People Smarter than Us Disect the Sub-prime Crisis

I came across this article on the Freakonomics blog about Carmen Reinhart and Kenneth Rogoff, two economists from the National Bureau of Economic Research, who are working on a paper entitled, Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison.

The authors have some interesting things to say about the current credit crunch and how it mirrors other economic downturns worldwide over the past 60 years. Surprisingly, our current problems aren't that much different than any other crisis since WW2 (basically, had you been studying Sweden's 1991 housing crash you could've seen our mortgage meltdown coming a mile away). As they explain, with a little help from Russia's preeminent novelist:

Tolstoy famously begins his classic novel Anna Karenina with "Every happy family is alike, but every unhappy family is unhappy in their own way." While each financial crisis no doubt is distinct, they also share striking similarities, in the run-up of asset prices, in debt accumulation, in growth patterns, and in current account deficits. The majority of historical crises are preceded by financial liberalization, as documented in Kaminsky and Reinhart (1999). While in the case of the United States, there has been no striking de jure liberalization, there certainly has been a de facto liberalization. New unregulated, or lightly regulated, financial entities have come to play a much larger role in the financial system, undoubtedly enhancing stability against some kinds of shocks, but possibly increasing vulnerabilities against others.

I'd suggest downloading the full paper here. It's only about 15 pages and even includes several color coded charts and graphs,.

For those of you who don't feel like going through the effort and just want to know when they predict this thing will all be over, the paper offers the following:

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.

Well said.