Crisis and History

NBER WORKING PAPER SERIESAN HISTORICAL PERSPECTIVE ON THE CRISIS OF 2007-2008Michael D. BordoWorking Paper 14569http://www.nber.org/papers/w14569NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts AvenueCambridge, MA 02138December 2008

Remarks prepared for the Central Bank of Chile Twelfth Annual Conference on Financial Stability,

Monetary Policy and Central Banking. Santiago, Chile November 6-7 2008

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The views expressedherein are those of the author(s) and do not necessarily reflect the views of the National Bureau of

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An Historical Perspective on the Crisis of 2007-2008Michael D. BordoNBER Working Paper No. 14569December 2008JEL No. N10

ABSTRACT

This paper provides an historical perspective on the crisis of 2007-2008. The crisis is part of a perennial

pattern. It has echoes in earlier big international financial crises which were triggered by events in

the U.S. financial system. Examples include the crises of 1857, 1893 1907 and 1929-33. This crisis

has many similarities to those of the past but also some important modern twists.Michael D. BordoDepartment of EconomicsRutgers UniversityNew Jersey Hall75 Hamilton StreetNew Brunswick, NJ 08901and NBERbordo@econ.rutgers.edu

2An Historical Perspective on the Crisis of 2007-2008The current international financial crisis is part of a perennial pattern. Today’s eventshave echoes in earlier big international financial crises which were triggered by events inthe U.S. financial system. Examples include the crises of 1857,1893, 1907 and 1929-1933. This crisis has many similarities to those of the past but also some importantmodern twists.The crisis started in the U.S.. with the collapse of the subprime mortgage market in early2007 and the end of a major housing boom. It occurred following two years of risingpolicy interest rates. Its causes include major changes in regulation, lax oversight,relaxation of normal standards of prudent lending and a prolonged period of abnormallylow interest rates. Defaults on mortgages spread to investment banks and commercialbanks in the U.S. and across the world via an elaborate network of derivatives. It hasrecently spilled over into the real economy through a virulent credit crunch andcollapsing equities market which will likely produce a significant recession. The Fed andother central banks have responded in a classical way by flooding the financial marketswith liquidity and the fiscal authorities are also dealing with the decline in solvency in thebanking system following the template of earlier bailouts like the Reconstruction FinanceCorporation in the 1930s, Sweden in 1992 and Japan in the late 1990s.This paper provides an historical perspective on the current crisis, contrasts the old withthe modern and offers some lessons for policy. Section

1

describes the crisis in a bit moredetail. Section

2

provides some descriptive empirical evidence putting the crisis in long-