How Bad Could It Have Been?

A recent academic study called Financial Crises and Economic Activity, written by Stephen G Cecchetti, Marion Kohler and Christian Upper, has implications for the current strength and trend of the U.S. and Global economic recovery.

The paper examined 40 systemic banking crises since 1980 and evaluated the real output costs of these crises. The conclusion:

“First, the current financial crisis is unlike any others in terms of a wide range of economic factors. Second, the output losses of past banking crises were higher when they were accompanied by a currency crisis or when growth was low at the onset of the crisis. When accompanied by a sovereign debt default, a systemic banking crisis was less costly. And, third, there is a tendency for systemic banking crises to have lasting negative output effects.”

How bad could it have been for us this time? The mean peak to trough decline in GDP for the 40 crises was 18.4%, with a median decline of 9.2%. Also, in one crisis, it took seven years for GDP to get back to its pre crisis level.

Read the original study here.