Here at Easy Street, I've been interested in the idea - the fear, really - that 2012 will be a replay of the Worst Year in Recent Financial Memory: 2008.
Here's what's haunting us: The country's biggest bank, JP Morgan, made an enormous bet earlier this year that the world economy would fall into crisis. (They've since reduced that bet, but there's no word on whether they've reduced their confidence.) The European financial crisis is intensifying every day, with five countries in bailout mode. We know that U.S. banks worked to become stronger and hoard money, but they've still come up short: Economist Robert Engle estimates our banks need $500 billion more on hand to survive a deep financial crisis.
What we've been missing, however, is a timeline. Sure, a financial crisis is coming in the long run. That's inevitable. But as John Maynard Keynes said, "in the long run, we are all dead." So timing is everything. When will this crisis land? And how? And what will it look like?
The International Monetary Fund may be able to help. No, they didn't pull out their crystal ball. But two of its researchers, Luc Laeven and Fabian Valencia, released a new paper today that analyzed all the major financial crises since1970. Here's a sobering tally: there have been 147 bank crises, 218 currency crises and 66 country-financing crises since then.
So much for learning our lessons. But let's press on. Here's a handy guide to the IMF's wisdom.
- "Banking crises tend to start in the second half of the year, with large September and December effects."
A dramatic IMF chart shows that 25 banking crises over the past 40 years started in September. August, November and December brought six-to-seven each. But from January to June? Barely any. The authors didn't give reasons for this. Generally, however, the last few months of the year are when fund managers - the buyers of many assets - have to tally up their wins and losses. They may be more eager to sell out of risky assets then, and buy again in January if they're still interested.
- "Crises occur in waves...one in three banking crises were preceded by a credit boom."
The IMF researchers found that banking crises often overlap with credit busts. The biggest credit boom in history - in the early 2000s - ended in the greatest number of crises in history during the Great Recession, around 2008.
- Crises come in pairs: "Banking crises frequently occur together with currency or sovereign debt crises."
That means that when a country's banks are in trouble, it reverberates to the rest of the economy, from its currency to the bonds it issues to finance itself. Interestingly, however, it's not usually all three kinds of trouble at once. A bank crisis will probably coincide with a depreciation in a country's currency - but rarely will a bank crisis overlap with a country-debt crisis. Banking crises can also often lead to currency and sovereign debt crises. The IMF found that one-fifth of bank crises are followed by a currency crisis within three years. But, maybe encouragingly, a bank crisis doesn't always mean that a country goes off the cliff of indebtedness. A sovereign debt crisis follows a banking crisis only 5% of the time.
- In a financial crisis, the bigger the economy, the harder it falls.
A bigger, more advanced economy probably has a deeper, more established banking system - think of the U.S., for instance. So when that banking system suffers in a crisis, the ripples affect the entire economy. Economists look at "output," which you can think of as economic growth. Big crises tend to really hurt output (this one certainly has.) For advanced economies,the IMF says, banking crises have hurt economic output by an amount equal to about one-third of GDP, and increased debt by over one-fifth of GDP.
- Bailouts may extend the time it takes to fix the economy after a crisis.
The IMF report noted that "if macroeconomic tools are used to avoid a sharp contraction in economic activity, this may discourage more active bank restructuring that would allow banks to recover more quickly and renew lending to the real economy, with the risk of prolonging the crisis and depressing growth for a prolonged period of time." Translation: Let the banks fail, or else they'll never learn their lessons and get back on their feet.
- The costliest financial crises have been outside the U.S.
It's hard to look at our strugling economy and think we have it pretty good, but the IMF paper shows that the most damaging financial crises didn't involve the U.S. at all. Of the top 10 crises in three categories - fiscal cost, increased debt and loss of economic outpu - the U.S. was not in the top 10. Some of the most damaging crises took place in Indonesia in 1997, Argentina in 1980, Iceland in 2008, Guinea-Bissau in 1995, Congo in 1991 and 1992, Kuwait in 1982, Argentina in 2001, Ireland in 2008 and Turkey in 2000. Ireland's crisis, which started in 2008, is still the costliest since the Great Depression in terms of the economic havoc it wreaked on the country.
That sums up the most surprising and interesting findings from the IMF. Something tells us this information will come in very handy, very soon.