The Financial Crisis at the Economics Convention

I’m at the annual economics conference in San Francisco. I’ve been going to these things, on and off, since I was a grad student in the early 1980s. Because of the combination of the financial crisis and the new president, there’s a sense of urgency here which I don’t recall from the past, even during previous downturns.

So far, the star of the first day of the conference has been Ken Rogoff of Harvard, with a paper in the morning, being the featured speaker at lunch, and then participating in the afternoon on a panel on the crisis. His message is a gloomy one: There’s a lot further down to go.

He compared the U.S. crisis to the big financial disasters in the past, and suggested that we are following much the same path. In each of these, the devastation was enormous.

Here’s some historical data he showed at lunch, taken from his new paper with Carmen M. Reinhart, entitled “The Aftermath of Financial Crises.” (I copied the data from his slide, and then checked it against his paper). The data represents the average from a large number of historical financial crises.

Rogoff: Past Financial Crises
Peak-to-trough change Duration (in years)
Home Prices* -36% 6
Equity* -56% 3.4
Unemployment Rate** 7 4.8
GDP per capita* -9.3% 1.9
Government debt* 86% ***
* Adjusted for inflation
**Rise in percentage points
*** Three years after the crisis started
Data: Reinhart and Rogoff

Rogoff made particular note of the enormous rise in government debt in a crisis. Historically, government debt balloons not just because of the cost of bailouts,but because of the fall in tax revenues and rise in government spending.

A couple more Rogoff points: At lunch he predicted “what we will see next is a wave of sovereign defaults.” At the afternoon panel, he added “We’ll be seeing second and third bailouts of the big banks.”

Finally, Rogoff observed at lunch that “A depression is to economists like a plague is to morticians.” I’m not quite sure what that means, but it doesn’t sound good.

Before it's here, it's on the Bloomberg Terminal.