Charts of the Day: How Does the Subprime Bust Compare to Past Crises?

Not favorably.

Here are a series of charts from a new paper to be presented at this weekend's annual meeting of the American Economics Association written by Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard. (I'll be down in New Orleans where the Meetings are being held and will be posting throughout the weekend on Odd Numbers.)

This first chart shows how home prices have evolved during the current crisis (blue line), home price changes for all post-WWII bank-centered financial crises (red line), and home price changes for what Reinhart and Rogoff dub the "Big 5" crises (green line). The Big 5 are those financial meltdowns "that are associated with major declines in economic performance for a protracted period" and include Spain in 1977, Norway in 1987, Finland in 1991, Sweden in 1991 and Japan in 1992. (The 'T' in each chart shows the point at which the crisis started with t+1 then meaning one year after the crisis and t-1 meaning one year before and so on.)

The next chart shows the path of equity prices:

This chart shows the current account balance as a percentage of GDP. This time the Big 5 are not plotted:

Here is per-capita GDP growth. The lesson here is that past crises have typically taken the wind out of growth for about two years:

And this chart the evolution of public debt. Here the picture is a little more positive for the current crisis. Public debt is rising more slowly than the average of the other previous financial meltdowns, indicating that the reason for the large current account deficits experienced by the U.S. in recent years is not primarily a result of "just government excess."

The takeaway?

The correlations in these graphs are not necessarily causal, but in combination nevertheless suggest that if the United States does not experience a significant and protracted growth slowdown, it should either be considered very lucky or even more "special" that most optimistic theories suggest. Indeed, given the severity of most crisis indicators in the run-up to its 2007 financial crisis, the United States should consider itself fortunate if it can have post-crisis trajectory parallel to the milder banking crises in the comparison set, as opposed to the much larger growth pauses experiences by Spain, Japan, Sweden, Norway and Finland during their severe financial crises.