Finance

How the Current US Economy Parallels Past Financial Crises

Five Nations Have Faced Economic Conditions Similar to the American Economy

Written by Gaurav Bhola, MSM, Managing Editor & Community Manager on February 14, 2008 1:28 pm EST

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Is the US economy in trouble? If it is what can be the extent of the damage? What is unique about the subprime mortgage crisis? Will the elected representatives and traditional media tell the American people the truth or hide the true facts?

Recently, I found an interesting paper titled, Is the 2007 U.S. Sub-Prime Financial Crisis So Different? by Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University.

The authors draw parallels between the current US economic issues with five previous financial woes. These five past crises lasted longer than anyone had anticipated. The nations where the extended crises occurred were:

Spain (1977)
Norway (1987)
Finland (1991)
Sweden (1991)
Japan (1992)

It is abundantly clear that these nations vary from the US in many ways but a closer examination reveals some similar patterns.

The Chronicle of Higher Education did just that. In reviewing the Reinhart and Rogoff paper, they focused on the parallels to the Japan crisis. The Chronicle states that like Japan et al., the United States has seen:

A sharp rise in home prices the four years preceding the financial crisis (The U.S. increase was twice as large as the average of the five nations)
An extreme jump in equity prices (Larger in the U.S.)
A healthy rise in account deficits
A decline in per-capita growth in gross domestic product (In this case, the U.S. situation doesn’t appear as bad as in the five predecessors)
An increase in public debt (Here again, the U.S. situation isn’t as bad as in the historical examples – but Reinhart and Rogoff add that “if one were to incorporate the huge buildup in private U.S. debt into these measures, the comparisons would be notably less favorable”)

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