This Time is Different?

I have been working through the stack of books I have accumulated in the wake of the global financial crisis.

One of the best, completed on a rather long set of plane rides (thank you Delta for serial delays) was Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton University Press, 2009).

There is much to their analysis. It is heavily data driven and provides a great overview of existing scholarly research.   I don’t intend to present an overall summary or critique here.  But here is a sobering passage from page 224, where they note that “financial crisis are protracted affairs. More often than not, the aftermath of several financial crises share three characteristics:

  • First. Asset market collapses are deep and prolonged.  Declines in real housing prices average 35 percent stretched out over six years, whereas equity price collapses average 56 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 during the down phases of the cycle, which lasts on average more than four years.  Output falls (from peak to trough) more than 9 percent on average…
  • Third…the value of government debt tends to explode; it rose an average of 86 percent (in real terms, relative to precrisis debt) in the major post-World War II episodes. …the biggest driver of debt increases is the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions.”

The “Second Great Contraction” (the authors’ term for the current crisis) may be more significant than other postwar contractions because “the global nature of the recent crisis has made it far more difficult, and contentious, for individual countries to grow their way out through higher exports or to smooth the consumption effects through foreign borrowing.” (239)

My take: All of this suggests that we have a long way to go before we can celebrate “Recovery Summer”  and job growth. To the extent that  economic chaos carries political ramifications, we may be in for a prolonged period of instability in electoral politics the impacts of which may not be limited to one or another of the two parties. Indeed, as I read the current polls, there is grave dissatisfaction with both parties.  Even if there is growing skepticism regarding Obamanomics,  the Democratic majorities in the House and Senate, the direction the nation is heading, etc., the news for Republicans is no better (perhaps a product of the dearth of ideas, perhaps a decision to draw a line in the sand over the extension of unemployment benefits).

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