The Financial Crisis: Lessons For The Next One

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The Financial Crisis: Lessons For The Next One

The Financial Crisis: Lessons For The Next One by Alan S. Blinder and Mark Zandi, Center on Budget and Policy Priorities

The massive and multifaceted policy responses to the financial crisis and Great Recession — ranging from traditional fiscal stimulus to tools that policymakers invented on the fly — dramatically reduced the severity and length of the meltdown that began in 2008; its effects on jobs, unemployment, and budget deficits; and its lasting impact on today’s economy.

Without the policy responses of late 2008 and early 2009, we estimate that:

  • The peak-to-trough decline in real gross domestic product (GDP), which was barely over 4%, would have been close to a stunning 14%;
  • The economy would have contracted for more than three years, more than twice as long as it did;
  • More than 17 million jobs would have been lost, about twice the actual number.
  • Unemployment would have peaked at just under 16%, rather than the actual 10%;
  • The budget deficit would have grown to more than 20 percent of GDP, about double its actual peak of 10 percent, topping off at $2.8 trillion in fiscal 2011.
  • Today’s economy might be far weaker than it is — with real GDP in the second quarter of 2015 about $800 billion lower than its actual level, 3.6 million fewer jobs, and unemployment at a still-dizzying 7.6%.

We estimate that, due to the fiscal and financial responses of policymakers (the latter of which includes the Federal Reserve), real GDP was 16.3% higher in 2011 than it would have been. Unemployment was almost seven percentage points lower that year than it would have been, with about 10 million more jobs.

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