The Great Contraction of 2008-2009

CAMBRIDGE – A popular view among economic forecasters and market bulls is that “the deeper the recession, the quicker the recovery.” They are right – up to a point: immediately after a normal recession, economies do, indeed, often grow much faster than usual over the ensuing twelve months. Unfortunately, the Great Recession of 2008-2009 is far from being a normal global recession.

The Great Recession was turbo-charged by a financial crisis, making it a far more insidious affair that typically has far more long-lasting effects. As Carmen Reinhart and I argue in our new book This Time is Different: Eight Centuries of Financial Folly , the Great Recession is better described as “The Great Contraction,” given the massive and simultaneous contraction of global credit, trade, and growth that the world has experienced.

Fortunately, despite a hobbled recovery in the developed world, emerging markets in Asia, Latin America, and the Middle East have enormous latent growth potential. Most should be able to grow strongly, despite the challenging global environment.

Nevertheless, the legacy of the huge contraction in credit is not likely to go away anytime soon. Yes, if you are a bank, particularly a big one, you can raise money easily enough, thanks to sweeping explicit and implicit government guarantees. But, for everyone else, particularly small and medium-size firms, the credit environment continues to be very challenging. Even firms in established industries such as energy report facing great difficulties in raising capital.