Our comparisons employ a small piece of a much larger and longer historical data set we have constructed (see Reinhart and Kenneth S. Rogoff, 2008.) The extended data set catalogues banking and financial crises around the entire world dating back to 1800 (in some cases earlier). In order to focus here on data most relevant to present U.S. situation, we do not consider the plethora of emerging market crises, nor industrialized country financial crises from the Great Depression or the 1800s. Nevertheless, even in the smaller sample considered in this paper, the refrain that "this time is different" syndrome has been repeated many times.
First come rationalizations. This time, many analysts argued, the huge run-up in
U.S. housing prices was not at all a bubble, but rather justified by financial innovation
(including to sub-prime mortgages), as well as by the steady inflow of capital from Asia
and petroleum exporters. The huge run-up in equity prices was similarly argued to be
sustainable thanks to a surge in U.S. productivity growth a fall in risk that accompanied
the "Great Moderation" in macroeconomic volatility.
As for the extraordinary string of outsized U.S. current account deficits, which at their peak accounted for more than twothirds
of all the world’s current account surpluses, many analysts argued that these, too,
could be justified by new elements of the global economy. Thanks to a combination of a
flexible economy and the innovation of the tech boom, the United States could be
expected to enjoy superior productivity growth for decades, while superior American
know-how meant higher returns on physical and financial investment than foreigners
could expect in the United States.
Next comes reality. Starting in the summer of 2007, the United States
experienced a striking contraction in wealth, increase in risk spreads, and deterioration in
credit market functioning. The 2007 United States sub-prime crisis, of course, has it
roots in falling U.S. housing prices, which have in turn led to higher default levels
particularly among less credit worthy borrowers. The impact of these defaults on the
financial sector has been greatly magnified due to the complex bundling of obligations
that was thought to spread risk efficiently. Unfortunately, that innovation also made the
resulting instruments extremely nontransparent and illiquid in the face of falling house
prices.
As a benchmark for the 2007 U.S. sub prime crisis, we draw on data from the
eighteen bank-centered financial crises from the post-War period, as identified by
Kaminsky and Reinhart (1999) and Gerard Caprio et. al. (2005):
These crisis episodes include:
The Five Big Five Crises: Spain (1977), Norway (1987), Finland (1991),
Sweden (1991) and Japan (1992), where the starting year is in parenthesis.
Other Banking and Financial Crises: Australia (1989), Canada (1983),
Denmark (1987), France (1994), Germany (1977), Greece (1991), Iceland
(1985), and Italy (1990), and New Zealand (1987), United Kingdom
(1974, 1991, 1995), and United States (1984).
The "Big Five" crises are all protracted large scale financial crises that are
associated with major declines in economic performance for an extended period. Japan
(1992), of course, is the start of the "lost decade", although the others all left deep marks
as well.
The remaining rich country financial crises represent a broad range of lesser
events. The 1984 U.S. crisis, for example, is the savings and loan crisis. In terms of
fiscal costs (3.2 percent of GDP), it is just a notch below the "Big Five". Some of the
other 13 crisis are relatively minor affairs, such as the 1995 Barings (investment) bank
crisis in the United Kingdom or the 1994 Credit Lyonnaise bailout in France. Excluding
these smaller crises would certainly not weaken our results, as the imbalances in the runsup
were minor compared to the larger blowouts.