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The Aftermath of GlobalThe Aftermath of GlobalFinancial Crises Financial Crises
Carmen M. Carmen M. ReinhartReinhart, , University University ofof MarylandMaryland,, NBER, NBER, andand CEPRCEPR
Brookings InstitutionBrookings InstitutionWashington DC, April 20, 2009Washington DC, April 20, 2009
Reinhart and RogoffReinhart and Rogoff 22
This talk is based on several works This talk is based on several works with Kenneth with Kenneth RogoffRogoff::
““Banking Crises: An Equal Opportunity MenaceBanking Crises: An Equal Opportunity Menace””NBER Working Paper 14587, December 2008. NBER Working Paper 14587, December 2008.
““The Aftermath of Financial Crises,The Aftermath of Financial Crises,”” American American Economic Review,Economic Review, forthcoming, May 2009. forthcoming, May 2009.
This Time its Different: Eight Hundred Years of This Time its Different: Eight Hundred Years of Financial Folly Financial Folly (Princeton University Press, 2009)(Princeton University Press, 2009)
Reinhart and RogoffReinhart and Rogoff 33
Where are we at present Where are we at present in a historical global in a historical global context?context?
Reinhart and RogoffReinhart and Rogoff 44
Varieties of crises: World aggregate, 1900Varieties of crises: World aggregate, 1900--20082008A composite index of banking, currency, sovereign default and, iA composite index of banking, currency, sovereign default and, inflation nflation
crises, and stock market crashes (weighted by their share of worcrises, and stock market crashes (weighted by their share of world income)ld income)
0
20
40
60
80
100
120
140
160
180
1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Banking, currency, default, and inflation crises
(BCDI index)
BCDI index + stock market
crashPanic of 1907
WWI-hyperinflation Great Depression
WWII-more defaults
Oil shock-inflation
Emerging market crises and Nordic and Japanese banking
Global recession and crash
Reinhart and RogoffReinhart and Rogoff 55
The incidence and numberThe incidence and numberof banking crises is quite of banking crises is quite similar in high and middlesimilar in high and middle--toto--lowlowincome countriesincome countries……
Reinhart and RogoffReinhart and Rogoff 66
OnOn the duration and depth of the duration and depth of the postthe post--banking crisis crash for banking crisis crash for selected indicators.selected indicators.
Financial crises are protracted Financial crises are protracted affairsaffairs……
Reinhart and RogoffReinhart and Rogoff 77
Past and Ongoing Real House Price Cycles and Banking Crises:
Peak-to-trough Price Declines (left panel) and Years Duration of Downturn (right panel)
-60 -50 -40 -30 -20 -10 0
Hong Kong, 1997
Philippines, 1997
Colombia, 1998
Finland, 1991
Indonesia, 1997
Norway, 1987
Japan, 1992
Historical Average
Spain, 1977
Sweden, 1991
US, 2007
Argentina, 2001
Norway, 1899
Ireland, 2007
Korea, 1997
Thailand, 1997
Malaysia, 1997
Iceland, 2007
UK, 2007
US,1929
Hungary, 2008
Austria, 2008
Percent decline
-35.5 percent
Ongoing
0 5 10 15 20
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Duration in years
6 years
Reinhart and RogoffReinhart and Rogoff 88
Indices of total building activity in selected countries
(1929 = 100) Country Indicator 1932 South Africa Buildings completed (value) 100 Argentina Permits (area) 42 Australia Permits (value) 23 Belgium Permits (number) 93 Canada Permits (value) 17 Chile Permits (area) 56 Colombia Buildings completed (area) 84 Czechoslovakia Buildings completed (number) 88 Finland Buildings completed (cubuc space) 38 France Permits (number) 81 Germany Buildings completed (rooms) 36 Hungary Buildings completed (number) 97
Netherlands Buildings completed (dwellings) 87
New Zealand Buildings completed (value) 22 Sweden Buildings completed (rooms) 119 United Kingdom Permits (value) 91 Unites States Permits (value) 18 Average 64 Memorandum item: United States Permits (number)
September 2005 peak = 100 23 1 Sources: League of Nations, World Economic Survey (various issues), Historical Statistics of the United States (2003). Notes: Note differences in the definition of the indicator cross-country. 1 Through March 2009.
Reinhart and RogoffReinhart and Rogoff 99
Past and Ongoing Real Equity Price Cycles and Banking Crises:
Peak-to-trough Price Declines (left panel) and Years Duration of Downturn (right panel)
-100.0 -90.0 -80.0 -70.0 -60.0 -50.0 -40.0 -30.0 -20.0 -10.0 0.0
Iceland, 2007
Thailand, 1997
Austria, 2008
Korea, 1997
Indonesia, 1997
Malaysia, 1997
Spain, 1977
Colombia, 1998
US, 1929
Finland, 1991Japan, 1992
Ireland, 2007
Philippines, 1997
Historical Average
Hungary, 2008
Spain, 2008
US, 2007
UK, 2007
Sweden, 1991
Norway, 1987
Hong Kong, 1997
Argentina, 2001
Norway, 1899
Percent decline
-55.9 percent
Ongoing
n.a.
0 1 2 3 4 5 6
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Duration in years
3.4 years
Reinhart and RogoffReinhart and Rogoff 1010
0
20
40
60
80
100
120
t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t+11
Index (t) 1928 = 100
Index (t) 2007 = 100
1932
1936
March 29, 2009
. Global stock markets during global crises: Composite real stock price index
(end-of- period)
Reinhart and RogoffReinhart and Rogoff 1111
Past Unemployment Cycles and Banking Crises: Trough-to-peak Percent Increase in the Unemployment Rate (left panel) and Years Duration of Downturn (right panel)
0 5 10 15 20 25
US, 1929
Finland, 1991
Colombia, 1998
Spain, 1977
Sweden, 1991
Historical Average
Argentina, 2001
Korea, 1997
Norway, 1987
Hong Kong, 1997
Philippines, 1997
Thailand, 1997
Japan, 1992
Indonesia, 1997
Malaysia, 1997
Percent increase
7 percent
0 2 4 6 8 10 12
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Duration in years
4.8 years
Reinhart and RogoffReinhart and Rogoff 1212
Past Real Per Capita GDP Cycles and Banking Crises: Peak-to-trough
Percent Decline in Real GDP (left panel) and Years Duration of Downturn (right panel)
-30 -25 -20 -15 -10 -5 0 5
Spain, 1977
Japan, 1992
Norway, 1987
Philippines, 1997
Sweden, 1991
Hong Kong, 1997
Colombia, 1998
Korea, 1997
Historical Average
Malaysia, 1997
Finland, 1991
Thailand, 1997
Indonesia, 1997
Argentina, 2001
US, 1929
Percent decrease
-9.3 percent
0 1 2 3 4 5
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Duration in years
1.9 years
Reinhart and RogoffReinhart and Rogoff 1313
The duration of major financial crises since the Great DepressioThe duration of major financial crises since the Great Depression:n:The downturn, peakThe downturn, peak--toto--prepre--crisis peak in real per capita GDP in crisis peak in real per capita GDP in
28 episodes28 episodes
Post -WWII crises
Argentina, Canada, Chile, Mexico
Austria, France, USIndonesia, PolandBrazil
Thailand Germany, RomaniaIndonesia Italy
SwedenJapan
Norway, Mexico, Philippines, MalaysiaJapan, Korea
Spain
Number of episodes
Colombia,Argentina
Duration in years Duration in yearsGreat Depression crises
0 2 4 6
0
2
4
6
8
10
12
Average 4.4 years
0 2 4 6
0
2
4
6
8
10
12
Average 10 years
Reinhart and RogoffReinhart and Rogoff 1414
As to theAs to the fiscalfiscal aftermathaftermath of of banking crises, we find:banking crises, we find:
That the nearly universal focus on That the nearly universal focus on calculations of calculations of bailout costsbailout costs as the as the centerpiece of the fiscal consequences of centerpiece of the fiscal consequences of banking crises is banking crises is misguided and incomplete. misguided and incomplete. Banking crises weaken fiscal positions Banking crises weaken fiscal positions beyond the costs of bailouts, as beyond the costs of bailouts, as government government revenues contractrevenues contract and and stimulus plansstimulus plans find find favor.favor.
Reinhart and RogoffReinhart and Rogoff 1515
Real Government Revenue and Banking Crises, Advanced Economies, 1815-2007
(annual percent changes)
-3.00
-1.00
1.00
3.00
5.00
7.00
t-3 t-2 t-1 T t+1 t+2 t+3
Per
cent
The "Big Five"
All episodes
Reinhart and RogoffReinhart and Rogoff 1616
Thus, the true legacy of financial Thus, the true legacy of financial crises is crises is more government debtmore government debt……
Cumulative increase in public debt in the three years following the banking crisis
100 150 200 250 300
ColombiaFinland
ChileIndonesia
SpainAverageThailandSweden
KoreaPhilippines
NorwayJapan
MexicoMalasia
Index=100 in year of crisis
Average is 186.3
Reinhart and RogoffReinhart and Rogoff 1717
100 120 140 160 180 200 220 240 260
AustriaCanadaFrance
GermanyJapan
SwedenUS
Average-AdvancedArgentinaAustralia
BrazilChile
MexicoSouth Africa
Average-Emerging Index 1929=100
1929 to 19321929 to 1935
184144
136
134
Cumulative increase in real public debt in three and six years following the onset of the Great Depression, 1929
Reinhart and RogoffReinhart and Rogoff 1818
Institutional Investor sovereign ratings cycles and banking crises:Peak-to-trough index declines (left panel) and years duration of downturn (right panel)
-35 -30 -25 -20 -15 -10 -5 0
Mexico
Hong Kong, 1997
Sweden,1991
Norway, 1987
Japan, 1992
Finland, 1991
Colombia, 1998
Average
Thailand, 1997
Korea, 1997
Malaysia, 1997
Indonesia, 1997
Argentina, 2001
Chile, 1980
Percent decline
-15.1
Default/restructuring
Near-default/bailout
0 5 10 15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Duration in years
5.1 years
Reinhart and RogoffReinhart and Rogoff 1919
Banking crises andBanking crises anddefault cycles default cycles onon externalexternal debtdebt
This lull in sovereign defaults may also be This lull in sovereign defaults may also be temporary.temporary.A high incidence of global banking crises A high incidence of global banking crises (such as at present) has historically been (such as at present) has historically been associated with a high incidence of associated with a high incidence of sovereign defaults on external debtsovereign defaults on external debt……
Reinhart and RogoffReinhart and Rogoff 2020
Proportion of Countries with Banking and Debt CrisesWeighted by Their Share of World Income
0
5
10
15
20
25
30
35
40
45
1900
1904
1908
1912
1916
1920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
Perc
ent
of c
ount
ies
0
5
10
15
20
25
30
35
40
45
Banking Crises Debt Crises
Reinhart and RogoffReinhart and Rogoff 2121
World export growth, 1928World export growth, 1928--20092009(annual percent change)(annual percent change)
-35
-25
-15
-5
5
15
25
35
45
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
Perc
ent
Average (1928-2008) = 7.8
+/- one standard deviation
2009 estimate
Reinhart and RogoffReinhart and Rogoff 2222
Policy issues going forwardPolicy issues going forwardSwift Swift implementation is criticalimplementation is critical——delays are terribly delays are terribly costly costly in both terms of the economy and of the in both terms of the economy and of the cost cost of the crisis (of the crisis (speedspeed should take precedence over should take precedence over polish)polish)Soaring debtSoaring debt: Policy makers should be concerned : Policy makers should be concerned about the debt levels (explicit and implicit) that it is about the debt levels (explicit and implicit) that it is likely to take on as it works its way out of the crisis. likely to take on as it works its way out of the crisis. Financial crises are Financial crises are ““hardy perennialshardy perennials””---- regulation regulation needs to be constantly revised and revisited to needs to be constantly revised and revisited to ““keep keep upup”” with market innovation. with market innovation.