How prescient was this, circa January 2008:

“Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics:

First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.

Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.

Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes. Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system.

Admittedly, bailout costs are difficult to measure, and there is considerable divergence among estimates from competing studies. But even upper-bound estimates pale next to actual measured rises in public debt. In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn.”

Not only are most other economists getting it wrong, they seem to be pretending that nobody warned them in advance what to expect.

Kudos to Reinhart & Rogoff (again)


5 Historical Economic Crises and the U.S. (February 9th, 2008)

The Aftermath of Financial Crises (January 24th, 2009)

Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International
Historical Comparison*  (PDF)
Carmen M. Reinhart, University of Maryland and the NBER
Kenneth S. Rogoff , Harvard University and the NBER, January 14, 2008

Category: Bailouts, Philosophy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “QOTD: Financial Crisis Recoveries”

  1. mitchn says:

    Someone please explain this to Indiana governor Mitch Daniels, who is either dumber than he looks (I know, hard to believe) or just another partisan hack. Disgraceful performance on Squawk Box (aka RNC-TV) this morning — though I have to admit I enjoyed the frozen look on his face when Ross Sorkin said, in effect, “Hey, you ever hear of Rogoff and Reinhart?”

  2. AlexM says:

    No one could have forseen….

  3. Super-Anon says:

    I can never get away from the feeling that 2008 was just the previews and the feature presentation is still coming up.

  4. mark says:

    There are others you know – James K. Galbraith comes to mind and especially Paul Krugman (who did foresee it, btw, “The Return of Depression Economics” was originally published in 2000). It’s always struck me as ironic that David Rosenberg and Krugman come to almost identical conclusions about the economy while starting from what seems to be completely opposite ends of the politico-economic spectrum.

  5. lunartop says:

    Wait a minute you mean this time it’s not different…

    As to the Economists who predicted it

  6. foosion says:

    It’s at least possible that the reason financial crises have taken so long to resolve is that the policy responses have been totally inadequate.

  7. mitchn says:

    The reason credit crises take so long to resolve is because they are always about the same thing: too much debt. And the only way to get rid of excessive debt is to pay it down (a painfully slow process) or to write it off (a non-starter for the banks, which inevitably leads to the Chinese water torture known as extend-and-pretend).

  8. b_thunder says:

    The only shot of the “economic profession” to regain some of it’s credibility respect (and not sink to the level of astrology) is to conduct a “trial” of the so-called leading economist, both left- and right-leaning, by the rest of the Academia.

    First, Summers, Bernanke, Romer, and full spectrum of the GWB’s “team” etc need to be held accountable for the degenerative policies they’ve put in place.
    Second, the Academia needs to assess the actions of Hank Paulson, Tim Geithner and the Treasury before during, and after the crisis.
    Third, if what Rogoff and Reinhart are correct, then there should be a definitive “playbook” of how to deal with post-credit crises recessions (hint: whatever you try to do, won’t make much difference. so stay put and wait it out.)

    Without assessing past actions, there’s no way to save the profession of economics

  9. jameskahler says:

    I must have quoted this same piece a hundred times in the past 3 years. Simple, brilliant and prescient.

  10. Transor Z says:

    Simple, brilliant and prescient.

    The best minds always present complex ideas with clarity and simplicity. The rest of us just thrash about trying to put words to things.

  11. Lyle says:

    To boot lets include the records of the 1893 (called the great depression until 1929) and 1873 panics. Both were financial panics with bubbles driving the economy to the cliff. In both cases railroads were the cause as people went crazy building railroads. Mileage rose from 35k in 1865 to 53k in 1870 to 163k in 1890. A 66 % increase in a thing in five years qualifies as a bubble, as does moving from 93k to 163k (75%)in 10 years. In both cases the railroad companies engaged in rate cutting and pooling to stop them from rate cutting with abandon, and eventually in 1893 a lot of railroads went into recievership. It took 6 years to recover from these events, but of course the data to make nice graphs is not readily available. (I suspect that a flock of students sent to newpaper and magazine archives, to mine the data could do this but of course no one wants to do it. Here is a link to a NY times article from 1911 with a summary of the 1893 event: (This has been linked to before by Barry but it never hurts to remind people of it)

  12. Lyle says:

    Note that Babson (the author of the above) also wrote articles on 1873 and 1837. All are available free from the NYTimes web site.

  13. DeDude says:


    The experiment has been done to over and over and over again. The two main reactions to a severe economic downturn is either Keynesian (counter-cyclical stimulus spending) or Austerian (belt-tightening; slashing government spending to bring down budget deficits that explode as tax receipts go down). If you just look at the facts Keynesian approaches that are undersized (as our latest 0.8 trillion stimulus to fill a 2 trillion loss in aggregate demand) will stop the fall but not bring you back to normal; whereas appropriately sized stimulus (like the Chinese) can prevent or completely reverse a severe downturn. The Austerian approach always make things a lot worse and their claim to produce better results “in the long run” is not supported by facts. Most recently Spain did a lot of cutting spending and now have 20% unemployment and an economy sinking so fast that the bond vigilantes are after them anyway (Greece is about to do the same with the same result, although they were dead in any case). In short Austerians are a bunch of hacks using fact free arguments in favor of a policy that are good for the rich banksters and terrible for the country and its people. Austerian policies provides those with a lot of cash the opportunity to purchase assets at fire-sale prices (from those who become unemployed or are hurt by the completely unnecessary deepening of the downturn).

    Just simple turning your brain on would suggest that when millions of people who want to work and produce something, are sitting idle at home, then there is a loss to society of production that never happened (and that loss is permanent and can never be recouped). But then if you simply are a Chicago school pimp for the rich, then you stop thinking as soon as it leads to the “wrong” conclusion.

    So yes there is a simple fact-based playbook for how to optimize the economy. However, it has two problems. First it has this very unhappy ending where the rich don’t get to plunder the poor and regular folks. Second, in the last act the politicians have to slap the voters over the fingers and say “no you cannot have that piece of candy (sugar-sweet tax-cut); we cannot afford it (have to pay back the debt now that the economy is growing again)”.

  14. Detroit Dan says:

    Reinhart and Rogoff are incompetent bozos. See

  15. blackjaquekerouac says:

    there’s nothing philosphical about oil. “it just makes entire economies into economies.” i agree–over-leveraging and governmental policies vis a vis “the collapse” historically speaking play the paramount role. the fact of the matter is the discovery of oil and its various byproducts changed this forever. not only was there the creation of entire industries and producets we never thought we needed (and probably now wish we never bought) but entire technologies were created around this specific commodity which changed entirely the way we live our lives (for better no doubt…but certainly for worse as well.) simply put we have the subsitute–the billionaires are billionairing over it and this alternative is already recreating entire industries and making other industries left for dead suddenly spring to life again. Natural gas and the technology used to extract it (which is new) is no panacea and indeed it will require of policy makers the ability to put the community first over their natural prediiction for “self-serving.” there is no guarantee this will occur. Should it occur however we have a fighting chance to start slaying this deficit dragon. “All great journies start with a single step.”

  16. Liminal Hack says:

    “It’s at least possible that the reason financial crises have taken so long to resolve is that the policy responses have been totally inadequate.”


    Things are different this time because:

    1) this is the first time large scale debt monetisation has been used as a policy response
    2) this is the first time a large financial crisis has happened when virtually all meaningful transactions are electronic
    3) this is all happening against a deeper current of demographic change which is the primary underlying reason why long term growth is for the first time off the cards.
    4) this is all happening in a genuinely globally connected (by fiber optics) situation.