The Great Recession is Different from All Previous Ones: New Outlook Needed

 

Although it has been roughly five years since the United States suffered a massive subprime mortgage crisis, the effects are still lingering and as a nation, we have yet to fully recover.

Many economists have long claimed that the current economic recovery is not really all that different from previous recession recoveries.  The average recession usually takes less than a year or two to bounce back, while more systematic financial crashes after the postwar era often take about four years. After the Great Depression, it took about ten years for GDP to get back to pre-depression levels.

What can past market crashes teach us about the current one?

The markets have largely recovered since the March selloff, but most would agree we're not out of the woods yet. The COVID-19 pandemic isn't close to being over, so it seems that volatility is here to stay, at least until the pandemic becomes less severe. Q2 2020 hedge fund letters, conferences and more At the Read More


We may have to redefine the whole recession and recovery. Here is what Rogoff and Reinhart, authors of ‘This Time is Different’, suggest:

What’s the best way to accurately calibrate recession and recovery after a deep financial crisis? It isn’t enough simply to establish when per capita GDP growth resumes, as economists have traditionally done to mark the end of a conventional recession. As we emphasized in our book, “This Time Is Different,” it is essential to measure where an economy stands compared with pre-crisis levels of important variables such as output, unemployment and housing prices.

There also is the interesting question of whether, after a deep financial crisis, an economy will ever fully reach its earlier trajectory for trend GDP, or whether some output capacity is lost forever. Researchers at the Organization for Economic Cooperation and Development found that the most likely scenario involves some permanent loss, though extrapolations over long time periods — a decade or more — are necessarily subject to a high degree of uncertainty.

 

In the end, we need to wait and see where the economy will stand in a few months and in a few years.  Everyone is waiting for a full-recovery but it’s not happening the way we expect it to.