Software Nerd

Sunday, April 26, 2009

The Aftermath of Financial Crises

In their paper, "The Aftermath of Financial Crises", economists Reinhart and Rogoff look at data from other financial crises (from across the world). They ask: to what extent did key indicators like unemployment and GDP deteriorate, and for how long?

They document a lot of variation among the various crises. Here are the averages they found, across the various crises. (The figures in parentheses are the current US figures for this crisis.)
  • Unemployment: Up 7%, across 4.8 years (US current: up 4%)
  • House prices: Down 35%, across 6 years from the top (US current: down 28%)
  • Equity prices: Down 56%, across 3.4 years (US current: down 42%)
  • Per capita real GDP: Down 9% across 2 years (US current: down 1%)
There is a lot of variation among the different episodes included in this sample. Still, they were all chosen because they were largely bank/financial/credit crises. (So, for instance, the bust-up is not included.)

I found graphs of U.S. data for three of the above measures (from the late 1980's to today). Then, I marked the averages from the study on the graph, to answer the question: if this US crisis turns out to be about averages, how far are we from the turning point. [I did not graph the real per capita GDP. Instead, the real GDP is shown -- i.e. not per-capita].

In summary, if the current US recession is typical, we can expect another year of flat or falling real GDP (falling per capita); unemployment would go to 11% over the next three years or more; house prices would come down a bit more and not recover for another 5 years.

An average does not tell us what will really happen; but it does provide a feel for the order of magnitude that is typical, to allow us to use that as a benchmark.



  • Some of your readers might be interested in a September, three-week SGO study group that will focus on one essay by Ludwig von Mises. In it, Mises discusses the causes of financial crises, the cure (progress toward a full gold standard), and pitfalls in accepting compromises that do not bring full freedom.

    The study group leader will be Robert Garmong, Ph.D., philosophy, specializing in economics and liberty.

    By Blogger Burgess Laughlin, at 4:23 AM  

  • Burgess, thanks for the info. Perhaps I'll mention this on the forum as well, in case someone there is interested in joining.

    By Blogger SN, at 7:58 AM  

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