The Aftermath

No, not the Dr. Dre classic but a great NBER paper titled The Aftermath of Financial Crises that goes over about 20 historical examples of banking crises to try and chart the course of the next few years. The surprising thing is that, historically, the outcome of each major financial crisis has been pretty homogeneous worldwide and there is no reason to believe this time will be different. As the authors nicely put it in their conclusion, "one would be wise not to push too far the conceit that we are smarter than our predecessors".

Basically here's what we should expect (the averages for the historical comparison group):

- A real housing price decline of 35% with a downturn lasting about six years.
- An equity price decline of 55%, downturn lasting three and a half years.
- A rise of 7% in the unemployment rate over a 4-year employment downtrend.
- A GDP fall of over 9% over a 2-year downtrend.
- An explosion in the real value of government debt of 86% due, not to bailouts, but to the collapse in tax revenues and countercyclical fiscal policies.

And this, it would seem, no matter what our good friends in Washington concoct for us.