Benchmarking the Financial Crisis - Part 2

In December of last year, Carmen Reinhart and Kenneth Rogoff published an article comparing the current financial crisis to historical financial crises from around the world. I summarized their findings in a previous blog entry. Yesterday, Barry Eichengreen and Kevin O'Rourke published a similar article comparing the current crisis to the Great Depression. Such comparisons have become commonplace. They've generally found that the current crisis has been mild compared to the Great Depression...in the United States. Eichengreen and O'Rourke depart from the usual analysis by comparing the two crises at a global level. Their findings are sobering.

Using the peak in global industrial production (i.e., April 2008) as a starting point, Eichengreen and O'Rourke found that:

• Global industrial production has fallen by over 10%. Thus far, it has more or less followed the same trajectory as in the Great Depression.
• Global stock prices have fallen by 50%. In contrast, stock prices had fallen by only about 10% in the first twelve months following the 1929 peak in industrial production.
• Global trade has fallen by over 15%. Again, the rate of contraction is much greater than in the first twelve months of the Great Depression, when trade fell by only about 5%.

The authors point out that global policy responses have thus far been much more aggressive (and appropriate) than in the Great Depression. Evidently policy makers have learned from past mistakes. Let's hope that we get better results than the last time.