the aftermath of global financial crises - brookings · the aftermath of global financial crises...

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)


Where are we at present Where are we at present in a historical global in a historical global context?context?


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


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……


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……


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


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.


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


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)


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


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


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


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.


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


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


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


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


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……


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


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


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.

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