aftershocks of financial crisis

The world is suffering from a financial crisis that is remarkably similar to many that we have experienced in the recent and not-so-recent past. Carmen Reinhart and Ken Rogoff have written a very useful book that describes precisely how and why economies suffer when a financial system collapses. They summarize their findings succinctly in a paper prepared for the January 2009 meetings of the American Economic Association.

An examination of the aftermath of severe financial crises shows deep and lasting effects on asset prices, output and employment. Unemployment rises and housing price declines extend out for five and six years, respectively. On the encouraging side, output declines last only two years on average. Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt.

[snip]

Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. …. 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

Carmen M. Reinhart and Kenneth S. Rogoff, “The Aftermath of Financial Crises”, 19 December 2008.

So, we can expect employment figures and housing prices to return to ‘normal’ in 2013 or 2014.

If you read nothing else on the financial crisis, read this 11-page paper. For further reading, the book’s title is This Time is Different: Eight Centuries of Financial Folly (Princeton University Press, 2009). Cuban-American economist Carmen Reinhart teaches at the University of Maryland. Harvard economist Ken Rogoff was Director of Research at the IMF from 2001 to 2003.

Also of interest is Russ Roberts’ interview of Carmen Reinhart on EconTalk. The podcast can be downloaded here.

2 Responses to “aftershocks of financial crisis”

  1. […] is the original:  aftershocks of financial crisis « Thought du Jour Tags: aftermath, book, carmen-reinhart, crisis, ECONOMICS, entry, finance, financial, […]

  2. […] Wells and Paul Krugman have written an interesting review of This Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff (Princeton University Press, 2009). It is a generally […]