The Aftermath of Financial Crises

There are real differences between normal business-cycle recessions and a recession brought on by a financial crisis. The latter are much more severe. Sadly, we are in the latter type.

From Reinhart and Rogoff "...Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial affairs share three characteristics. FIRST, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. SECOND, the aftermath of banking crises is associated with profound declines on output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn,  averaging roughly two years, is considerably shorter than for unemployment. THIRD, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War 2 episodes.

Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. ...In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer..."