Tags: Reinhart | Rogoff | Crisis | Recovery

Reinhart and Rogoff: Five Years After Crisis, No Normal Recovery

Tuesday, 03 April 2012 01:12 PM

While recent U.S. economic reports have shown some firming, the current expansion isn’t likely to accelerate because of excessive debt, economists Carmen Reinhart and Kenneth Rogoff wrote in an op-ed for Bloomberg View.

“Considering the huge and rising debt levels in the U.S., and the very limited extent to which deleveraging has taken place in the household and government sectors, we would be pretty happy to see a few straight years of trend growth, even if that falls short of the V-shaped recovery that some see around the corner,” they wrote. “It might happen, but the historical evidence is at best mixed.”

Reinhart and Rogoff are authors of the 2009 book, “This Time Is Different: Eight Centuries of Financial Folly,” which found a “deep and lasting effect” of financial crises on output, employment and asset prices. The authors traced similarities among such crises in 66 countries dating back to Medieval times, including sovereign defaults, banking panics and inflationary surges.

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The two economists disagreed with a Federal Reserve working paper by Greg Howard, Robert Martin and Beth Anne Wilson, dated November 2011, which found “little or no difference in the pace of output growth across types of recessions.” The researchers of the Fed paper used an “idiosyncratic interpretation of business-cycle dynamics” by dating the recoveries sometimes years later based on when output bottomed out rather than when the financial crises occurred, Reinhart and Rogoff wrote.

Crises Aftermath

“On the point of whether the aftermath of financial crises plays out differently than normal recoveries, the evidence isn’t mixed at all,” Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington, and Rogoff, a Harvard University professor, wrote. “As our studies and many others have confirmed — including the misconstrued recent Fed study — financial crises leave behind deep recessions of long duration and considerable volatility.”

Even though household debt levels have dropped in the past few years, they continue to restrain the U.S. recovery, Reinhart said on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene.

“The household in particular continues to be worrisome,” she said. “The private debt issue remains a dark cloud not just in the U.S. but even more so in Europe, where we are seeing not just an absence of a recovery but what is looking more like a double-dip” recession.

The economists cited recent International Monetary Fund research which found that recoveries in which credit is growing rapidly and house prices are appreciating tend to be stronger.

“U.S. housing prices are still falling in many areas, and credit to small- and medium-size businesses is restrained,” Reinhart and Rogoff wrote. “We hope for better ahead, but let’s not misconstrue the lessons of the past.”

Budget Deficit

The U.S. government’s budget deficit widened more than forecast in February as revenue fell. The gap expanded 4.1 percent to $231.7 billion from a $222.5 billion shortfall in February 2011, according to Treasury Department data released March 12 in Washington.

Reinhart and Rogoff wrote that it is an “interesting question” whether economies, in the wake of financial crises, will ever return to the earlier trajectory of trend gross domestic product growth. The trend path of GDP matters in part because policy makers may overstate the slack in the economy, leading to potential policy mistakes, St. Louis Fed President James Bullard said in recent speeches.

“Much work remains to be done” on the issue, though “even in the best case, it is certainly not a matter of a couple of years as would be true after a normal recession.”

In an April 2011 press conference, Fed Chairman Ben S. Bernanke said he agreed with Reinhart and Rogoff’s finding “that as an historical matter that recoveries following financial crises tend to be relatively slow.”

“Problems in credit markets,” housing and slow response by policy makers might all contribute to that, he said. “There are a number of factors which are holding the recovery back,” he said. “We haven’t allowed that historical fact to dissuade us from doing all we can to support a strong recovery.”

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Tuesday, 03 April 2012 01:12 PM
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