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What’s So Special About the Subprime Mess?

The answer, according to the economists Carmen Reinhart and Kenneth Rogoff, is … “not much.” Here’s what they describe in a new NBER working paper about the causes and consequences of the current subprime crisis:

Our examination of the longer historical record finds stunning qualitative and quantitative parallels to 18 earlier post-war banking crises in industrialized countries. Specifically, the run-up in U.S. equity and housing prices (which, for countries experiencing large capital inflows, stands out as the best leading indicator in the financial crisis literature) closely tracks the average of the earlier crises.

As to the differences between this crisis and others, they offer some good news and some bad:

Among other indicators, the run-up in U.S. public debt is actually somewhat below the average of other episodes, and its pre-crisis inflation level is also lower. On the other hand, the United States[‘s] current account deficit trajectory is worse than average.

On the question of whether the current crisis will deepen and cause widespread financial harm, or level out and lead to recovery, Reinhart and Rogoff are — unlike every financial pundit you see on TV these days — mercifully not tossing out bold predictions:

Much will depend on how large the shock to the financial system proves to be and, to a lesser extent, on the efficacy of the subsequent policy response.

I am continually surprised at how widespread the perception is that our economy is in a complete nosedive, despite much evidence to the contrary. I recently saw a poll in which 12 percent of Americans said that we are currently in a depression, not just a recession.

If I were an insurance salesman — any type of insurance at all — I would like to find those 12 percent. I think they would be terrific customers.