Kenneth Rogoff and Carmen Reinhart have a new paper out. It’s worth a read, and since it’s “lite” enough for a dilettante like me, most anyone can get something out of it.

The bulk of the paper compares the current situation in the United States to various historical financial crises, and concludes that the parallels are there. The gem of the piece, as is often the case with econ papers, comes in the conclusion:

During the 1970s, the U.S. banking system stood as an intermediary between oil-exporter surpluses and emerging market borrowers in Latin America and elsewhere. While much praised at the time, 1970s petro-dollar recycling ultimately led to the 1980s debt crisis, which in turn placed enormous strain on money center banks. It is true that this time, a large volume of petro-dollars are again flowing into the United States, but many emerging markets have been running current account surpluses, lending rather than borrowing. Instead, a large chunk of money has effectively been recycled to a developing economy that exists within the United States’ own borders. Over a trillion dollars was channeled into the sub-prime mortgage market, which is comprised of the poorest and least credit worth borrowers within the United States. The final claimant is different, but in many ways, the mechanism is the same.

That’s such a tidy analogy, it sends shivers down my spine! Though such tidiness is rarely found in the real world, if lumens like Brad Setser and Martin Wolf are impressed, we should all take note.