) and Kenneth S. Rogoff, Harvard University and NBER.
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There are patterns to how financial crises play out, say Reinhart and Rogoff, who have studied many of them for This Time is Different: Six Centuries of Financial Folly, their forthcoming book. For their recent paper, they narrowed the universe to the events they consider most relevant to the current crisis: 18 post-World War II banking crises in industrialized countries, including the 1984 savings and loan crisis in the U.S. Of those 18 cases, they identify a particularly dire Big Five, including Spain (beginning in 1977), Norway (1987), Finland (1991), Sweden (1991), and Japan (1992). |
Reinhart and Rogoff present this graph, illustrating the severity of the decline in US housing values, as compared to the other countries they studied:
They provide this data showing the decline in equity prices:
In the above graphs, T represents the onset of the financial crisis.
These 18 crises suggest how bad things could get in the U.S. On average, economic growth dropped by more than 2% and took two years to recover. In the Big Five worst case scenarios, growth dropped by more than 5% and remained below pre-crisis trend for more than three years.
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