The central part played by credit in the deep downturn and weak recovery fits a recurring historical pattern. Financial crises correlate with more painful recessions. This column takes a close look at 14 advanced economies over the past 140 years and shows that larger credit booms during expansions have been systematically associated with more severe and prolonged slumps. In short, credit bites back. Measured against the historical benchmark, the recent US recovery has been far better than could have been expected.
The record of finance capitalism over two centuries appears replete with financial crises far more costly than normal recessions (Bordo et al. 2001, Reinhart and Rogoff 2009ab, Schularick and Taylor 2012). Economic historians knew this. But in the current malaise, the study of crises is understood to be no longer of solely antiquarian interest. As the Bank of England’s Andrew Haldane wrote on Vox recently, “the lessons of financial history have been painfully re-taught since 2008 ” (Haldane 2012).
Fact-checking financial recessions is a salient issue, especially in a US election year. On the one hand, the incumbent faces criticism that the recovery is slow. In August the Mitt Romney campaign invoked US history to argue that performance has been poor:
“The 2007-2009 financial crisis produced a severe recession … But GDP growth has been anaemic since then, averaging just 2.2% per year since the trough. This pattern is unusual. The past ten recessions have been followed by faster recoveries, and GDP has fairly swiftly recovered to the previous trendline.”
On the other hand, none of the last ten US downturns coincided with a financial crisis. In his convention speech nominating Barack Obama a month later, Bill Clinton intimated that the usual pattern in normal recessions was not relevant in this instance:
“The difference this time is purely in the circumstances… no president, not me, not any of my predecessors, no one could have fully repaired all the damage that he found in just four years.”
Read the whole story here: VOX