(UPDATED: Per a request directly from Professor Rogoff's office at Harvard, for attribution purposes I've transposed the names, Reinhart and Rogoff, throughout this diary.)
University of Maryland Economics Professor Carmen Reinhart, along with former International Monetary Fund Chief Economist and Harvard University Economics Professor Kenneth Rogoff, have a very notable OpEd piece in today's Wall Street Journal entitled, "What Other Financial Crises Tell Us."
In a sentence they tell us that history dictates this is going to be a rather ugly and prolonged slump.
Perhaps more importantly, and while they don't say it directly, their historical reference infers that we may very well come close to equalling unemployment levels here in the U.S. that we haven't seen since 1932, at the height of the Great Depression. (More about that in a moment.)
Reinhart's and Rogoff's basis for their findings, conveyed in today's article, were developed from their evaluation of "standard macroeconomic indicators" which they had gleaned during a study they conducted for the National Bureau of Economic Research (NBER) last December.
Their conclusion, in four words: "Expect a long slump."
Their studies included comparisons between the current U.S. meltdown and serious financial crises in Spain (1977), Norway (1987), Finland (1991), Sweden (1991), and Japan (1992), as well as with other banking crises in emerging-market economies.
In their article in today's WSJ, they cite many parallels that "...are nothing short of stunning."
Reinhart's and Rogoff's findings on the length of the current downturn, housing, and equities markets.
Some of their findings:
--the Recession (which they're tacitly telling us is really a Depression), should end sometime between the end of 2009 and September, 2010.
--the housing market will fall another 8%-10%, with a bottom not being reached until at least the end of 2010.
--a "sustained rebound" in the stock market may not occur until 2011, according to "historical benchmarks."
And, perhaps their two scariest comments in today's Wall Street Journal concern expectations as far as ongoing unemployment levels (at least when one reads between the lines on the jobless figures) and government debt are concerned.
Unemployment
With regard to unemployment:
Turning to unemployment, where the new administration is concentrating its focus, pain seems likely to worsen for a minimum of two more years. Over past crises, the duration of the period of rising unemployment averaged nearly five years, with a mean increase in the unemployment rate of seven percentage points, which would bring the U.S. to double digits.
Interestingly, unemployment is a category where rich countries, with their high levels of wage insurance and stronger worker protections, tend to experience larger problems after financial crises than do emerging markets. Emerging market economies do have deeper output falls after their banking crises, but the parallels in other areas such as housing prices are quite strong.
Their mean historical increase in unemployment--and it's important to note that we're talking about Bureau of Labor Statistics' "U3" unemployment levels here--is projected to be roughly seven percent from the start of the downturn. If one approximates unemployment to have been at 4.5% at the start of the current downturn (and I believe that's fairly generous), this indicates an expected unemployment rate of 11.5% at the height of the current downturn would be expected based upon the duo's historical projections now.
However, "U3" unemployment rates are running at levels that are approximately half of current "U6" employment rates. December's "U3" rate was 7.2%. December's "U6" rate was 13.5%.
(Up until a couple of years into the Clinton administration, publicized "U6" rates were the norm, which included folks that had been out of work for more than a year, as well as underemployed members of the workforce--those forced into part-time and significantly lower-paying occupations primarily due to current economic conditions. These two segments are not accounted for in the "U3" rate, which is the "standard" unemployment rate that is widely publicized by the U.S. government now, even though the "U6" rate is also/still updated by the BLS on a monthly basis. John Williams over at Shadow Stats has very concise graphics on this as well as other information that certainly questions the propaganda we hear coming forth from our government's numbers crunchers on a regular basis. Well worth a read if you haven't been there already.)
Government Debt
Perhaps the most stunning message from crisis history is the simply staggering rise in government debt most countries experience. Central government debt tends to rise over 85% in real terms during the first three years after a banking crisis. This would mean another $8 trillion or $9 trillion in the case of the U.S.
Reinhart and Rogoff provide projections and conclusions based upon their historical analyses that also indicate the following:
--The real reason why a country's debt explodes as a byproduct of a Depression is not due to the cost of a government bailout, but is instead the result of diminishing tax revenues.
--Much higher interest rates are the norm once everything's said and done.
--A collapse in "today's bond market bubble" is to be expected.
--An inability to rely upon the U.S. 'exporting itself' out of harm's way due to the reality that this downturn is global in scope.
Most Prudent Disposition of Financial Services/Banking Sector
--accelerated bankruptcy
--temporary receivership of entities, if necessary; and "only then recapitalizing and privatizing them."
Perhaps their final sentence in today's WSJ is the most important of all:
This is not the time for the U.S. to avoid painful but necessary restructuring by telling ourselves we are different from everyone else.