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Getting Through the Long Post-Crisis Hangover

As the effects of the financial crisis finally recede, so do our chances of another disaster. Or maybe not.

While the financial crisis raged around them in 2008, economists Carmen N. Reinhart and Kenneth S. Rogoff were hard at work assembling historical tables and charts. In 2009 they published page after page after page of them in the wonky book “This Time Is Different: Eight Centuries of Financial Folly,” which became an unlikely bestseller.

The book’s basic message (other than wow, that's a lot of tables and charts!) can be summed up as:

  1. Financial crises happen, and have been happening for a long time whenever governments, banks, businesses and/or individuals run up too much debt. The 2008 crisis fits the pattern.
  2. These financial crises are followed by economic hangovers that are much deeper and longer-lasting than garden-variety recessions.
  3. Eventually, things get better.

I pulled my copy of the book off the shelf after Scott Winship, a social scientist now working for the Joint Economic Committee of the U.S. Congress, asked this on Twitter after Friday's strong jobs report:

Yeah, I think we can give that one to Reinhart and Rogoff.

As you may remember, the two -- who are both professors at Harvard University 1  -- found themselves in a brand-tainting controversy in 2013 when a group of economists at the University of Massachusetts at Amherst redid the calculations in a 2010 Reinhart-Rogoff paper that linked government debt of above 90 percent of gross domestic product to slower growth, and found that once you corrected for "coding errors, selective exclusion of available data, and unconventional weighting of summary statistics," the effect disappeared.

But just because that particular Reinhart-Rogoff conclusion didn't quite hold up shouldn't disqualify the entire oeuvre. And it hasn't: The notion that a financial crisis hangover explains most of what we've been going through has some influential adherents. Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, the global central bankers' organization, devoted a whole speech to it in Washington last week. 2 A sample:

The world has been haunted by the inability to restrain financial booms that, once they turn to bust, cause huge and long-lasting economic damage -- deep and protracted recessions, weak and drawn-out recoveries, and persistently slower productivity growth. Such outsize financial cycles are best characterized by the joint fluctuations in credit and asset prices, especially property prices, as risk-taking ebbs and flows. And they tend to be much longer than “traditional” business cycles (say, 15-20 years rather than eight-10).

This view can be seen in part as a corrective to the argument made by a few conservative economists -- I'm thinking of Stanford's John Taylor in particular -- that the weakness of the post-crisis recovery in the U.S. was due mainly to, in Taylor's words, "regulatory expansion and policy uncertainty."

Borio, though, presents his "financial cycle drag" hypothesis as an alternative to the gloomy "secular stagnation" theories advanced by former Treasury Secretary Lawrence H. Summers, among others. To oversimplify wildly: In a world of secular stagnation, we have financial bubbles and busts because the underlying rate of economic growth is so slow. In a world of financial cycle drag, we have slow economic growth because financial volatility is weighing on the economy.

Rogoff himself -- who uses the name "debt supercycle" for what Borio is getting at with "financial drag" -- described the relationship between the two in a 2015 essay:

All in all, the debt supercycle and secular stagnation view of today’s global economy may be two different views of the same phenomenon, but they are not equal. The debt supercycle model matches up with a couple of hundred years of experience of similar financial crises. The secular stagnation view does not capture the heart attack the global economy experienced; slow-moving demographics do not explain sharp housing price bubbles and collapses. 

Ultimately, the debt/financial view seems more more hopeful. As the impact of the financial crisis fades, the prospects for growth improve -- presuming we don't get into another financial crisis. Here's Borio again:

The financial cycle drag hypothesis does assert that the headwinds from the financial bust, while very persistent, are temporary. Moreover, one may also be skeptical, as I am, of the technological pessimism expressed by some observers. Even so, it is hard to be that optimistic if one considers the “risky trilogy" that is to a significant extent the legacy of the successive financial booms and busts the world has seen: productivity growth that is unusually low, global debt levels that are historically high, and a room for policy maneuver that is remarkably narrow.

So, yay, we're not fated to be stuck with slow economic growth! But we may get it anyway.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

  1. Rogoff has been there since 1999; Reinhart, a former Bear Stearns chief economist, came from the Peterson Institute for International Economics in 2012.

  2. Borio has been doing research on this topic since at least 2001.

To contact the author of this story:
Justin Fox at

To contact the editor responsible for this story:
Brooke Sample at

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