Tuesday, October 07, 2008
For the complete version, check out the article by Claessens, Kose and Terrones of the IMF.
Translation: if you are lucky, the interrelated bursting of a housing bubble, a credit crunch and a stock market crash don't necessarily result in a recession, but, if it does, look out below. Given that 159,000 Americans lost their jobs in September, and that employment has been dropping for 9 straight months, things don't look too good. I try to avoid financial hysteria, but I am beginning to understand why Southerners developed the practice of having money buried in the backyard after the trauma of the Civil War. You just never know what might happen, they'd tell their friends. And the others, shaking their heads wisely, would reply, No, you sure don't.
Contrary to the view of some commentators, the triple whammy of a house price bust, a credit crunch and an equity price bust has not always led to an eventual recession. What is true is that many recessions are indeed associated with credit crunches or asset price busts. In about one out of six recessions, there is also a credit crunch underway, and in about one out of four recessions a house price bust. Equity price busts overlap for about one-third of recession episodes. There can also be considerable lags between financial market disturbances and real activity. A recession, if one occurs, can start as late as four to five quarters after the onset of a credit crunch or a housing bust.
One of the key questions surrounding the current financial crisis is whether recessions associated with crunches and busts are worse than other recessions. Here, the international evidence is clear: these types of recessions are not just slightly longer on average, but also have much more output losses than others. In particular, although recessions accompanied with severe credit crunches or house price busts last only a quarter longer, they have typically result in output losses two to three times greater than recessions without such financial stresses. During recessions coinciding with financial stress, consumption and investment usually register much sharper declines leading to the more pronounced drops in overall output and unemployment.