The Aftermath of Financial Crises

So what happens after a financial crisis. To have a preview of the aftermath, it is necessary to look back into the past. Professors Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard, in a recent paper entitled “The Aftermath of Financial Crises”, investigated the end-game across various countries.

Some notable points brought up in the paper:

First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.
Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.
Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes.

It is also interesting to note in that when it comes to banking crises, the emerging markets, particularly those in Asia, seem to do better in terms of unemployment than do the advanced economies. This is mainly attributed to wage flexibility and lack of social safety nets in emerging economies which make the unemployed more anxious to get back to the work force.
In addition, the declines in real GDP are much higher in emerging markets than advanced economies, due to the abrupt exodus of foreign credit.

The paper presented is rather short and relatively easy to understand - highly recommended for all.