Growls

Today's Wall Street Journal has a "must read" op-ed by Rutgers University economics professor Michael Bordo, who writes that "financial recessions don't lead to weak recoveries." Here's how he introduces the issue:

"There's a belief among policy makers that serious recessions associated with financial crises are necessarily followed by slow recoveries—like the one we've experienced since mid-2009. But this widespread belief is mistaken. To the contrary, U.S. business cycles going back more than a century show that deep recessions accompanied by financial crises are almost always followed by rapid recoveries.

"The mistaken view comes largely from the 2009 book "This Time Is Different," by economists Carmen Reinhart and Kenneth Rogoff, and other studies based on the experience of several countries in recent decades. The problem with these studies is that they lump together countries with diverse institutions, financial structures and economic policies. They also conflate two different measures of speed—how long it takes a country to get back to its previous business-cycle peak, and how fast the economy grows once the recovery has started."

Here seems to be the nut of his argument:

"In a recent working paper for the National Bureau of Economic Research, Joseph Haubrich of the Federal Reserve Bank of Cleveland and I examined U.S. business cycles from 1880 to the present. Our study not only confirms Friedman's plucking model but also shows that deep recessions associated with financial crises recover at a faster pace than deep recessions without them.

"We measured the depth of a contraction by the percentage drop in quarterly real gross domestic product from peak to trough. We measured the strength of the recovery in several ways: first as the percentage change in quarterly GDP in the first four quarters after the trough, then also looking further into the expansion. So, for example, since the 1920 recession lasted six quarters, we looked six quarters into the subsequent expansion.

"We found that recessions that were tied to financial crises and were 1% deeper than average have historically led to growth that is 1.5% stronger than average. This pattern holds even when we account for various measures of financial stress, such as the quality spread between safe U.S. Treasury bonds and BAA corporate bonds and bank loans."

The Wall Street Journal sub-titled the op-ed this way: "The evidence since 1880 shows a faster pace of recovery. The Obama years are the exception." Friends of Growls are encouraged to read the entire op-ed so they can respond appropriately the next time they are confronted with the excuse the current recovery is "different."