The First Global Crisis of the Twenty-first Century: Was it Predictable?

25
The First Global Crisis of the The First Global Crisis of the Twenty-first Century: Twenty-first Century: Was it Was it Predictable? Predictable? Saktinil Roy Athabasca University

description

The First Global Crisis of the Twenty-first Century: Was it Predictable?. Saktinil Roy Athabasca University. Introduction. The US Subprime Crisis by now a global crisis “unprecedented” since the Great Depression However - PowerPoint PPT Presentation

Transcript of The First Global Crisis of the Twenty-first Century: Was it Predictable?

Page 1: The First Global Crisis of the Twenty-first Century: Was it Predictable?

The First Global Crisis of the Twenty-first The First Global Crisis of the Twenty-first Century: Century: Was it Predictable? Was it Predictable?

Saktinil RoyAthabasca University

Page 2: The First Global Crisis of the Twenty-first Century: Was it Predictable?

IntroductionIntroductionThe US Subprime Crisis by now a global crisis “unprecedented” since the Great

Depression

However some authors suggest: historical bank-

centered crises in several other parts of the world could foretell the story

My research reviews and confirms this proposition

Page 3: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Introduction (contd...)Introduction (contd...)In particular, Reinhart & Rogoff (2008a) find “striking” similarities between post world-war

banking crises in advanced economies and the US subprime crisis

consider a few crisis indicators and suggest certain changes in their behaviour as “precursors” of crisis

Reinhart & Rogoff (2008b) arrive at the same conclusion with an extended

database that goes back to 1800 and includes a core sample of sixty-six countries

Page 4: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Introduction (contd...)Introduction (contd...)But the questions really are

Could we actually “predict” the subprime crisis with historical experiences?

How well in advance?

Which country experiences would have given the best prediction?

Which indicators are most relevant?

Page 5: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Introduction (contd...)Introduction (contd...)Some other observations Shiller (2008):

The recent housing boom in the United States was lot more pronounced in the low-price tier than in the high-price tier.

After the bubble burst the sharpest fall in house prices was observed in the low-price market

Krugman (2007): Increase in risky mortgage debts in the United States partly

as an effect of protracted increase in income inequality over the last three decades

Iacoviello (2008) suggests a similar causality: Examines the US time series of income distribution and

household debt from 1963 through 2003 Finds that long run increase in household debt can be

explained only by increasing income gaps

Page 6: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Introduction (contd..)Introduction (contd..)

30

40

50

60

70

80

90

100

50 55 60 65 70 75 80 85 90 95 00 05

Labor productivity Real wage

Figure 1. 1950--2007: US Labor Productivity and Real Wage Rate

Page 7: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Introduction (contd..)Introduction (contd..)Hence, a couple of other questions

The historical crisis episodes better understood in relation to rise in income inequality?

This could help predict the US experience with greater confidence?

Page 8: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Reinhart & Rogoff, 2008aReinhart & Rogoff, 2008aPostwar Crisis episodes:

The “Big Five” Crises: Spain (1977), Norway (1987), Finland (1991),

Sweden (1991), Japan (1992)

Other Postwar Bank-centered Financial Crises: Australia (1989), Canada (1983), Denmark

(1987), France (1994), Germany (1977), Greece (1991), Iceland (1985), Italy (1990), New Zealand (1987), Britain (1974, 1984,1991, 1995), and the United States (1984)

Page 9: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Reinhart and Rogoff, 2008a Reinhart and Rogoff, 2008a (contd..)(contd..)Indicators:

Real Estate Real Price Real Equity Price % of Current Account in GDP Growth of Real GDP per Capita Public Debt

Page 10: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Reinhart & Rogoff, 2008a Reinhart & Rogoff, 2008a (contd..)(contd..)

Page 11: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Reinhart & Rogoff, 2008a Reinhart & Rogoff, 2008a (contd..)(contd..)

Page 12: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Reinhart & Rogoff, 2008a Reinhart & Rogoff, 2008a (contd..)(contd..)

Page 13: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Reinhart and Rogoff, 2008a Reinhart and Rogoff, 2008a (contd..)(contd..)

Page 14: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Reinhart & Rogoff, 2008a Reinhart & Rogoff, 2008a (contd..)(contd..)

Page 15: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Reinhart & Rogoff, 2008a Reinhart & Rogoff, 2008a (contd..)(contd..)Limitations: If a certain change in the behavior of an indicator must

be accepted as a “precursor of crisis” is an issue that must be settled only in practice – specifically with an actual out-of-sample forecasting exercise

If we assume that the four year period foreshadows a crisis episode, then for “prediction” purposes it is also important to know if there were similarities even before this period – this will then allow us to distinguish between a period that is “tranquil” and a period that is “pre-crisis”

A comparison of any crisis with the “average” of historical crises could be elusive There could be differences across countries which

might be cloaked under the “average” construct For prediction purposes such differences need to be

controlled

Page 16: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Predicting the US Subprime Predicting the US Subprime CrisisCrisisThe Problem:

Specifically, could we predict the crisis starting from 2003?

Same as asking: going back to the year of 2002 or earlier could we predict that the United States was not going to experience any financial crisis in 2006 or earlier (except the savings and loan crisis in 1984)?

Page 17: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Predicting the US Subprime Predicting the US Subprime Crisis (contd..)Crisis (contd..)I consider two additional indicators

Growth difference between average productivity and real wage rate In the absence of adequate data on Gini

coefficient and other measures of income inequality this is taken as the measure of growth of income gap

Inflation To account for growth of cost of living

Page 18: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Predicting the US Subprime Predicting the US Subprime Crisis (contd..)Crisis (contd..)Data, Methodology & Criteria:

For any historical crisis include only eight observations prior to the actual occurrence

Labelling “Pre-crisis” period: four years just prior to the

crisis episode “Tranquil” period: four years even prior to the

“pre-crisis” period

Page 19: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Predicting the US Subprime Predicting the US Subprime crisis (contd..)crisis (contd..) A panel probit model

The binary dependent variable = 1 when “pre-crisis”; = 0 when “tranquil”

To conclude in favour of a crisis incidence within a period of four years The predicted probability is compared to a

pre-specified threshold value If the probability exceeds the threshold then a

crisis incidence is predicted I consider both 50% and 75% as the threshold

Page 20: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Predicting the US Subprime Predicting the US Subprime Crisis (contd..)Crisis (contd..)Results: Four specifications

Specification 1A (all postwar crisis episodes) Except Public Debt all indicators considered by Reinhart &

Rogoff (2008a) are significant

Specification 1B (all postwar crisis episodes) The two additional indicators are introduced – only

“inequality growth” is significant but with a wrong sign

Specification 2 (only the BIG FIVE crises) Only Real Estate Price, Public Debt & Inflation are significant

Specification 3 [Finland (1991), Italy (1990), Japan (1992), New Zealand (1987), UK (1995) & US (1984)] Real Estate Price, Public Debt, Current Account and

Inequality Growth are significant with the correct signs

Page 21: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Predicting the US Subprime Predicting the US Subprime Crisis (contd..)Crisis (contd..)

Spec 1A Spec1B Spec 2 Spec 3 ______________________________________________________________________________________________

Threshold Probability = 50%

Percent of pre-crisis years correctly called 86.8 85.3 80.0 79.2 True alarms as percent of total alarms 77.6 79.4 94.1 82.6

Threshold Probability = 75%

Percent of pre-crisis years 69.1 64.7 80.0 70.8correctly called

True alarms as percent of total alarms 73.9 74.6 94.1 94.4

Within Sample Performance Results

Page 22: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Predicting the US Subprime Predicting the US Subprime Crisis (contd..)Crisis (contd..) Out-of-Sample Performance Results

Spec 1A Spec1B Spec 2 Spec 3 ______________________________________________________________________________________________

Threshold Probability = 50%

Percent of pre-crisis years correctly called 100.0 75.0 100.0 100.0 True alarms as percent of total alarms 80.0 100.0 80.0 100.0

Threshold Probability = 75%

Percent of pre-crisis years 50.0 50.0 75.0 100.0correctly called

True alarms as percent of total alarms 100.0 100.0 100.0 100.0

Page 23: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Predicting the US Subprime Predicting the US Subprime Crisis (contd..)Crisis (contd..)Interpretations:

Significance of Real Estate Price: Consistent with Shiller (2008) – “irrational

exuberance” -- economists, policy makers & market experts believed in ever-rising house prices

Similar thing was observed during the housing & stock market booms in Japan before the financial crisis in 1992 and also in Sweden and Finland before the financial crises in 1991.

Page 24: The First Global Crisis of the Twenty-first Century: Was it Predictable?

Predicting the US Subprime Predicting the US Subprime Crisis (contd..)Crisis (contd..) Significance of Current Account

Consistent with Reinhart & Rogoff (2008a, 2008b): persistent current account deficit & capital flow bonanza are precursors of crisis

Significance of Public Debt Again, consistent with Reinhart and Rogoff

(2008a)

Significance of Inequality Growth Like with other historical experiences, rise in

earnings inequality contributed significantly – consonant with Krugman (2007)

Page 25: The First Global Crisis of the Twenty-first Century: Was it Predictable?

ConclusionsConclusions The US Subprime fiasco could be predicted

consistently starting in 2003 Earlier than 2005 when Robert Shiller (one of the

few economists) predicted the crisis

Despite Alan Greenspan (2007) talking about “froths” in the local markets, thus rejecting the possibility of a speculative bubble

The crisis could be predicted much earlier than February 2007 -- a date that the Global Financial Stability Report (ch. 3, April 2009) by the IMF states as the earliest when increasing systemic pressures could be signaled

One got to look at both “similarities” and “dissimilarities” across historical crisis experiences

Apart from the traditional indicators, inequality growth contributed significantly


TWENTY-FIRST CENTURY COMMUNICATIONS AND VIDEO ...

TWENTY-FIRST CENTURY COMMUNICATIONS AND VIDEO ...

Predictable Revenue Book Sample - First Four Chapters

Predictable Revenue Book Sample - First Four Chapters

A twenty-first century light music composer: sailing on: composing light music in the twenty-first

A twenty-first century light music composer: sailing on: composing light music in the twenty-first

Twenty-First-Century Aerial Mining

Twenty-First-Century Aerial Mining

Metrics for a Successful Twenty-First Century … whitepaper 2012 final...Successful Twenty-First Century Academic Corporate Relations Program W ... Twenty-First Century University

Metrics for a Successful Twenty-First Century … whitepaper 2012 final...Successful Twenty-First Century Academic Corporate Relations Program W ... Twenty-First Century University

Reading the Face: Lavater in the Twenty-first CenturyLavater in the Twenty-first Century In 1982, ... Reading the Face: Lavater in the Twenty-first Century 85 biology, anthropologist

Reading the Face: Lavater in the Twenty-first CenturyLavater in the Twenty-first Century In 1982, ... Reading the Face: Lavater in the Twenty-first Century 85 biology, anthropologist

VOLUNTEERING PRACTICES IN THE TWENTY-FIRST …

VOLUNTEERING PRACTICES IN THE TWENTY-FIRST …

Twenty First Century Church

Twenty First Century Church

SIXTEENTH INFANTRY.dmna.ny.gov/historic/reghist/civil/rosters/Infantry/16th...Infantry. . Twenty-first Infantry. — and Twenty-first New York Volunteers. and Twenty-first New York

SIXTEENTH INFANTRY.dmna.ny.gov/historic/reghist/civil/rosters/Infantry/16th...Infantry. . Twenty-first Infantry. — and Twenty-first New York Volunteers. and Twenty-first New York

TowardsaParadigmShiftinEducationPractice: Developing Twenty-First ... · TowardsaParadigmShiftinEducationPractice: Developing Twenty-First Century Skills with Design Thinking Christine

TowardsaParadigmShiftinEducationPractice: Developing Twenty-First ... · TowardsaParadigmShiftinEducationPractice: Developing Twenty-First Century Skills with Design Thinking Christine

First Quarter 2014 Twenty-First Century WATCH 1 TWENTY-FIRST … · 2016-12-09 · 4 Twenty-First Century WATCH Vol. 17, No. 1 Most of us can only imagine the sickening pain American

First Quarter 2014 Twenty-First Century WATCH 1 TWENTY-FIRST … · 2016-12-09 · 4 Twenty-First Century WATCH Vol. 17, No. 1 Most of us can only imagine the sickening pain American

LITERATURE FOR THE TWENTY-FIRST CENTURY

LITERATURE FOR THE TWENTY-FIRST CENTURY

Twenty-First Century Psychotherapies

Twenty-First Century Psychotherapies

ORDINAL NUMBERS + DATES + YEARS · ORDINAL NUMBERS Write first second third fourth eleventh twelfth twentieth twenty-first twenty-second twenty-third twenty-fourth Ordinal 1st 2nd

ORDINAL NUMBERS + DATES + YEARS · ORDINAL NUMBERS Write first second third fourth eleventh twelfth twentieth twenty-first twenty-second twenty-third twenty-fourth Ordinal 1st 2nd

Miss Mendoza · 18th 19th 20th 21st 22nd 23rd 24th seventeenth eighteenth nineteenth twentieth twenty-first twenty-second twenty-third twenty-fourth 25th twenty-fifth 26th twenty-sixth

Miss Mendoza · 18th 19th 20th 21st 22nd 23rd 24th seventeenth eighteenth nineteenth twentieth twenty-first twenty-second twenty-third twenty-fourth 25th twenty-fifth 26th twenty-sixth

The First Global Crisis of the Twenty-first Century: Was it Predictable? Saktinil Roy Athabasca University.

The First Global Crisis of the Twenty-first Century: Was it Predictable? Saktinil Roy Athabasca University.

Yiddish in the Twenty-first Century

Yiddish in the Twenty-first Century

Sunday, October 25, 2015 Twenty-First Sunday After Pentecoststmarypawtucket.org/.../09/2015.10.25-Twenty-First... · 10/25/2015  · Sunday, October 25, 2015 Twenty-First Sunday After

Sunday, October 25, 2015 Twenty-First Sunday After Pentecoststmarypawtucket.org/.../09/2015.10.25-Twenty-First... · 10/25/2015  · Sunday, October 25, 2015 Twenty-First Sunday After

A Renewed Homiletic for the Twenty-First-Century Church · PDF fileA Renewed Homiletic for the Twenty-First- ... A Renewed Homiletic for the Twenty-First-Century Church" ... communicate

A Renewed Homiletic for the Twenty-First-Century Church · PDF fileA Renewed Homiletic for the Twenty-First- ... A Renewed Homiletic for the Twenty-First-Century Church" ... communicate

TMA's first twenty years

TMA's first twenty years