Monday, March 2, 2009
Carmen Reinhart and Kenneth Rogoff foresaw in a paper they presented to the AEA, comparing our current crisis to past financial crises. Key metrics: 1. Real housing price declines average over 35% over a six year period. Note in other crises, residential real estate was not necessarily a focus of the bubble. Even excluding Japan (which has suffered a 17 year housing price decline) the average is over 5 years. 2. Equity prices fall 55% over three and a half years. 3. GDP falls an average of 9% (read that twice) 4. Unemployment increases 7% over previous norms. 5. Government debt "explodes", increasing an average of 86%, but the cause is typically not a banking industry recapitalization, but maintaining services in the face of collapsing tax revenues and countercyclical measure ex financial system measures.