February 8, 2008
Portents of Financial Doom
In his column this morning, Paul Krugman points to a grim analysis of the U.S. economy released last month by Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University. (Rogoff is an adviser to Sen. John McCain’s presidential campaign.)
In their paper, Reinhart and Rogoff list several ways in which the current U.S. situation resembles five previous financial crises that were “associated with major declines in economic performance over an extended period.” The most famous of those past crises is the one Japan suffered for nearly a decade beginning in 1992. Their other four examples are Spain (beginning in 1977), Norway (1987), Finland (1991), and Sweden (1991).
Like Japan et al., the United States has seen:
- A steep rise in housing prices during the four years preceding the crisis. (The U.S. rise was more than twice as large as the average of the other five.)
- A steep rise in equity prices. (Again, the U.S. rise was larger.)
- A large increase in its current account deficit.
- A decline in per-capita growth in gross domestic product. (In this case, the U.S. situation doesn’t appear as bad as in the five predecessors.)
- An increase in public debt. (Here again, the U.S. situation isn’t as bad as in the historical examples – but Reinhart and Rogoff add that “if one were to incorporate the huge buildup in private U.S. debt into these measures, the comparisons would be notably less favorable.”)
Reinhart and Rogoff don’t make any firm predictions of recession, but they offer this: “Given the severity of most crisis indicators in the run-up to its 2007 financial crisis, the United States should consider itself quite fortunate if its downturn ends up being a relatively short and mild one.”
Meanwhile, the econ blogger Barry Ritholtz has a bit of fun with people who spent the mid-oughts denying that the housing bubble was a serious problem.
We can play that game too: See here and here and here.
(Photo by the Flickr user aturkus. Used under a Creative Commons license.)
David Glenn | Posted on Friday February 8, 2008 | PermalinkComments
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When I can refinance my house with a free-closer fixed rate of 5.25%, the recession will be over. That’s how it works folks. It isn’t rocket science and it isn’t Star Wars.
— marci Feb 8, 05:11 PM #
Terribly complex systems are very hard to improve and very hard to destroy, but because nations, of US size, are huge, tweaks at the margin affect millions of lives. We all tremble because of possible job losses, to us, and possible 1/3 decrements in our total income, for the next ten years. We asked for these things by electing Bush twice, now we got these things. We must live with the consequences of our decisions.
— Richard Tabor Greene Feb 8, 05:46 PM #
marci…if that was true then magically the folks that bought my $530k home in 2006 w/ a combined income of $50k will be able to afford it. Yeah right!! It’s an affordability problem, not an interest rate problem.
— in_the_black Feb 9, 12:42 PM #
Main issue is the USA is household debt which went from 50% of GDP to 100% of GDP over the past few years.
Talking about debt without taking about all debts (public, household, business) is just plain stupid.
You can own your house (you have the debt) or rent a government build house (government has the debt), you can ride a government built road (government has the debt) or pay a fee for a private road (business has the debt). Debts can substitute one another according to policy, talking about one in isolation is meaningless.
Economists always talk only about public debt, but it’s not like economists know anything about the economy :).
And MSM never ever talked about household debt doubling.
— Laurent GUERBY Feb 10, 05:47 AM #