The Daily Scoop: 5 Years After Crisis, No Normal Recovery


So many write attempting to compare the Great Recession’s recovery to other more “normal” recoveries from “normal” downturns. Those are like comparing the proverbial apples and oranges. The most accurate economic crisis to compare this one to is the Great Depression and its recovery. As a result, other comparisons are simply inaccurate in their conclusions. This article provides an in-depth assessment of the current economic situation and how we may need to rethink how recoveries from severe crises are judged.

  With the U.S. economy yielding firmer data, some researchers are beginning to argue that recoveries from financial crises might not be as different from the aftermath of conventional recessions as our analysis suggests.

Their case is unconvincing. It is mystifying that they can make this claim almost five years after the subprime mortgage crisis erupted in the summer of 2007 and against a backdrop of an 8.3 percent unemployment rate (compared with 4.4 percent at the outset of the financial crisis). Our research makes the point that the aftermaths of severe financial crises are characterized by long, deep recessions in which crucial indicators such as unemployment and housing prices take far longer to hit bottom than they would after a normal recession. And the bottom is much deeper. Studies by the International Monetary Fund concluded much the same.

We have suggested that the concepts of recession and recovery need to take on new meaning. After a normal recession (which for the average post-World War II experience in the U.S. lasted less than a year), the economy quickly snaps back; within a year or two, it not only recovers lost ground but also returns to trend.

After systemic financial crises, however, economies of the postwar era have needed an average of four and half years just to reach the same per capita gross domestic product they had when the crisis started. We find that, on average, unemployment rates take a similar time frame to hit bottom and housing prices take even longer. With the Great Depression of the 1930s, economies on average needed more than a full decade to regain the initial per capita GDP.

After the Fall,” a 2010 paper written by one of the authors of this article and Vincent Reinhart, a former Fed official who is now chief U.S. economist at Morgan Stanley, added evidence that in 10 of 15 severe post-WWII financial crises, unemployment didn’t return to pre-crisis levels even after a decade.
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