Monday, September 12, 2011

US Experiencing An Average GDP Recovery After A Banking Crisis Caused Recession: The US Is In Its First Post WWII Banking Crisis GDP Recovery: No Economic Consensus On Remedies Or Causes Of Below Trend Growth

From Economic Letter, Vol. 6, No. 9, September 2011, Federal Reserve Bank of Dallas, "The Sluggish Recovery from the Great Recession: Why There Is No ‘V’ Rebound This Time" by Mark A. Wynne, senior economist and vice president :
The Great Recession of 2008–09 was by far the most severe United States economic downturn since the Great Depression of the 1930s. Real gross domestic product (GDP), the most comprehensive measure of U.S. economic activity, topped out in fourth quarter 2007 and has yet to approach that peak. Employment totaled just below 138 million jobs in January 2008 and, as of July 2011, was still nearly 5 percent below its precrisis level.

Conventional wisdom holds that severe recessions are usually followed by strong recoveries.
This Time Is Different
Unlike all other post-World War II recessions, the 2008–09 episode was precipitated by a banking crisis. A number of researchers have shown that downturns associated with banking crises tend to be more severe, and furthermore, in their aftermath, output takes a lot longer to recover. In some cases, the crisis seems to persistently affect the trend rate of growth, while in other cases, the growth path of activity seems to shift down.

Chart 2 is a summary of the average impact of financial crises on output. It shows average deviation of output from its trend path in a sample of countries that experienced banking crises from the early 1970s to 2002, along with a measure of the range of outcomes (shaded area). During the first year of a banking crisis, output falls by about 2.5 percent on average and then slips further in subsequent years. The persistent decline in output relative to the precrisis trend is striking. The finding that banking crises tend to have persistent effects on output is robust to alternative definitions.

Why does output tend to stay below its precrisis trend path in the aftermath of recessions associated with banking difficulties? There is little or no consensus on this issue. Banking crises tend to have persistent effects on productivity, the employment rate, investment and the capital-labor ratio. Fortunately, there is little evidence of a persistent impact on growth rates: Most countries experiencing banking crises tend to return to their precrisis rates of growth over time.

Recessions and Banking Crises
While the U.S. economy has been in a recovery for almost two years, the pace has been unusually weak by the country’s historical standards. Rather than seeing the V-shaped recovery that might have been expected given the severity of the downturn, the nation is undergoing a more protracted process. However, when viewed in a broader international context, the pace of the recovery seems to be very much in line with what other countries have experienced. The persistence of the output losses associated with banking crises should serve as additional motivation—if any were needed—for preventing recurrences in the future. [Footnotes omitted] [Emphasis added].
Read the complete article here.

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