How to apply past financial lessons to today’s crisis

When the world feels like it is ending, it can be comforting to look to history and see that such global convulsions have happened before and the earth kept on turning.

For help during the coronavirus crisis, Reuters turned to Carmen Reinhart, an economist and professor at the John F. Kennedy School of Government at Harvard University. She is the coauthor, along with Kenneth Rogoff, of the book This Time Is Different: Eight Centuries of Financial Folly.

What is your take on what we are seeing so far?

This didn’t start as a financial crisis, but it’s certainly evolving into one. You can’t have a standstill in economic activity and not expect it to have serious balance-sheet consequences. My expectation is that we will see a big increase in bankruptcies at the household level, at the corporate level and at the sovereign level.

Many people are looking to the Spanish Flu of 1918 for clues - what can we learn from how that pandemic played out?

We don’t really have historical antecedents for a lockdown of this scale. We’ve had a lot of pandemics before, from time immemorial to the last major one in 1918. But that was in World War One, and as is common with wartime economies, the big thing was production. Real GDP growth at the time was nine per cent, so we can’t really look to that period for lessons in economic effects.

What are you worried about, that others aren’t realising?

I worry a great deal about social unrest. You saw the number of jobless claims (in the US). The longer this lasts, the hardest-hit households will have less and less ability to cope. A prolonged scenario when people don’t have jobs, and things are shut down, is worrisome in terms of what it does to the human psyche. We haven’t really had this experience before.

Since you have looked at hundreds of financial crises, any lessons that are helpful now?

This pandemic is going to leave countries, corporations and households with a lot of debt. There have been other episodes with a lot of debt, such as the end of World War Two. What experience tells us is that you have to take an out-of-the-box approach, and think seriously about writeoffs - at the household, corporate and sovereign levels. We have to be open to a greater role for the restructuring of public and private debts. That’s the healthy way to go.

How do you see this crisis developing from here?

Even in a good scenario, I don’t think we’re going to return to business as usual anytime soon. Think of global trade patterns and global supply chains, with everyone relying so heavily on other countries. And remember in 1918, influenza continued to circle the globe and kill people until 1920. So I would not be expecting a pre-coronavirus environment like we had before. This is going to depress global growth for some time.

Let’s leave on a positive note - anything encouraging you see out of all this?

The policy response is an upbeat note - night and day compared to the 1930s, for example. And in terms of efforts to limit human costs, we are seeing broad consensus for distancing and quarantines, which is fundamental to how long this will last. It’s hard to measure that in economic terms, but that’s at the heart of global response, and that’s encouraging. 

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