This Time is Different:

Eight Centuries of Financial Folly

Carmen M. Reinhart, University of Maryland, NBER, and CEPR

Kenneth S. Rogoff, Harvard University and NBER

(Princeton University Press, forthcoming 2009)

Reinhart and Rogoff, 2009 1

This talk is based on the following

references (in chronological order):
• Reinhart, Carmen M., and Kenneth S. Rogoff, “Is the 2007 U.S.
Subprime Crisis So Different? An International Historical
Comparison,” American Economic Review, Vol. 98 No. 2, May
2008, 339–344. (RR, 2008a)

• Reinhart, Carmen M., and Kenneth S. Rogoff, “Banking Crises:

An Equal Opportunity Menace,” (with Kenneth S. Rogoff), NBER
Working Paper 14587, December 2008. (RR, 2008d)

• Reinhart, Carmen M., and Kenneth S. Rogoff, “The Aftermath of

Financial Crises,” (with Kenneth S. Rogoff), American Economic
Review, forthcoming, May 2009. (RR, 2009)

Reinhart and Rogoff, 2009 2

1
 Recent examples of the “this time is
different syndrome”
• US in the run-up to the 2007 financial crisis: This time was
different because of globalization, the technology boom, our
superior financial system, our better understanding of monetary
policy, the phenomenon of securitized debt. Sure, housing
prices doubled, equity prices soared, all fueled by record
borrowing from abroad. But it is not like the United States can
have an emerging market type financial crisis…

• Asia following the Mexican 1994-1995 crisis: Sure, Latin

America may experience recurrent problems, but Asia has high
savings rates and superior work ethic (not to mention Asian
values). Record current account deficits owe to high investment
rates—not consumption booms. Financial crises are other
people’s problems.

Reinhart and Rogoff, 2009 3

And a not so recent example…

more to follow
(courtesy of Professor Peter Lindert)

Reinhart and Rogoff, 2009 4

2
 An advertisement for:

Reinhart and Rogoff, 2009 5

Where are we at present in a historical

global context?
Proportion of Countries with Banking Crises, 1900-2008
Weighted by Their Share of World Income
The Great The First Global Financial Crisis of 21st
45 Depression
Century

40

Emerging Markets, Japan the

35
Nordic Countries, and US(S&L)

30 World War I
Percent o f co unties

25

20
The Panic
15
of 1907

10

0
1900
1903
1906
1909
1912
1915
1918
1921
1924
1927
1930
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008

Reinhart and Rogoff, 2009 6

3
Is the U.S. subprime
meltdown a new kind of
financial crisis?

A review of some of the antecedents

of crises.

Reinhart and Rogoff, 2009 7

Quantitative parallels to post-war banking

crises in industrialized countries
• Leading indicators:

• Large capital inflows

• Sharp housing and equity price run-ups

• Inverted V-shaped growth trajectory

• Marked rise in indebtedness

Reinhart and Rogoff, 2009 8

4
 The “Big Five” post-war industrialized
country financial crises
Country (Start date)

• Spain (1977)

• Norway (1987)

• Finland (1991)

• Sweden (1991)

• Japan (1992)

Reinhart and Rogoff, 2009 9

Milder industrialized country financial crises

• Australia (1989), Canada (1983), Denmark (1987),

France (1994), Germany (1977), Greece (1991),
Iceland (1985), Italy (1990),

• New Zealand (1987),

• United Kingdom (1974, 1991, 1995)

• United States (1984).

Reinhart and Rogoff, 2009 10

5
A year ago we (RR, 2008a) compared the US
2007 crisis
• To the milder post-WWII crises

• and to the really severe ones (Big Five)

Reinhart and Rogoff, 2009 11

On housing and equity price run-ups on the

eve of crises
• This is what real housing prices looked like then…
Real Housing Prices and Banking Crises

135

130

125 US, 2003=100

120

115
Index

110
Average for banking crises in
advanced economies
105

100
Average for the "Big 5"
Index t-4=100
Crises
95
t-4 t-3 t-2 t-1 T t+1 t+2 t+3

Reinhart and Rogoff, 2009 12

6
 This is what it looks like now…

Real Housing Prices and Banking Crises

135

130

125 US, 2003=100

120

115
Index

110 Average for banking crises in

advanced economies
105

100 Average for the "Big 5"

Index t-4=100
Crises
95
t-4 t-3 t-2 t-1 T t+1 t+2 t+3

Reinhart and Rogoff, 2009 13

For real equity prices, this is what it looked

like then…

Real Equity Prices and Banking Crises

135

130

125 US, 2003=100

120

115

110

105
Index

100
Average for banking crises in
95 advanced economies

90
Average for the "Big 5"
85 Index t-4=100
Crises

80
t-4 t-3 t-2 t-1 T t+1 t+2 t+3

Reinhart and Rogoff, 2009 14

7
 This is what real equity prices look like
now…
Real Equity Prices and Banking Crises

135

130

125

120

115

110

105
Average for the
100
"Big 5" Crises
Index

Average for banking crises in

95 advanced economies

90

85

80
US, 2003=100
75 Index t-4=100

70
t-4 t-3 t-2 t-1 T t+1 t+2 t+3

Reinhart and Rogoff, 2009 15

As to real per capita GDP,

this was then…

Real GDP Growth per Capita and Banking Crises

(PPP basis)

3
Average for banking crises in
advanced economies
2 U.S.
Percent

0
Average for the "Big 5" Crises

-1

-2
t–3 t–2 t–1 t t+1 t+2 t+3

Reinhart and Rogoff, 2009 16

8
Using consensus estimates for 2009, this is
what real per capita GDP looks like now.

Real GDP Growth per Capita and Banking Crises

(PPP basis)

3
Average for banking crises in
2 advanced economies
Percent

1
Average for the "Big 5" Crises
0

-1
U.S.
-2

-3
t–3 t–2 t–1 t t+1 t+2 t+3

Reinhart and Rogoff, 2009 17

To sum up on the question: Is the US

subprime meltdown a new kind of crisis?
• We conclude that while each crisis has idiosyncratic
features (the subprime episode being no exception),
the runup and unfolding of the current crisis bears
many similarities to past episodes of severe financial
crises.

• This time (once again) is not entirely different …

Reinhart and Rogoff, 2009 18

9
 Here, we document the duration and depth
of the post-crisis crash for selected
indicators.

Reinhart and Rogoff, 2009 19

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

Austria, 2008 22

Ongoing Hungary, 2008 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 0 5 10 15 20

Percent decline Duration in years

Reinhart and Rogoff, 2009 20

10
 Past and Ongoing Real Equity Price Cycles and Banking Crises:
Peak-to-trough Price Declines (left panel) and Years Duration of Downturn (right panel)

23
n.a. Norway, 1899
22
Ongoing Argentina, 2001
21
Hong Kong, 1997
20
Norway, 1987
19
Sweden, 1991
18
UK, 2007
17
US, 2007
16
Spain, 2008
15
Hungary, 2008
3.4 years
-55.9 percent Historical Average
14

13
Philippines, 1997
12
Ireland, 2007
11
Japan, 1992
10
Finland, 1991
9
US, 1929
8
Colombia, 1998
7
Spain, 1977
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 0 1 2 3 4 5 6

Percent decline Duration in years

Reinhart and Rogoff, 2009 21

Past Unemployment Cycles and Banking Crises: Trough-to-peak

Percent Increase in the Unemployment Rate (left panel) and Years Duration of Downturn (right panel)

15
Malaysia, 1997
14
Indonesia, 1997

13
Japan, 1992

12
Thailand, 1997

11
Philippines, 1997

10
Hong Kong, 1997

9
Norway, 1987

8
Korea, 1997

7
Argentina, 2001

7 percent Historical Average 6 4.8 years

5
Sweden, 1991

Spain, 1977 4

Colombia, 1998 3

Finland, 1991 2

US, 1929 1

0 5 10 15 20 25 0 2 4 6 8 10 12

Percent increase Duration in years

Reinhart and Rogoff, 2009 22

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

US, 1929
15
-30 -25 -20 -15 -10 -5 0 5 0 1 2 3 4 5
Percent decrease Duration in years

Reinhart and Rogoff, 2009 23

Severe financial crisis summary:

Peak-to-trough changes, all countries
Averages Cumulative % Duration
change

Real housing -36 5 years

prices

Real equity prices -56 3.4 years

Unemployment, 7 4.8 years

trough-to-peak

Real per capita -9.3 1.9 years

GDP
Reinhart and Rogoff, 2009 24

12
 Across severe crises in emerging and
advanced economies, we find:
• Depth and duration of housing price cycle (peak to
trough) is similar.

• Broad similarity also in equity prices, a v-shaped

recovery more common than in housing.

• There are similarities in the GDP trajectory—although

contractions are more severe in emerging markets.

• Unemployment rises, if anything, LESS in emerging

markets (perhaps due to sticky wages and high
benefits in advanced countries)

Reinhart and Rogoff, 2009 25

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, 2009 26

13
 On the first point, the discrepancies across estimates of
bail-out costs are large and in, some cases, staggering

Country/beginning year Estimated bailout cost as a percent of GDP

Upper bound Lower bound Difference

Argentina, 1981 55.3 4.0 51.3
Chile, 1981 41.2 29.0 12.2
Ghana, 1982 6.0 3.0 3.0
Japan, 1992 24.0 8.0 16.0
Norway, 1987 4.0 2.0 2.0 1
Philippines 13.2 3.0 10.2
Spain, 1977 16.8 5.6 11.2
Sweden, 1991 6.4 3.6 2.8
US (S&L), 1984 3.2 2.4 0.8

Reinhart and Rogoff, 2009 27

On the second point, government revenues

suffer as the crisis lingers
(more details to follow)

Real Government Reveues and Banking Crises

(annual percent changes)

2
Percent

0
t-3 t-2 t-1 T t+1 t+2 t+3
-1

-2 Bail-out costs are only part of the story why public debt surges
after the crisis
-3

Reinhart and Rogoff, 2009 28

14
 Stimulus packages add to the bill of the
crisis
• Also, governments engage in stimulus packages
involving sometimes wasteful expenditure programs.

• At the height of Japan’s banking crisis in the 1990s,

repaving the streets in Tokyo became a routine
exercise. As a result, Japan’s gross debt-to-GDP
ratio is now nearly 200 percent and a drag on what
once was a vibrant economy.

Reinhart and Rogoff, 2009 29

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 Index=100 in year of crisis
Japan
Norway
Philippines
Korea Average is 186.3
Sweden
Thailand
Average
Spain
Indonesia
Chile
Finland
Colombia

100 150 200 250 300

Reinhart and Rogoff, 2009 30

15
 Banking crises and default cycles on
external debt
• This lull 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, 2009 31

Proportion of Countries with Banking and Debt Crises

Weighted by Their Share of World Income
45 45

40 40
Banking Crises Debt Crises

35 35

30 30
Per cen t of cou n t i es

25 25

20 20

15 15

10 10

5 5

0 0
00
04

08
12
16

20
24
28
32

36
40
44

48
52
56
60

64
68
72

76
80
84
88
92
96

00
04
08
19
19
19

19
19
19
19
19
19

19
19
19

19
19
19
19

19
19
19

19
19
19
19

19
19
20

20
20

Reinhart and Rogoff, 2009 32

16
 Perhaps Ecuador’s latest default
(December 2008) on its external debt is a
sign of things to come…

Reinhart and Rogoff, 2009 33

17