NEW YORK – We are at a moment when the range of uncertainties facing the global economy is unusually wide. We have just passed through the worst financial crisis since World War II. The only relevant comparisons are with the Japanese real-estate bubble, which burst in 1991 (and from which Japan has not recovered), and the Great Depression of the 1930’s – except that this crisis has been quantitatively much larger and qualitatively different.
Unlike the Japanese experience, this crisis involved the entire world, rather than being confined to a single country. And, unlike the Great Depression, this time the financial system was put on artificial life-support, rather than being allowed to collapse.
In fact, the magnitude of the problem today is even greater than during the Great Depression. In 1929, total credit outstanding in the United States was 160% of GDP, and it rose to 250% by 1932. In 2008, we started at 365% – and this calculation leaves out the pervasive use of derivatives, which was absent in the 1930’s.
Despite this, artificial life-support has worked. Barely a year after the bankruptcy of Lehman Brothers, financial markets have stabilized, stock markets have rebounded, and the economy is showing signs of recovery. People want to return to business as usual – and to think of the Crash of 2008 as a bad dream.