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The Post-Crisis Decade: More Ugliness To Come

It's been three years since the subprime mortgage market fell apart and the financial crisis started to gain steam. Shouldn't things be looking up by now?

No, according to a new study of more than a dozen financial crises from the past century. Far from it.

In most cases, there's at least a decade when unemployment remains higher and home prices remain lower than they were before the crisis.

The authors, husband and wife economists Vincent and Carmen Reinhart, take a close, quantitative look at the 21-year period surrounding financial crises (10 years before, the year the crisis hits, and 10 years after).

Their analysis includes the Great Depression, the 1973 oil shock, and a bunch of smaller, regional crises in both developed and developing economies. They find that, in general, economies take a long, long time to recover:

Unemployment rates are "significantly higher" in the decade after crises, compared to the decade before. In 10 of the 15 post-World War II crises they looked at, unemployment rates never returned to their pre-crisis levels.

Median housing prices are 10 to 15 percent lower during the entire post-crisis decade, compared to their prices just before the crisis. Of all of the home-price data points they looked at from post-crisis decades, 90 percent showed prices lower than they were before the crisis.

Economic growth, as measured by real, per-capita GDP, is "significantly lower" during the entire post-crisis decade, on average, than during the pre-crisis decade.

All of these phenomena are driven by the credit cycle that tends to be tied to economic crises.

During the booms leading up to crises, it gets easier and easier for people to borrow money — to take on more leverage, in financial speak. Then the crisis hits, it gets harder to borrow, and everybody starts trying to pay back their debts. This is called de-leveraging, and it's what we're living through now.

The period of de-leveraging typically lasts as long as the credit boom that preceded it. The Reinharts suggest that the recent credit boom lasted for about a decade, and ended in 2007.

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