A perspective on 2000's illiquidity and capital crisis: past banking crises and their relevance to today's credit crisis

The current financial crisis is marked by the simultaneous occurrence of several severe economic and financial conditions. These circumstances reinforce the need to provide expectations for investors and consumers in an environment marked by risk and uncertainty. This author strongly believes the current financial crisis shares a key characteristic of prior banking crises. Sharp credit contractions were preceded by inflationary asset bubbles and credit expansion. It was therefore felt useful to obtain a perspective on today's crisis by viewing it in the context of 15 prior systemic banking crises. This setting enables an assessment of the possible course of today's financial crisis. If today's crisis turns out to be similar to the benchmark, a recovery period of 10.6 years is expected for real equity prices to regain their peak. Then, equity prices could return to their inflation-adjusted peaks by mid-2018, from the prior peak of October 9, 2007. Real total equity returns of about 10 percent annually for nine years would be implied, if March 9, 2009 were adopted as the date of the true trough in equity prices. The unemployment rate is likely to peak at about 11.5 percent if today's crisis turns out to be similar to past credit crunches. And real Gross Domestic Product is expected to decline by four percent between 2008 and 2009. [PUBLICATION ABSTRACT]