Is the U.S. Sub-Prime Financial Crisis So Different? An International
Historical Comparison
Carmen M. Reinhart
University of Maryland and the NBER
and
Kenneth S. Rogoff
Harvard University and the NBER
REINHART: School of Public Policy and Department of Economics, 4105 Van
Munching Hall, University of Maryland, College Park, Maryland 20742; email:
creinhar@umd·edu; and ROGOFF: Economics Department, Littauer Center, Harvard
University, Cambridge MA 02138-3001; email: krogoff@harvard·edu. We would like to
thank Vincent Reinhart and Alan Taylor for their helpful comments.
The first major financial crisis of the 21st century involves esoteric instruments,
unaware regulators, and skittish investors. It also follows a well-trodden path laid down
by centuries of financial folly. Is the "special" problem of sub-prime mortgages this time
really different?
Our examination of the longer historical record, which is part of a larger effort on
currency and debt crises, finds stunning qualitative and quantitative parallels across a
number of standard financial crisis indicators. To name a few, the run-up in U.S. equity
and housing prices that Graciela L. Kaminsky and Carmen M. Reinhart (1999) find to be
the best leading indicators of crisis in countries experiencing large capital inflows closely
tracks the average of the previous eighteen post World War II banking crises in industrial
countries.
So, too, does the inverted v-shape of real growth in the years prior to the
crisis. Despite widespread concern about the effects on national debt of the early 2000s
tax cuts, the run up in U.S. public debt is actually somewhat below the average of other
crisis episodes. In contrast, the pattern of United States current account deficits is
markedly worse.
At this juncture, the book is still open on the how the current dislocations in the
United States will play out. The precedent found in the aftermath of other episodes
suggests that the strains can be quite severe, depending especially on the initial degree of
trauma to the financial system (and to some extent, the policy response). The average
drop in (real per capita) output growth is over 2 percent, and it typically takes two years
to return to trend.
For the five most catastrophic cases (which include episodes in
Finland, Japan, Norway, Spain and Sweden), the drop in annual output growth from peak
to trough is over 5 percent, and growth remained well below pre-crisis trend even after
three years. These more catastrophic cases, of course, mark the boundary that
policymakers particularly want to avoid.