Lately, everyone seems to have his own prediction for whether we’re entering a double-dip recession. This is a conversation that frustrates Ken Rogoff to no end. Rogoff, is co-author, with the Peterson Institute’s Carmen Reinhart, of “This Time Is Different: Eight Centuries of Financial Folly.” And when Rogoff hears economists talking about recessions and double-dips he wishes they would have read him more closely.
“The whole mentality of thinking of this as a recession leads to bad forecasts and bad policy,” he says. “It’s just not the right framework.”
Recessions, he argues, imply a very particular economic phenomena: a business-cycle recession, in which the drop is quick, and the recovery is usually similarly swift. That is not what we’re in. That is not what financial crises are. And mistaking one for the other has, in his opinion, cost us a fortune.
Financial crises are about debt. Lots of it. The period after a financial crisis is marked by consumers trying to dig out from under a mountain of borrowed money. You can accelerate that process, but it’s hard to do.
Rogoff has suggested we call this period the “Great Contraction” in order to distinguish it from more normal recessions.
“Debt de-leveraging takes about seven years. That’s the essence,” she says. “And in the decade following severe financial crises, you tend to grow by 1 to 1.5 percentage points less than in the decade before, because the decade before was fueled by a boom in private borrowing, and not all of that growth was real. The unemployment figures in advanced economies after falls are also very dark. Unemployment remains anchored about five percentage points above what it was in the decade before.”
Reinhart focuses on the housing market, where much of the debt is concentrated. “I ultimately think we have to wind up with some form of debt forgiveness,” she says.