How bad will the recession be and how long will it last?
The belief that we will ultimately cope better that other countries might be mistaken.
The media are awash with economists', partisan think tank "scholars"' and financial journalists' thoughts on the matter but nobody knows, anymore than anybody knew, if the Fed failed to take away the punchbowl just as the party got started, exactly when the trouble would start.
Economists Carmen M Reinhart and Kenneth S Rogoff have taken a different tack. At the American Economics Association annual conference earlier this month they delivered a paper, "The Aftermath of Financial Crises". They studied the aftermaths of some 20 severe banking system crises over the last 20 years, throwing in the 1933 US crisis for comparison.
Their conclusions?
"An examination of the aftermath of severe financial crises shows deep and lasting effects on asset prices, output and employment. Unemployment rises and housing price declines extend out for five and six years, respectively. On the encouraging side, output declines last only two years on average. Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt."
They warn that, while current understanding of how to cope with a crisis may be a lot better than it was in the past, there was also a common belief that, with this understanding, such crises could be prevented from ever happening again.
It is plain that this view was seriously mistaken. The belief that we will ultimately cope better might be mistaken too.
Australia is so far only modestly scathed by events. It would be comforting to think that our economy will suffer little more than flesh wounds, but if it is to be four or five years before consumer finances in the worst affected countries are fully repaired, the fall-out may be worse than most of us expect.
The Reinhart-Rogoff paper is at www.aeaweb.org/annual_mtg_papers/2009/retrieve.php?pdfid=140
MikeM is roadkill in the wake of the capitalist juggernaut but his voice continues to protest that he is not an individual.
miltonfih
February 6, 2011 at 6:58 pm
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