The Great Recession In Comparative Context

A post from Josh Lehner comparing the US experience during the Great Recession not to other U.S. business cycles but to other financial crises is making the rounds. The upshot—we’re doing okay.

This is an important comparative perspective. Similarly, when you’re assessing the performance of the Bush and Obama administrations and the Ben Bernanke Fed it’s important to not just compare them to some theoretical ideal but to policymakers in the UK, EU, Japan, and elsewhere. It’s clear that several small economies (Israel, Sweden, Canada, Australia) have weathered the crisis better than the United States but we’re doing better than the other big blocs.

That said, I have two doubts about the interpretation of this chart. One is that even though doing so s all the rage these days, I don’t love the idea of treating “financial crisis” as an exogenous event. If you want to ask me for an example of successful management of a collapsing asset price bubble, I’d point you to the United States in the two years between mid-2006 (when the Case-Shiller Index turned negative) and mid-2008 (when unemployment started rising). In other words, I’d point you to the time when we managed to have a significant decline in asset prices without a financial crisis or a giant recession:

Once people start losing their jobs, then obviously they can’t pay their mortgages. And since prices have declined, they can’t just sell or refinance either. And banks can’t just foreclose and resell. So you get a banking crisis which exacerbates the labor market situation which exacerbates the banking problems and you get the whole downward spiral. But the name of the game isn’t so much to arrest the spiral as to prevent it from occurring. Or at least to—as we did in the early aughts—prevent it from ever becoming a full-blown crisis. The existence of the crisis is the policy policy.

A second point is that the “good news” in this chart is really just that the decline was halted relatively quickly. So if you do want to treat “financial crisis” as an exogenous occurrence, what the chart says is simply that our crisis was relatively small. There’s nothing particularly impressive about the bounceback. Compare it to the U.S. Great Depression and you’ll see a giant crisis followed by a really fast recovery recovery once FDR got us off the gold standard. Even this Spanish fiasco in the late-seventies has a nice v-shape to it, and the Norwegians obviously took a long time to figure out a recovery strategy but once they started recovering they recovered fast. What we’ve got in America is this kind of lamentable dead cat bounce. So all credit to the folks who pulled out all the stops in the first half of 2009 to halt the decline, but it doesn’t change the fact that the subsequent recovery has been disappointing.