Financial crises at a glance: bank crashes, geopolitics and how long til the rebound?

Here are two illuminating graphics from the Financial Times and Economist. First up is a figure from Martin Wolf’s latest column in the FT, itself based on a new paper by Carmen Reinhart and Kenneth Rogoff, showing the proportion of the world economy affected by banking crises, from 1900-2008. Its main features are a spike around the Great Depression of the 1930s, then a period of tranquility from 1940-1975 – an era of strong and stable growth and the post-war ‘Keynesian consensus’. All that comes to an end in the 1970s, when the world enters the financial chaos of the modern era, after the US suspended dollar-gold convertibility in 1971, effectively ending the post war period of stable exchange rates. Casino capitalism was born, as capital flows boomed and became more volatile, provoking regular financial crises. After a brief lull in the boom years of the early noughties, banking crises are now surging and look like they could surpass the level of the Great Depression.

The graph brings home the cost of excessive deregulation of capital and financial markets – the last three decades have seen a series of banking crises, each of which destroys GDP and leaves governments North and South saddled with substantial burdens as they are forced to nationalise bank debts to get financial systems working again. Question: what would it take to return us to the 1940-75 status quo ante?

The second graph is from this week’s Economist. It shows the % share of world growth accounted for by developed and emerging economies. First the well known part – led by China, emerging economies have been accounting for ever greater chunks of world growth, overtaking the rich world around the turn of the millennium. But the interesting numbers come at the end – even though both rich and emerging economies are being hit by the downturn, the rich economies are being hit harder – the result has been to accelerate the move of the economic centre of gravity Southwards. This year emerging markets are forecast to account for 80% of global growth. An economic tectonic shift of that order is highly likely to precipitate a matching political shift – maybe the G20 will eclipse the G8; perhaps regional financial mechanisms, such as Japan’s proposal for an Asian Monetary Fund, will eventually replace global institutions like the IMF. A shock of this magnitude is bound to trigger change on a grand scale.

 

Also based on the Economist’s coverage of the Reinhart and Rogoff paper is the table below which pulls together the track record of 14 severe banking crises since 1929. Topline message? On average GDP takes two years to recover, unemployment nearer five. Looks like Enver Hoxha was right (see last post). Sorry.

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Comments

3 Responses to “Financial crises at a glance: bank crashes, geopolitics and how long til the rebound?”
  1. Iris Reyna

    Could you explain the reason why “even though both rich and emerging economies are being hit by the downturn, the rich economies are being hit harder”? Economist in the south say that developing countries end up paying the bill sooner or later as developed countries have the power to change the rules in their favour.

  2. Ken Smith

    I’m old enough to remember some of the 14 severe banking crisis since 1929 and I don’t remember unemployment taking 5 years to recover. Just by the maths 5×14 would be 70 years out of the last 80. It’s hard to tell for the UK economy as I guess it’s swamped by women entering the paid workforce over the last 80 years but a better question would be “In how many years in the last 80 was employment less than the year before ?

  3. Duncan

    Dear Iris
    sorry for delay in replying – the reason for saying this is that all the projections for GDP are that the North is going into recession, whereas the developing world will keep growing, only more slowly. For example Global Economic Prospects 2009 sees growth across developing countries falling from 7.9% in 2007 to 4.4% in 2009, whereas growth in the rich countries will be negative.

    Dear Ken
    the difference is that most of these 14 case studies were national, not global, so the 5 year periods would have been overlapping, not sequential. But that may also point to the difficulty of generalizing to global downturns from national experiences

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