I've commented previously on Carmen Reinhart and Ken Rogoff's great book, This Time is Different: Eight Centuries of Financial Folly, arguing that if financial crises are so common and the world keeps growing anyway, then they must not be so damaging in the long run. I had been meaning to check what the authors themselves thought of this argument, but am only getting around to it now. Here is my email exchange with Carmen Reinhart:
Bill to Carmen: What do you think of the argument that your results suggest that financial crises are really not so enormously damaging in the long run, since you have confirmed they have happened repeatedly in both rich and poor countries alike. Or to put it another way, the US economy in particular has kept reverting to its long run trend path for two centuries despite all the crises you document. All the best, Bill
Carmen to Bill: On the long run effects being non-catastrophic I would tend to agree for most crises.
1. I think I would separate out cases where the crisis led to major policy reversals (epitomized by Argentina--perhaps also Spain in the 1800s)
2. I would also examine the 1930s depression case separately. For many emerging makets it took more than two decades (no exaggeration-there are several cases where it took even longer) to get back to pre crisis GDP levels.
I guess the gigantic question is whether the current crisis fits into either of Carmen's categories 1 and 2.