Similarities between 2007 subprime crisis and 1987 crash

I had written earlier about the superb Reinhart and Rogoff paper where they compare the previous crisis to the subprime crisis and see no difference. This paper has been discussed on many forums/blogs.

I came across this paper by Mark Carlson (of Fed) discussing the 1987 crash. What struck me was the similarity between 1987 and recent crisis. The Fed intervened even then providing liquidity and confidence to the frozen markets. Though, the current crisis is broader/worser but the way equity markets behaved then is very similar to the way they are behaving now.

And this again takes me back to the point- Can we call this modern finance? It keeps coming back in nearly similar ways. That is why we need a fresh thinking to understand developments in financial sector. By being stubborn and calling it capitalism (Fed/government bailouts isn’t capitalism), we are not going to move anywhere forward.

PS: The Rogoff -Reinhart duo have also done a more detailed analysis of the various financial crises spread over eight centuries. The paper is here. The shorter version of the paper is here.

 

3 Responses to “Similarities between 2007 subprime crisis and 1987 crash”

  1. Avid reader Says:

    Another similarity is the proliferation of new financial products. Every bout of financial creativity ends up in a financial crisis.

    But I think the similarity ends there.

    This is a credit crunch and a recession. The one in 87 was a financial crisis and I believe a liquidity crisis.

    PS: I will introduce myself to you via email one of these days. I meant to do that earlier but I have been incredibly busy.

  2. Similarities between subprime crisis and Sweden 90’s crisis « Mostly Economics Says:

    […] I had pointed earlier about that the ongoing sub-prime crisis is very similar to 1987 crisis. And then we have a paper from Rogoff et al which says there is nothing different about it. Yes, […]

  3. Business news and reviews Says:

    he market rallied immediately after the crash, posting a record one-day gain of 102.27 the very next day and 186.64 points on Thursday October 22. It took only two years for the Dow to recover completely; by September of 1989, the market had regained all of the value it had lost in the ’87 crash. How long will it take this time.

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