Recessions don’t have to be followed by periods of slow economic recovery, a recent paper by Berkeley economics professors Christina Romer and David Romer found, which explored reasons for why the 2008 financial crisis was especially difficult to recover from.
The paper found that many developed countries bounced back quickly after recessions over the past century, contrary to conventional wisdom. Why then was 2008 followed by such a severe economic slump?
Low interest rates close to zero in many countries, including America and Japan, leading up to the global financial crisis may have made recovery slower, according to the report, which raises questions about whether future government policies can prevent history from recurring.
The 2008 crisis was also a different kind of recession. Throughout the last century, the U.S. economy fell into recessions in response to the federal reserve increasing its rates to counter inflation. After the Federal Reserve cut rates, recovery soon followed. By contrast, the 2008 financial meltdown was caused by risky lending practices in the private sector and the usual solution of lowering rates was made less effective by already low interest rates.
