200 Years of American Financial Crises

Hard-working white guys preparing to pay benefits for dark-skinned leeches.

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January 7, 2014 5 Comments

By CATHERINE RAMPELL

New York Times

CATHERINE RAMPELL

Dollars to doughnuts.

Shaila Dewan and I had an article on Monday about a study suggesting the American economy was doing reasonably well — at least compared with the aftermath of previous systemic financial crises. Some readers wrote me asking about what the previous crises were and how they’re defined, so here’s some more detail.

Carmen M. Reinhart and Kenneth S. Rogoff, the study’s authors, use apreviously established definition of modern systemic crises as “episodes where there are bank runs, a significant share of nonperforming assets, bank liquidations and large-scale policy intervention to support banks.” The authors argued that the subprime crisis that began in 2007 was a systemic crisis by this definition — and that it was the first such crisis the United States had suffered since the Great Depression.

The table below, taking from a presentation Professor Reinhart gave last Friday, shows the track record of the nine systemic financial crises the United States has experienced in the last two centuries. It lists total peak-to-trough decline in per-capita gross domestic product following a systemic financial crisis, the time it takes for a country to “snap back” to its precrisis peak and whether there was a double-dip recession, among other data points.

Courtesy of Carmen M. Reinhart and Kenneth S. Rogoff.

A couple of observations: This definition of recovery does not capture what the economy “should” look like if it were performing at its full potential. It just shows when the economy returned to its previous peak.

It also does not capture other areas in which the American economy has still not fully recovered — perhaps most saliently, in the job market. Professor Reinhart said historical employment data were spottier, which was why the study focused on per-capita output trends. But her presentation did include some unemployment trends from a smaller sample of systemic crises:

Courtesy of Carmen M. Reinhart and Kenneth S. Rogoff.

As you can see, on average, it has taken 12.8 years before the unemployment rate returned to its precrisis level. We are six years out from the most recent financial crisis, and the unemployment rate is not projected to return to its pre-crisis level for at least a few years.