Reinhart and Rogoff: Is the 2007 US Sub-Prime Financial Crisis so Different?

REINHART, CM, and K ROGOFF. 2008. Is the 2007 US Sub-Prime Financial Crisis so Different? an International Historical Comparison. NBER Working Paper.

This paper explores the relationship between the sub-prime mortgage crisis and historical patterns that emerge before financial crises. The authors find that there is a great deal of parallels between these emerging patterns and other crises. Particularly, they find that large gluts in equity and housing prices are indicative of a pending crisis. The authors then engage in a historical comparison.

The results of the comparison are as follows: house prices followed similar patterns with other crises, though they rose more acutely and seem to be falling even more rapidly; real equity prices have yet to fall substantially as has been the case with other financial crises, though the growth trend is very sharply upward; the US current account balance is much less balanced than the average for other countries entering financial crises; real GDP growth per capita is following a similar, slightly contracted, trend as have other countries as they approach financial crises; public debt has also risen consistently, as was the case with previous crises.

The authors conclude by noting that all financial crises are surely different, and that most crises are preceded by a period of financial liberalization. While they note that there has not been substantial juridical liberalization, financial freedom can be seen in the removal of certain barriers and regulatory frameworks.

The authors also paralell the 1970s petro-dollar recycling that took place, and how that led to the debt crisis of the 1980s, where cheap money was freely given to countries. In the 1990s, however, the unsuitable debtor is not a de facto nation, but rather a slice of American borrowers who cannot afford to be home owners.