Photo: Bloomberg Television
Economists Carmen M. Reinhart and Kenneth S. Rogoff are back with a new Bloomberg View op-ed, in which they double down on their claim that recessions caused by financial crises do not see normal recoveries, and that the comeback will be slow and uneven, much like we’ve seen for the last few years.You might think that this is consensus now, but the point of their column is to blast a series of studies which have been arguing the opposite, that there’s no reason for post-crisis comebacks to be so mediocre.
The point that all recoveries are the same — whether preceded by a financial crisis or not — is argued in a recent Federal Reserve working paper by Greg Howard, Robert Martin and Beth Anne Wilson. It was also discussed in a recent article in the Wall Street Journal.
It is mystifying that they can make this claim almost five years after the subprime mortgage crisis erupted in the summer of 2007 and against a backdrop of an 8.3 per cent unemployment rate (compared with 4.4 per cent at the outset of the financial crisis). Our research makes the point that the aftermaths of severe financial crises are characterised by long, deep recessions in which crucial indicators such as unemployment and housing prices take far longer to hit bottom than they would after a normal recession. And the bottom is much deeper. Studies by the International Monetary Fund concluded much the same.
The gist of the Reinhart and Rogoff complaint here is that these new studies, which suggest post-crisis recoveries can show a return to trend growth rates is that they have as their starting points actual “recoveries”, rather than the moment the bust happened.
Hence they say:
We admit that this time is different in one important respect: The goal posts many analysts use to assess economic outcomes seem to shift from data point to data point.
They conclude grimly:
Looking ahead, does history suggest that the current U.S. recovery will be strong and robust, even if it has been so long coming? We hope this will be the case, but the jury is out. Precisely because there is often no bright line that marks a “recovery” stage after a deep financial crisis — the kind of halting uneven recovery the U.S. has experienced is the norm — considerable judgment is required in choosing turning-point dates (especially in real time).