It is often proclaimed that it normally takes very long time for the economy to recover after a financial crisis. During one of the on-line arguments, I was once challenged to compare the recovery after 2008 crisis with the recoveries from similar financial crises in the past. My opponent offered me a list of recessions – and I arbitrarily chose to analyze the crisis of 1907 (I confess my laziness to check the other ones).
But before wasting a lot of numbers, here is the background for the 1907 recession. According to wikipedia:
The Panic of 1907, also known as the 1907 Bankers’ Panic or Knickerbocker Crisis, was a financial crisis that occurred in the United States when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered bankruptcy. Primary causes of the run include a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors, exacerbated by unregulated side bets at bucket shops. The panic was triggered by the failed attempt in October 1907 to corner the market on stock of the United Copper Company. When this bid failed, banks that had lent money to the cornering scheme suffered runs that later spread to affiliated banks and trusts, leading a week later to the downfall of the Knickerbocker Trust Company—New York City’s third-largest trust. The collapse of the Knickerbocker spread fear throughout the city’s trusts as regional banks withdrew reserves from New York City banks. Panic extended across the nation as vast numbers of people withdrew deposits from their regional banks.
Lets examine the aftermath of the 1907 crisis and how quickly economy recovered under the unobstructed free market economy – and then compare with the recovery under president Obama and welfare socialism.
From 1907 to 1912, the real GDP grew from 801 billion dollars to 857 billion dollars (all are in 2008 dollars). The real growth of the economy was 7% , five years after the start of the financial crisis. The data was downloaded from the website “Many Eyes“.
In 2007, the US GDP was 14,071 billion dollars (in 2007 dollars) according to the website Infoplease. In 2012, the US GDP is expected to be 15,903 billion dollars (in 2012 dollars) according to website Forecasts. When I add the 11% total inflation from 2007 to 2012 (inflation calculator is here), the 2007 GDP in 2012 dollars becomes 15,619 billion dollars. This means that the real GDP growth from 2007 to 2012 was only 1.8%.
In short, the US economy recovered much faster from the 1907 financial crisis than from the 2008 financial crisis. After 5 years, the US economy grew by 7% and 1.8% respectively (1907-1912 and 2007-2012).
Please keep these numbers handy when someone tells you that Obama’s recovery is not unusually slow.
This is why economics is an art, not a science, so many variables and givens were different a century ago. For example, at the time, the US was on a gold standard, meaning there should have been a slight deflationary pressure. However, the cause sounds familiar. Crooks were attempting to rig the system (cornering a marker) and the “bucket shop” trades sound to me like the various complex financial instruments that brought about the real estate bubble.
This is analysis? All you did was look at the rate of recovery. Were the two recessions similar in nature? Were they both international in nature? What were debt levels, private and public entering each recession? (Unless you think debt does not matter.) Were those regional banks solvent, but facing liquidity problems? How many banks failed? What was the percentage? Were the failures occurring across the nation, or limited to New York?
When you compare recessions that are similar, this recovery is about average. Recessions that occur when the private sector is already holding record levels of debt are slower, especially if they are international in nature.
Steve
Steve, The original claim was that financial crisis takes very long to be fixed. One of the proponents of this theory claimed that a number of other crises showed similar slowness of recovery. I arbitrarily chose one and found that the rate of recovery was much faster then than it is under Obama.
Now, you also believe that slowness of Obama’s recovery is normal. Can you yourself point to a financial crises in the US that support this claim? Moreover, you claim that our crisis is international – and yet, the reason why EU is in dire straits has nothing to do with private entities – it is simply the bankruptcy of the welfare state and the euro.
“Now, you also believe that slowness of Obama’s recovery is normal. Can you yourself point to a financial crises in the US that support this claim?”
Normal for a debt driven recession with international reach. The Great Depression comes to mind. The Long Depression also lasted for quite a while. Reinhart and Rogoff have documented a number of crises in other countries with similar features and compard with those, we are actually a bit ahead.
I would expect that recession occurring because a couple of banks tried to corner a market, but the other banks were solvent, would recover fairly quickly. A crisis in which hundreds or thousands of banks were insolvent and we entered with record levels of private debt? I would expect that to take a while to overcome.
Query- In all seriousness, I have rarely seen a conservative address the issue of record levels of private debt that we had entering the crisis. Why is that unimportant? Is there an assumption that there is no natural limit on private debt levels?
Steve
“Normal for a debt driven recession with international reach. ”
That’s a claim on your part. Did EU go down because of US crisis, or independently? Why didn’t it go down in 1907?
“The Great Depression comes to mind. ”
No, it does not. First, the stocks went down. New York’s Bank of the United States collapses two years after the Great Depression commences. Clearly, financial issues came after the stock bubble burst.
“Reinhart and Rogoff have documented a number of crises in other countries with similar features and compard with those, we are actually a bit ahead. ”
You keep talking about this mythical analysis, but you cannot bring any details so we could discuss it. I actually my job, I checked out one Financial Crisis and analyzed how US recovered from it. You did not do any analysis on any US crises – which is where it stands now.
“I would expect that recession occurring because a couple of banks tried to corner a market, but the other banks were solvent, would recover fairly quickly. ”
All the major banks were in trouble. Now, if you don’t like 1907 financial crisis (because it proves Obama’s failure) which other crisis did you look at in US? Stay way from the Great Depression, since it was not a financial crisis.
In short, are you willing to check the data yourself – or you will rely on some mystical analysis done on unspecified crises in the whole world including the Dark Ages?
1) Why would Europe collapse because bankers in the US were trying to corner copper? Remember the relative size of the economies then. Europe has stagnated fro many of the same reasons we did, they also had a real estate bubble and the attendant increase in unsustainable debt, but they also had sovereign debt issues and long term problems associated with a common currency. If you isolate Greece as an example you see that by joining the EU they could immediately borrow at the same rates as Germany. This, for a country that has been in default for half of the last 150 years and with a fundamentally weak economy.
2) Banks were failing in the US at the rate of about 600/year in the lead up to the Depression. It accelerated after 1929. It leveled off after 1933 and the formation of the FDIC. If you have not done so, I would highly recommend reading Friedman and Schwartz.
http://www.econreview.com/events/banks1929b.htm
3) The great Depression started in 1929. Real GDP did not recover until the late 30s.
4) Frankly, I find it bizarre that someone who wants to comment upon economic recovery issues would not have read Reinhart and Rogoff. I assume you ahve the book. If you do, Chapter 14 is the relevant chapter.
In short, I have read the relevant data from multiple sources. Friedman, Kindleberger, Reinhart and Rogoff among others. I have read differing views offered by Taylor et al. When I sum them up I think that if you look at similar recessions, the current recovery is about average or slightly better than expected. my particular bias, since we all have one, is that debt is very important in recovery. When you enter a recession with debt levels that are already at record highs for a country, it takes longer to recover. I would note that you, like most conservatives, do not like to address this.
Steve
Steve, we are going in circles. Just like other liberals, you proclaim that the speed of Obama’s recovery is normal for financial recoveries, but you can quote only one recovery that was worse than Obama’s – the Great Depression. Of course, you forget to mention that Great Depression became the Great Depression because of two major errors on the part of the federal government – the cut off of foreign trade and major contraction of money supply. You cannot bring yourself to quote a second financial crisis in US that showed Obama’s slowness in recovery. I keep asking you to do that, and yet, in spite of your claims of “historic evidence”, you can provide none.
All in all, you behave in accordance with the pattern you told your students to follow – check the data and assumptions if results contradict the preconceived notions. The study that you like supports your political position, so you don’t see necessary to check if their claims are resting on good data.
I picked at random one big financial crisis in US history, analyzed the GDP growth and proved that the recovery was much steeper than the one under Obama. What is stopping you from picking a financial crisis in US (and not the Great Depression, which is a very special case) and see if the recovery was worse or better than Obama’s recovery? Don’t rely on books with a lot of claims, check the raw data, the way I did it. I know it takes more work to do that simply quoting someone, I also realize that you suspect that the results will disprove your views – but isn’t it the right thing to do?
P.S. Greece could borrow money at lower interest rate. By default it was a good thing for the Greek economy. Now, given the Greek government spent all the money they borrowed for Obama’s style welfare – but the root cause of their failure is Obamaism and welfare socialism, not low interest rates.