By Christopher Payne | April 27, 2012 11:15AM ET
The U.S. has done better than most economies that have suffered from a financial crisis in the past, perhaps a sign of the Federal Reserve’s better response and the country’s relative lack of red tape to impede business activity.
The financial system almost collapsed after the failure of Lehman Brothers Holding Inc. in late 2008. The crisis erupted as doubts arose about the new and complex financial structures that fed a boom in sub-prime lending. Much of the lending was held off the balance sheets of banks and finance companies that originated the mortgages.
Many features of the crisis were therefore new and specific to 2007 and 2008. Even so, the underlying theme of too much credit and a bubble in asset prices has been played out often and in many places.
Kenneth Rogoff and Carmen Reinhart’s 2009 book, “This Time Is Different,” drives the theme home. The two economists argue that the “this time is different” refrain usually indicates irrational exuberance is taking hold and that a crisis is imminent.
The book’s historical data, together with data from the Congressional Budget Office and data compiled by Bloomberg Government, provide an opportunity to monitor the progress of the U.S. economy through the crisis, and to compare it with earlier crises.
– House prices: Based on data from 21 crises, the average decline in house prices after a financial crisis is 35.5 percent over 6 years. According to the Case-Shiller index of 20 metropolitan areas, house prices in the U.S. have fallen by 34.5 percent in 5.5 years.
– Equity prices: Based on 23 crises, the average decline in the stock market from its highest level pre-crisis to the trough is 55.9 percent over 3.4 years. In the current crisis, the S&P 500 index of companies fell by 56.8 percent in 1.5 years.
– Unemployment: Based on 15 crises, the average increase in the unemployment rate is 7 percentage points over 4.8 years. In the current crisis, unemployment in the U.S. has risen by 5.4 percentage points in 1.5 years.
– Gross domestic product: Based on 15 crises, the average decline in GDP is 9.3 percent over 1.9 years. In the current crisis, GDP fell by 5.1 percent in 1.5 years.
– Public debt as a percentage of GDP: Based on 13 crises, public debt increased by an average of 86.3 percent in 3 years. Debt held by the public in the U.S. has increased from $5.0 trillion at the end of fiscal year 2007 to $10.1 trillion at the end of fiscal year 2011.
On three of the given measures, the U.S. economy reacted to the financial crisis in line with historical averages. The increases in public debt are also similar to the average experience after earlier crises.
Where the U.S. stands out is in the speed at which it has reached the trough in the latest crisis.
The Federal Reserve could claim credit for actions after the failure of Lehman Brothers to stop further major bank failures. On the other hand, economists such as John Taylor of Stanford University and Anna Schwartz, co-author with Milton Friedman of the influential “A Monetary History of the United States 1860-1963,” have argued that the Fed worsened the crisis because of weak actions before the failure of Lehman.
There are many other possible explanations for the U.S. performing better after the 2007-2009 crisis than many crisis-hit economies have done in the past. U.S. workers are highly skilled and the country puts a high cultural value on enterprise. That means less red tape facing entrepreneurs and businesses. The differences may also explain why passage from peak to trough has been quicker in the U.S. The increase in unemployment, for instance, took place over 1.5 years, much less than the average of 4.8 years.
Financial crises share many features even when the details are particular to each historical circumstance. These underlying patterns become apparent when historic data are used for analysis and comparison.
Analysts in search of lessons may find useful conclusions gained from comparing U.S. performance in the recent crisis with various countries’ performances historically after a financial crisis.
Recent U.S. economic data, viewed in the context of Reinhart and Rogoff’s historical analysis, suggests that the U.S. faced the same problems in the crisis than many economies in the past, and managed them better.
(Christopher Payne is a Bloomberg Government economic analyst. The views expressed are his own.)