Carmen Reinhart and Ken Rogoff have released a new cross-country empirical study “Banking Crises: An Equal Opportunity Menace“. Their analysis shows that the average fiscal impact of a banking crisis is to increase the level of public debt by 86 percent, such that the public debt nearly doubles. They also show that the typical duration of a housing bust is 4-6 years.
Such cross-country averages are useful benchmarks and it is useful to think about the reasons why the current Irish crisis might deviate from such patterns.
Update: Reinhart and Rogoff have also just released a much shorter companion paper “The Aftermath of Financial Crises” [to be presented at the January AEA meetings in San Francisco].
8 replies on “Banking Crises: An Equal Opportunity Menace”
Hi Philip, that link’s not working. Really excited about this new blog though.
Best,
Stephen
I found the Reinhart-Rogoff chart on debt rather odd; shouldn’t the normalization be relative to GDP or something less arbitrary than the initial value of debt.
In addition to the duration, Reinhart and Rogoff provide figures for the peak-to-trough fall in real house prices in 15 big housing busts. Mean housijng price decline is 35.5 per cent; median 33.3
Another relevant historic indicator for Ireland’s position is the duration of blanket deposit guarantees. Laeven and Valenciana’s banking crisis database (http://www.imf.org/external/pubs/ft/wp/2008/wp08250.pdf) provides information on the duration of fourteen such guarantees. The mean duration was 53.1 months; the median 44.5 months. Can we really sort this out in 24 months?
Median house price decline a third: roughly what we have experienced to date, if reported ‘actual sale’ prices are to be believed. So we have either bottomed out or are going to have a bigger than median, and average, price fall. I’d guess the latter.
Sorry Kevin, Irish national house price index is down only 15% from its peak in nominal terms — about 20% real (ILP-ESRI data). With CPI inflation stalling, expect another eighteen months to two years at this rate of nominal house price decline.
I don’t believe the national house price index…but would not be surprised if, regardless, prices continued to fall for as long as you say.
A nice wrinkle here: although (according to the ILP-ESRI index which Kevin distrusts) nominal house prices peaked in Feb 07, real house prices (CPI deflated) actually peaked in Oct 06, since when the real fall has been 21.2%.
In response to Patrick’s query about the best way to scale public debt, Reinhart and Rogoff argue that it is better to look at the percentage increase in debt, rather than debt-to-GDP, “because sometimes steep
output drops would complicate interpretation of debt–GDP ratios.”
The interpretation difficulty would only arise with change in the debt-to-GDP ratio. They should have expressed the change in debt as a % of average GDP.
(The way they have it a country with modest borrowing can look as if it is hit much worse than a country with huge borrowing, if the modest country starts with a low debt.)