Examining the evolution of real per capita GDP around 100 systemic banking crises reveals that a significant part of the costs of these crises lies in the protracted and halting nature of the recovery. On average it takes about eight years to reach the pre-crisis level of income; the median is about 6 ½ years. Five to six years after the onset of the current crisis only Germany and the US (out of 12 systemic crisis cases) have reached their 2007-2008 peaks in per capita income. In a sample that covers 63 crises in advanced economies and 37 in larger emerging markets, more than forty percent of the post-crisis episodes experienced double dips. The analysis summarized here adds another dimension to an observation we have been emphasizing on the basis of our earlier work—namely, that the subprime crisis is not an anomaly in the context of the pre-WWII era. Postwar business cycles are not the right comparator for the severe crises that have swept advanced economies in recent years.The policies of austerity in Europe have failed miserably and many countries there are experiencing a worse slump than during the Depression (austerity in the US has held back the recovery too, but at least there was a little stimulus in 2009, and monetary policy was accommodative). As Reinhart and Rogoff note, higher inflation in Europe (and the US) would help.
Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging-market counterparts. The current phase of the official policy approach is predicated on the assumption that growth, financial stability and debt sustainability can be achieved through a mix of austerity and forbearance (and some reform). The claim is that advanced countries do not need to resort to the more eclectic policies of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. Now entering the sixth or seventh year (depending on the country) of crisis, output remains well below its pre-crisis peak in ten of the twelve crisis countries. The gap with potential output is even greater. Delays in accepting that desperate times call for desperate measures keeps raising the odds that, as documented here, this crisis may in the end surpass in severity the depression of the 1930s in a large number of countries.
Friday, January 31, 2014
Reinhart and Rogoff: Great Recession may "surpass in severity" the Great Depression in many Countries
A new paper from Reinhart and Rogoff: Recovery from Financial Crisis: Evidence from 100 Episodes. Excerpt: