The Aftermath of Financial Crises

In their paper, "The Aftermath of Financial Crises", economists Reinhart and Rogoff look at data from other financial crises (from across the world). They ask: to what extent did key indicators like unemployment and GDP deteriorate, and for how long?

They document a lot of variation among the various crises. Here are the averages they found, across the various crises. (The figures in parentheses are the current US figures for this crisis.)

• Unemployment: Up 7%, across 4.8 years (US current: up 4%)
  
• House prices: Down 35%, across 6 years from the top (US current: down 28%)
  
• Equity prices: Down 56%, across 3.4 years (US current: down 42%)
  
• Per capita real GDP: Down 9% across 2 years (US current: down 1%)
  

There is a lot of variation among the different episodes included in this sample. Still, they were all chosen because they were largely bank/financial/credit crises. (So, for instance, the dot.com bust-up is not included.)

I found graphs of U.S. data for three of the above measures (from the late 1980's to today). Then, I marked the averages from the study on the graph, to answer the question: if this US crisis turns out to be about averages, how far are we from the turning point. [I did not graph the real per capita GDP. Instead, the real GDP is shown -- i.e. not per-capita].

In summary, if the current US recession is typical, we can expect another year of flat or falling real GDP (falling per capita); unemployment would go to 11% over the next three years or more; house prices would come down a bit more and not recover for another 5 years.

An average does not tell us what will really happen; but it does provide a feel for the order of magnitude that is typical, to allow us to use that as a benchmark.