The Aftermath of Global Financial Crises Carmen M. Reinhart, University of Maryland, NBER, and CEPR Brookings Institution Washington DC, April 20, 2009
This talk is based on several works with Kenneth Rogoff: Banking Crises: An Equal Opportunity Menace NBER Working Paper 14587, December 2008. The Aftermath of Financial Crises, American Economic Review, forthcoming, May 2009. This Time its Different: Eight Hundred Years of Financial Folly (Princeton University Press, 2009) Reinhart and Rogoff 2
Where are we at present in a historical global context? Reinhart and Rogoff 3
Varieties of crises: World aggregate, 1900-2008 A composite index of banking, currency, sovereign default and, inflation i crises, and stock market crashes (weighted by their share of world income) 180 160 WWI-hyperinflation Great Depression WWII-more defaults 140 Global recession and crash 120 100 80 Panic of 1907 Oil shock-inflation BCDI index + stock market crash 60 40 20 0 Banking, currency, default, and inflation crises (BCDI index) Emerging market crises and Nordic and Japanese banking 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Reinhart and Rogoff 4
The incidence and number of banking crises is quite similar in high and middle-to to-low income countries Reinhart and Rogoff 5
On the duration and depth of the post-banking crisis crash for selected indicators. Financial crises are protracted affairs Reinhart and Rogoff 6
Past and Ongoing Real House Price Cycles and Banking Crises: Peak-to-trough Price Declines (left panel) and Years Duration of Downturn (right panel) 23 Ongoing Austria, 2008 Hungary, 2008 22 21 US,1929 20 UK, 2007 19 Iceland, 2007 18 Malaysia, 1997 17 Thailand, 1997 16 Korea, 1997 15 Ireland, 2007 14 Norway, 1899 13 Argentina, 2001 12 US, 2007 11 Sweden, 1991 10 Spain, 1977 9-35.5 percent Historical Average 8 6 years Japan, 1992 7 Norway, 1987 6 Indonesia, 1997 5 Finland, 1991 4 Colombia, 1998 3 Philippines, 1997 2 Hong Kong, 1997 1-60 -50-40 -30-20 -10 0 Percent decline 0 5 10 15 20 Duration in years Reinhart and Rogoff 7
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 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. Reinhart and Rogoff 8 1
Past and Ongoing Real Equity Price Cycles and Banking Crises: Peak-to-trough Price Declines (left panel) and Years Duration of Downturn (right panel) Ongoing n.a. Norway, 1899 Argentina, 2001 Hong Kong, 1997 Norway, 1987 Sweden, 1991 UK, 2007 US, 2007 23 22 21 20 19 18 17 Spain, 2008 16-55.9 percent Hungary, 2008 Historical Average 15 14 3.4 years Philippines, 1997 13 Ireland, 2007 12 Japan, 1992 11 Finland, 1991 10 US, 1929 9 Colombia, 1998 8 Spain, 1977 7 Malaysia, 1997 6 Indonesia, 1997 5 Korea, 1997 4 Austria, 2008 3 Thailand, 1997 2 Iceland, 2007 1-100.0-90.0-80.0-70.0-60.0-50.0-40.0-30.0-20.0-10.0 0.0 Percent decline 0 1 2 3 4 5 6 Duration in years Reinhart and Rogoff 9
. Global stock markets during global crises: Composite real stock price index (end-of- period) 120 1936 100 Index (t) 1928 = 100 80 60 40 March 29, 2009 1932 20 Index (t) 2007 = 100 0 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t+11 Reinhart and Rogoff 10
Past Unemployment Cycles and Banking Crises: Trough-to-peak Percent Increase in the Unemployment Rate (left panel) and Years Duration of Downturn (right panel) Malaysia, 1997 15 Indonesia, 1997 14 Japan, 1992 13 Thailand, 1997 12 Philippines, 1997 11 Hong Kong, 1997 10 Norway, 1987 9 Korea, 1997 8 Argentina, 2001 7 7 percent Historical Average 6 4.8 years Sweden, 1991 5 Spain, 1977 4 Colombia, 1998 3 Finland, 1991 2 US, 1929 1 0 5 10 15 20 25 Percent increase 0 2 4 6 8 10 12 Duration in years Reinhart and Rogoff 11
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) Spain, 1977 1 Japan, 1992 2 Norway, 1987 3 Philippines, 1997 4 Sweden, 1991 5 Hong Kong, 1997 6 Colombia, 1998 7 Korea, 1997 8-9.3 percent Historical Average 9 1.9 years Malaysia, 1997 10 Finland, 1991 11 Thailand, 1997 12 Indonesia, 1997 13 Argentina, 2001 14-30 -25-20 -15-10 -5 0 5 Percent decrease US, 1929 15 0 1 2 3 4 5 Duration in years Reinhart and Rogoff 12
The duration of major financial crises since the Great Depression: The downturn, peak-to to-pre-crisis peak in real per capita GDP in 28 episodes Duration in years Post -WWII crises Duration in years Great Depression crises Colombia,Argentina 12 10 8 12 10 8 Argentina, Canada, Chile, Mexico Average 10 years Austria, France, US Indonesia, Poland Brazil Thailand Germany, Romania 6 6 Indonesia Italy Sweden Average 4.4 years 4 4 Japan Norway, Mexico, Philippines, Malaysia Japan, Korea 2 2 Spain 0 0 0 2 4 6 0 2 4 6 Number of episodes Reinhart and Rogoff 13
As to the fiscal aftermath of banking crises, we find: That the nearly universal focus on calculations of bailout costs as the centerpiece of the fiscal consequences of banking crises is misguided and incomplete. Banking crises weaken fiscal positions beyond the costs of bailouts, as government revenues contract and stimulus plans find favor. Reinhart and Rogoff 14
Real Government Revenue and Banking Crises, Advanced Economies, 1815-2007 (annual percent changes) 7.00 5.00 3.00 All episodes Percent 1.00-1.00 t-3 t-2 t-1 T t+1 t+2 t+3-3.00 The "Big Five" Reinhart and Rogoff 15
Thus, the true legacy of financial crises is more government debt Cumulative increase in public debt in the three years following the banking crisis Malasia Mexico Japan Norway Philippines Korea Sweden Thailand Average Spain Indonesia Chile Finland Colombia Index=100 in year of crisis Average is 186.3 100 150 200 250 300 Reinhart and Rogoff 16
Cumulative increase in real public debt in three and six years following the onset of the Great Depression, 1929 100 120 140 160 180 200 220 240 260 Austria 1929 to 1935 1929 to 1932 Canada France Germany Japan Sweden US Average-Advanced Argentina Australia Brazil Chile Mexico 144 184 South Africa 134 Average-Emerging 136 Index 1929=100 Reinhart and Rogoff 17
Institutional Investor sovereign ratings cycles and banking crises: Peak-to-trough index declines (left panel) and years duration of downturn (right panel) Chile, 1980 14 13 Argentina, 2001 Indonesia, 1997 12 Malaysia, 1997 11 Korea, 1997 10 Thailand, 1997 9-15.1 Average 8 5.1 years Colombia, 1998 7 Finland, 1991 6 Japan, 1992 5 Norway, 1987 4 Default/restructuring Near-default/bailout Sweden,1991 Hong Kong, 1997 3 2 Mexico 1-35 -30-25 -20-15 -10-5 0 Percent decline 0 5 10 15 Duration in years Reinhart and Rogoff 18
Banking crises and default cycles on external debt This lull in sovereign defaults may also be temporary. A high incidence of global banking crises (such as at present) has historically been associated with a high incidence of sovereign defaults on external debt Reinhart and Rogoff 19
45 40 35 30 25 20 15 10 5 0 Proportion of Countries with Banking and Debt Crises Weighted by Their Share of World Income 45 Banking Crises Debt Crises 40 35 30 25 20 15 10 5 0 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 Reinhart and Rogoff 20 1916 1912 1908 1904 1900 Percent of counties
World export growth, 1928-2009 2009 (annual percent change) 45 35 +/- one standard deviation 25 Percent 15 5-5 -15-25 -35 1928 1932 1936 1940 1944 1948 1952 1956 1960 Average (1928-2008) = 7.8 1964 2009 estimate 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 Reinhart and Rogoff 21
Policy issues going forward Swift implementation is critical delays are terribly costly in both terms of the economy and of the cost of the crisis (speed( should take precedence over polish) Soaring debt: : Policy makers should be concerned about the debt levels (explicit and implicit) that it is likely to take on as it works its way out of the crisis. Financial crises are hardy perennials -- regulation needs to be constantly revised and revisited to keep up with market innovation. Reinhart and Rogoff 22