IMF: Bank-Sector Stress Worsens Downturns
The International Monetary Fund surveys the world economy and outlines some examples of when financial turmoil turns into economic damage. America could be its poster child for the worst-case scenario.
Not all episodes of financial stress lead to economic slowdowns (that only happens about half the time), but when banking-sector problems do stunt growth, the pain lasts longer. How much longer? "In particular, slowdowns or recessions preceded by banking-related stress tend to involve 2 to 3 times greater cumulative output losses and tend to endure 2 to 4 times as long," the IMF says.
Key points from Chapter 4 of the IMF's latest World Economic Outlook 2008 (bold is mine):
- Episodes of financial turmoil characterized by banking sector distress are more likely to be associated with severe and protracted downturns.
- Financial stress is more likely to be followed by an economic downturn when it is preceded by a rapid expansion of credit, a run-up in house prices and heavy borrowing by households and non-financial firms.
- The current situation of the United States bears some resemblance to previous episodes of banking-related financial stress episodes that were followed by recessions.
Make no mistake. The Great Deleveraging is upon us, and it will remain the biggest stressor on our economy for some time to come.
Tags: IMF | economics | economy | global economy | banking
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Reader Comments
Downturns
Whilst asleep we thought was well,
the Reserve came along to cast it's spell!
Cheap credit rained down upon the crowd
to those who spent and cheered aloud,
"Let us praise those who have the know,
if we ask them nice they can make it snow
and fill the scene with solemn white
and can turn the day into the night!”
For we owe to them a thanks so much,
for they're the ones with the magic touch!
Give him a house and him one too
There’s more to give, so much to do!
We have the might to print a buck
to buy a house or brand new truck!
Just don't ask where they may work,
you'll feel silly more like a jerk!
He’ll thank us later when he’ll pay more,
we work though greed and nothing
More!
And we’ll get ours if we sharpen axes,
And we'll collect it all; if it means taxes!
glenn
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