Is the 2007 us sub-prime financial crisis so different? an international historical comparison

Abstract

The first major financial crisis of the twenty first century involves esoteric instruments, unaware regulators, and skittish investors. It also follows a well-trodden path laid down by centuries of financial folly. Is the "special" problem of sub-prime mortgages really different? Our examination of the longer historical record finds stunning qualitative and quantitative parallels across a number of standard financial crisis indicators. At this juncture, the book is still open on how the current dislocations in the United States will play out. The precedent found in the aftermath of other episodes suggests that the strains can be quite severe, depending especially on the initial degree of trauma to the financial system (and to some extent, the policy response). The average drop in real per capita output growth is over 2 percent, and it typically takes two years to return to trend. For the five most catastrophic cases (which include episodes in Finland, Japan, Norway, Spain, and Sweden), the drop in annual output growth from peak to trough is over 5 percent, and growth remained well below pre-crisis trend even after three years. © 2008 American Economic Association.