Carmen Reinhart and Kenneth Rogoff Compare Economic Crises

We have been reading a lot lately about economists Carmen Reinhart and Kenneth Rogoff who have done several studies predicting how our current economic dilemma will play out.

I would like to revisit the study released one year ago (and reviewed in a previous Seeking Alpha article in February 2008) which compared the economic crisis which began in 2007 with sub-prime mortgages to similar modern day financial crises. Reinhart and Rogoff believed they found qualitative and quantitative correlation across a number of economic indicators.

The current economic crisis now is much larger than any of the compared previous crises used for the study.

To set the stage, the baseline for events was modeled using two groupings:

• The largest five (big 5) banking crises: Spain 1977, Norway 1987, Finland 1991, Sweden 1991, and Japan 1992.
• 13 smaller crises: Australia 1989, Canada 1983, Denmark 1987, France 1994, Germany 1997, Greece 1991, Iceland 1985, Italy 1990, New Zealand 1987, United Kingdom 1974 / 1991 / 1995, and USA 1984.

The graphic presentations of the study were updated with 2008 data so that you can compare what is happening today against previous crises.

click to enlarge

I find the differences interesting.

Disclosure: none

Comments

[John Lounsbury:]

Steve - - -

I haven't seen some of this data before (the updated portions). Thanks for pulling it together.

Some comments:

1. The official national debt is misleading because we currently have so much "off-the-books" debt. Some of it can not be measured accurately. Examples: (a) TARP, FDIC and Fed investments in financial institutions and (b) the as yet untabulated 2008 federal deficit.

2. I don't understand the real GDP growth in 2007. Do you have any comments on that?

3. The timeline for housing response to the crisis is similar to the references but the equity timeline shows significant delay. Obviously the magnitude of both responses is dramatically larger than the referenced prior events. I think analysis of these behaviors would be worthwhile. Maybe some subsequent commenters will be in a position to discuss these timelines.

4. Your data indicates that making predictions on outcomes by comparing to recent history is problematic because the magnitudes of change involved are much greater and the timelines so far are deviating, in some cases, from historical timelines.

You continue to find and share intriguing data. Thanks.

Jan 09 03:26 PM

[carmen rein...:]

Dear Steve and John
Thank you for your interest in my work. Sincerely appreciated.
On the the real per capita GDP growth chart, these are the numbers I have: 1.1 percent for 2007, 0.2 for 2008, and -2.8 for 2009 (the latter are concensus forecasts published in the Wall Street Journal a few days ago. These are year-over-year number.
best
Carmen
ps
If you like I can send you the chart I updated




On Jan 09 03:26 PM John Lounsbury wrote:

> Steve - - -
>
> I haven't seen some of this data before (the updated portions).
> Thanks for pulling it together.
>
> Some comments:
>
> 1. The official national debt is misleading because we currently
> have so much "off-the-books&amp... debt. Some of it can not be
> measured accurately. Examples: (a) TARP, FDIC and Fed investments
> in financial institutions and (b) the as yet untabulated 2008 federal
> deficit.
>
> 2. I don't understand the real GDP growth in 2007. Do you have
> any comments on that?
>
> 3. The timeline for housing response to the crisis is similar to
> the references but the equity timeline shows significant delay.
> Obviously the magnitude of both responses is dramatically larger
> than the referenced prior events. I think analysis of these behaviors
> would be worthwhile. Maybe some subsequent commenters will be in
> a position to discuss these timelines.
>
> 4. Your data indicates that making predictions on outcomes by comparing
> to recent history is problematic because the magnitudes of change
> involved are much greater and the timelines so far are deviating,
> in some cases, from historical timelines.
>
> You continue to find and share intriguing data. Thanks.

Jan 09 04:31 PM

[Steven Hansen:]

John and Carmen:

Carmen, thank you for commenting. I am honored.

1) Normal business practice requires reserve accounts for potential losses. Governments get to make their own rules. The debt could be massively larger than published. We will know later.

2) Yes, the 8% GDP PPP numbers looks screwy. The numbers used were from the CIA factbook - and I back checked the curve using the CIA data to the rest of the curve and it matched. I double checked the PPP numbers to the IMF and World Bank numbers and all correlated. The WSJ number of 1.1 for 2007 would put the GDP PPP curve exactly on the forecast line.

3) John, the US equity market reacted to market and not economic fundamentals. In this age of globalization, even though the US economy was not running on all cylinders, the world economy was strong and growing. The US market did not want to go negative, and there was a lot of resistance - the market does what the market does.

4) There never is enough data points or events to accurately predict future events using historical data. The data itself is corrupted by actions and events which occur simultaneously. But was intriguing to me is the timeline itself. This is the masterpiece of the study. It suggests (and is being supported by our own crisis unfolding) the delays in the manifestation of destruction. Major economic events are not contained within short timeframes.

The current economic crisis is now the largest in modern history. The current government response is becoming an economic event in its own right. I do not expect much correlation anymore - that is not the point to me. It is the overall concept of destruction over time. This event will not be over soon.

steven hansen

Jan 09 06:09 PM

[John Lounsbury:]

Steven - - -

Your closing lines: " I do not expect much correlation anymore - that is not the point to me. It is the overall concept of destruction over time. This event will not be over soon."

I couldn't agree more. We can only hope that this can be turned into "creative destruction".

I might add to your comment on why the stock was late to the horror party. I like to say to my family and friends when I think they are avoiding facing something: De Nile is a deep river.

I am afraid the denial phase of this crisis is not completely finished.

Jan 09 11:47 PM

[scotty1560:]

Steven...count me in to....this event is far from over...

I've been in real estate sales for 25 years and I can say without a doubt
this is different and intimidating....I see a Japan scenario of years
without any serious moves...so many issues on the table...I doubt
the government can handle to many more years of these body blows...

we are in uncharted waters and out of quick fixes...our whole standard of
living may have peaked in this country for many of us..

Jan 10 11:50 PM