Financial Crisis. Conclusions

Tolstoy famously begins his classic novel Anna Karenina with "Every happy family is alike, but every unhappy family is unhappy in their own way". While each financial crisis no doubt is distinct, they also share striking similarities, in the run up of asset prices, in debt accumulation, in growth patterns, and in current account deficits. The majority of historical crises are preceded by financial liberalization, as documented in Kaminsky and Reinhart (1999).

While in the case of the United States, there has been no striking de jure liberalization, there certainly has been a de facto liberalization. New unregulated, or lightly regulated, financial entities have come to play a much larger role in the financial system, undoubtedly enhancing stability against some kinds of shocks, but possibly increasing vulnerabilities against others. Technological progress has plowed ahead, shaving the cost of transacting in financial markets and broadening the menu of instruments.

Perhaps the United States will prove a different kind of happy family. Despite many superficial similarities to a typical crisis country, it may yet suffer a growth lapse comparable only to the mildest cases. Perhaps this time will be different as so many argue. Nevertheless, the quantitative and qualitative parallels in run ups to earlier postwar industrialized country financial crises are worthy of note. Of course, inflation is lower and better anchored today worldwide, and this may prove an important mitigating factor. The United States does not suffer the handicap of a fixed exchange rate system. On the other hand, the apparent decline in U.S. productivity growth and in housing prices does not provide a particularly favorable backdrop for withstanding a credit contraction.

Another parallel deserves mention. During the 1970s, the U.S. banking system stood as an intermediary between oil exporter surpluses and emerging market borrowers in Latin America and elsewhere. While much praised at the time, 1970s petro dollar recycling ultimately led to the 1980s debt crisis, which in turn placed enormous strain on money center banks. It is true that this time, a large volume of petro dollars are again flowing into the United States, but many emerging markets have been running current account surpluses, lending rather than borrowing.

Instead, a large chunk of money has effectively been recycled to a developing economy that exists within the United States own borders. Over a trillion dollars was channeled into the sub-prime mortgage market, which is comprised of the poorest and least credit worth borrowers within the United States. The final claimant is different, but in many ways, the mechanism is the same. Finally, we note that although this paper has concentrated on the United States, many of the same parallels hold for other countries that began experiencing housing price duress during the 2007, including Spain, the United Kingdom and Ireland. There can be similarities across unhappy families, too.

REFERENCES

Caprio, Gerard and Daniela Klingebiel, Luc Laeven and Guillermo Noguera. 2005.
"Banking Crisis Database". In Patrick Honohan and Luc Laeven (eds.) Systemic Financial Crises. Cambridge: Cambridge University Press.
Dornbusch, Rudiger. 1986. Dollars, Debts, and Deficits. Cambridge, MA: MIT Press.
Kaminsky, Graciela L. and Carmen M. Reinhart. 1999. "The Twin Crises: The Causes of Banking and Balance of Payments Problems".
American Economic Review Vol. 89: 473-500.
Reinhart, Carmen M. and Kenneth S. Rogoff. This Time is Different: Six Centuries of Financial Folly. Forthcoming.
Shiller, Robert. 2005. Irrational Exuberance (Second Edition).
Princeton, NJ: Princeton University Press.
Sutton, Gregory D. 2002. "Explaining Changes in House Prices". BIS Quarterly
Review. (September): 46-55.

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Table of Contents Figure 5 looks at public Useful Links Free Job Search Find Government Jobs Hospitality Jobs UK NY Job Service Online Jobs College Graduate Jobs Mig Welding Jobs NHS Jobs Employer Clerical Office Jobs Church Jobs Stay at Home Jobs Psychology Graduate Jobs Education Jobs Best Careers Part Time Jobs In NY	Conclusions Tolstoy famously begins his classic novel Anna Karenina with "Every happy family is alike, but every unhappy family is unhappy in their own way". While each financial crisis no doubt is distinct, they also share striking similarities, in the run up of asset prices, in debt accumulation, in growth patterns, and in current account deficits. The majority of historical crises are preceded by financial liberalization, as documented in Kaminsky and Reinhart (1999). While in the case of the United States, there has been no striking de jure liberalization, there certainly has been a de facto liberalization. New unregulated, or lightly regulated, financial entities have come to play a much larger role in the financial system, undoubtedly enhancing stability against some kinds of shocks, but possibly increasing vulnerabilities against others. Technological progress has plowed ahead, shaving the cost of transacting in financial markets and broadening the menu of instruments. Perhaps the United States will prove a different kind of happy family. Despite many superficial similarities to a typical crisis country, it may yet suffer a growth lapse comparable only to the mildest cases. Perhaps this time will be different as so many argue. Nevertheless, the quantitative and qualitative parallels in run ups to earlier postwar industrialized country financial crises are worthy of note. Of course, inflation is lower and better anchored today worldwide, and this may prove an important mitigating factor. The United States does not suffer the handicap of a fixed exchange rate system. On the other hand, the apparent decline in U.S. productivity growth and in housing prices does not provide a particularly favorable backdrop for withstanding a credit contraction. Another parallel deserves mention. During the 1970s, the U.S. banking system stood as an intermediary between oil exporter surpluses and emerging market borrowers in Latin America and elsewhere. While much praised at the time, 1970s petro dollar recycling ultimately led to the 1980s debt crisis, which in turn placed enormous strain on money center banks. It is true that this time, a large volume of petro dollars are again flowing into the United States, but many emerging markets have been running current account surpluses, lending rather than borrowing. Instead, a large chunk of money has effectively been recycled to a developing economy that exists within the United States own borders. Over a trillion dollars was channeled into the sub-prime mortgage market, which is comprised of the poorest and least credit worth borrowers within the United States. The final claimant is different, but in many ways, the mechanism is the same. Finally, we note that although this paper has concentrated on the United States, many of the same parallels hold for other countries that began experiencing housing price duress during the 2007, including Spain, the United Kingdom and Ireland. There can be similarities across unhappy families, too. REFERENCES Caprio, Gerard and Daniela Klingebiel, Luc Laeven and Guillermo Noguera. 2005. "Banking Crisis Database". In Patrick Honohan and Luc Laeven (eds.) Systemic Financial Crises. Cambridge: Cambridge University Press. Dornbusch, Rudiger. 1986. Dollars, Debts, and Deficits. Cambridge, MA: MIT Press. Kaminsky, Graciela L. and Carmen M. Reinhart. 1999. "The Twin Crises: The Causes of Banking and Balance of Payments Problems". American Economic Review Vol. 89: 473-500. Reinhart, Carmen M. and Kenneth S. Rogoff. This Time is Different: Six Centuries of Financial Folly. Forthcoming. Shiller, Robert. 2005. Irrational Exuberance (Second Edition). Princeton, NJ: Princeton University Press. Sutton, Gregory D. 2002. "Explaining Changes in House Prices". BIS Quarterly Review. (September): 46-55. back to top
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