Thorsten Polleit

At the Jackson Hole summit last weekend, which brought together about 110 central bankers and economists, a paper presented by C. M Reinhart, an economist of the University of Maryland, generated considerable debate.

The paper basically says that the American economy could experience slow growth and stubbornly high unemployment for a decade or longer as a result of the 2007 collapse of the housing market and the economic turmoil that followed.

The paper examined 15 severe financial crises since World War II, as well as the worldwide economic contractions that followed the 1929 stock market crash, the 1973 oil shock and the 2007 implosion of the subprime mortgage market. In the decade following the crises, growth rates were significantly lower and unemployment rates were significantly higher.

Housing prices took years to recover, and it took about seven years on average for households and companies to reduce their debts and restore their balance sheets. In general, the crises were preceded by decade-long expansions of credit and borrowing, and were followed by lengthy periods of retrenchment that lasted nearly as long.

source: BarCap