Newsweek: The history of banking crises indicates this one may be far from over

[marmar]

Don’t Buy the Chirpy Forecasts
The history of banking crises indicates this one may be far from over.

By Kenneth Rogoff and Carmen Reinhart | NEWSWEEK
Published Mar 21, 2009


The good news from our historical study of eight centuries of international financial crises is that, so far, they have all ended. And we confidently predict this one will end, too. We are just not quite so sure it will be nearly as soon as the chirpy forecasts coming from policymakers around the globe. The U.S. administration, for example, is now predicting that growth will renew in the latter part of this year and continue at a brisk pace of 4 percent for several years thereafter. Is this a fact-based forecast or wishful thinking?

A careful look at the international evidence on severe banking crises suggests a far more cautious assessment. The recessions that follow in the wake of big financial crises tend to last far longer than normal downturns, and to cause considerably more damage. If the United States follows the norm of recent crises, as it has until now, output may take four years to return to its pre-crisis level. Unemployment will continue to rise for three more years, reaching 11–12 percent in 2011.

The news on housing prices and the stock market is arguably a little better, mainly because there has been so much damage already. The typical fall in inflation-adjusted stock prices is 55 percent, a benchmark the U.S. has more or less achieved. The typical decline in housing prices is 36 percent. According to some indicators, inflation-adjusted housing prices have already fallen roughly 30 percent. The bad news is that these down price cycles typically last for several years. So, even if the big hit on stocks and house prices has come already, the bottom might not be reached until the end of 2010.

These forecasts may seem somber, but so far the U.S. experience has mirrored past deep banking crises around the world to a remarkable extent. In our forthcoming book, "This Time Is Different: Eight Centuries of Financial Folly," we compare the U.S. crisis with earlier banking-crisis episodes in Spain, Norway, Finland, Sweden, Japan, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Thailand, Colombia and Argentina over the past three decades. It may seem like hyperbole to compare the United States with emerging markets, but hard evidence suggests it is not. True, rich countries are far less likely to face the prospect of sovereign default. (Why bother? Since rich countries can generally issue public debt in their own currency, they always have the option of reducing its value through inflation.) But, contrary to popular belief, banking crises tend to be far more of an equal opportunity menace. Indeed, a failure to recognize the historical vulnerability of rich countries to financial crises lies behind the incredible conceit of Anglo-American policymakers that their gold-plated financial systems were invulnerable. ........(more)

The complete piece is at: http://www.newsweek.com/id/190340?from=rss

[kentuck]

1. These are two credible professors...

One from Harvard and one from Maryland. I think they are closer to the truth than anything we have heard thus far.

[aquart]

2. No shit.

Ten years. At least. Because people just looking at the engulfing financial tsunami aren't factoring the huge payouts we'll be making for extreme weather, as well.

[steven johnson]

3. I agree, the Japanese Banking Crisis Took 10 Years to Resolve

The Japanese banking crisis only ended when the government stopped pouring money into the insolvent banks by auditing them rigorously, getting rid of the old management and spinning off the viable parts to other institutions.

[Possumpoint]

6. Do You Just Think

We might need to do the same thing here instead of stringing out the problem?

[chill_wind]

4. Well we'll just have to run out and hire another WS CE in rose-glass colored denial for The Treasury

Oh wait! We just did.

Citigroup’s chief economist is leaving the bank to join the Treasury department, the firm told employees in an internal memorandum on Tuesday.

Lewis Alexander, who had spent nine years in Citi’s economics research group, will work on domestic financial issues, Andrew Pitt, the head of Citi’s investment research, said in the memo, which was obtained by DealBook.

Before joining Citi, Mr. Alexander worked in the Federal Reserve’s international finance division.

To: Citi Investment Research & Analysis
From: Andrew Pitt
Date: 17 March, 2009
Re: Lewis Alexander

After over nine years in Citi’s Economics research group, most recently as Chief Economist, Lewis Alexander is leaving the firm to return to Washington. Lewis is joining the U.S. Treasury to work on domestic financial issues. Prior to joining Citi in 1999, Lewis had a long career in the Division of International Finance of the Federal Reserve Board.

more

http://dealbook.blogs.nytimes.com/2009/03/18/citis-chief-economist-to-join-treasury-dept/

Mr. Alexander will be a counselor to Treasury Secretary Timothy Geithner.

Mr. Alexander's role as Citigroup's chief economist didn't entail significant management responsibilities. But his optimistic economic forecasts colored executives' views that the U.S. was unlikely to face a prolonged slump.

"I think that's not going to spill over more broadly into the economy, and so I think we're going to have a normal kind of housing cycle that's going to last through the middle of this year," Mr. Alexander said in a Feb. 28, 2007, interview on PBS.

In the past five quarters, Citigroup has booked a total of more than $37 billion in net losses, largely stemming from the company's overexposure to the U.S. real-estate sector.

http://online.wsj.com/article/SB123732747181462245.html

[TexasObserver]

5. It will be five years before banking is sound, and even then ...

... and even then, the repercussions of the collapse will be felt for several more years.

The 1987 collapse was bad, but not this bad. It was 1993 before things really looked up. They had a big bailout. The FDIC and Fed did their things. RTC was created and dealt with security for debt gone bad. While the words used to describe the events are different, the dynamic was essentially the same: boom times led to easy credit and inflated values, and when the air was let out, banks and S&Ls failed in huge numbers.

We'll go through the same now, and it will take a while. We didn't get here in 2 years and we're not getting out in only 2 years.

[Tierra_y_Libertad]

7. Speaking of "chirpy" forecasts...

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x5308935

[Ex Lurker]

8. Their forecast may even be optimistic

in which case we may be looking at electoral losses in 2010 and a new president in 2012. Not Obama's fault he inherited the shittiest of hands, but that's the way politics goes. I hate to be pessimistic, but there needs to be some significant sign of a turnaround by this time next year or the Rethugs will take advantage.