Checking in on Financial Crises Recoveries FTA 2012 Josh Lehner, Oregon Office of Economic Analysis The views expressed here are not necessarily those of the Office of Economic Analysis or the State of Oregon

Great Recession / Little Depression Data through August, 2012

Financial Crises Precursors: Markedly rising asset prices Slowing real economic activity Large current account deficits Sustained debt buildup Public or private

Financial Crises Facts Main Findings Financial Crises Facts U.S. Avg (‘81, ‘90, ‘01) Historical Average Real Housing Prices -5.7% -35.5% Real Equity Prices -29.5% -55.9% Unemployment Rate +3.2% +7.0% Real GDP per Capita -2.3% -9.3% Real Government Debt 27.5% 86.0% Current U.S. Cycle -42.4% -53.4% +5.7% -6.4% 78.0% In honor of time I’m only going to go into some of this information a bit more. One item to note on equity prices is that they do exhibit a v-shaped recovery much of the time, certainly much more so than housing and employment.

42.4% 6.0 Average length of decline, however deeper than average, only 4 countries on this chart experienced worse declines. Runup to the peak was just a bit worse than the Big 5 and was identical to the swedish runnup in the early 90s. Note: While the financial crisis began in 2007, the S&P Case-Shiller peaked in mid-2006 and the calculation used here is based on this peak. The real home price trough was reached in February 2012. Sources: S&P/Case-Shiller Home Price Indices, BLS

US, 2007 78.0% Doesn’t really matter where you set your time frame for 3 years, you are in the 70 – 80% debt increase range. Obviously cumulative change from the beginning is larger than just 78% at this point. RR do not detail the longer run change because it is harder to measure in particular because sometimes after a couple years a country will default on the debt, thus wiping it off the books and making calculations impossible. Bailout costs, lower tax revenue, fiscal policy (stimulus plust automatic stabilizers). Note: To obtain inflation adjusted debt for a full three years the calculation dates chosen here are July 2008 – July 2011. Depending upon which dates one prefers, the percentage increase varies, e.g. Dec 2007 – Dec 2010 the increase is 73 percent. Source: BLS, U.S. Treasury – Debt Held by the Public

Employment Losses Given the history of post WWII recessions in the US, the current level of job loss and slow recovery to date make the current cycle the clear outlier Juxtapose the current US cycle against the Big 5 financial crisis in the developed world plus the Great Depression and the picture looks a bit different That doesn’t necessarily mean the current outcome is acceptable

But We’ve Done Something Right Note: Return to peak duration given in parenthesis. Japan’s employment essentially reached a plateau in 1992, the start date used here is 1992 Q1. Sources: OECD, BLS

More Context for Losses 2-5 yrs leading up to the peak/crisis, employment growth wasn’t that strong, japan and norway were about 2% per year, sweden and the US about 1-1.5%. Speaks to the asset price bubbles more so than anything fundamentally overheating in terms of employment

What Exactly is Different This Time? “We have put a much higher floor on the initial contraction.” - Carmen Reinhart via Ezra Klein, Oct 15th 2012 Monetary and Fiscal Policy Coordinated, global response

Monetary Policy 2006 and 2007: 3 changes per month, post Lehman 45 changes by early 2009 the changes more or less stopped

Monetary Policy (Cont) Source: Federal Reserve Bank of Atlanta

Monetary Policy (Cont) Source: Federal Reserve Bank of Atlanta

Fiscal Policy Select G20 countries. Mixture of tax cuts, infrastructure spending, does not include financial system bailouts Source: Brookings, March 2009 based on IMF and Brookings’ author’s calculations

Conclusion The U.S. is experiencing your “garden-variety severe financial crisis.” However labor markets are performing better than previous episodes. Recovery path has been slow and steady.

Contact Information Standard Contact: (503) 378-4052 joshua.lehner@state.or.us www.oregon.gov/das/oea Social Media: oregoneconomicanalysis.wordpress.com @OR_EconAnalysis 16