The aftermath of financial crises

That's the title of a recent paper from the National Bureau of Economic Research. The news is not good. The authors excluded emerging markets crises from the first draft of the paper because they thought those results were too dour. Now, it no longer seems like hyperbole to include them. Here's a summary of their findings:

• On average, house prices decline 35% over 6 years
• Unemployment rises 7%
• Equity prices drop 55% over 3 years

By the second measure, we're ahead of schedule (let's hear it for the USA!). Oh, and there's an 86% increase in government debt. Good thing we balanced our budget before this mess came along. Oh wait, we've been running deficits for years? That can't be good.

They base their analysis on the "big five" crises in post-war developed markets: Spain 1977, Norway 1987, Finland, 1991, Sweden, 1991, and Japan, 1992. For good measure they include the 1997 Asian financial crisis, Columbia 1998, and Argentina 2001. Output (GDP) declines 9% from peak to trough but recovers in only 2 years, and none of the crises studied were nearly as bad as the great depression. However, previous problems were national or regional in nature. It is still unclear how the global nature of this disaster will affect the severity and time to recovery.