Or why Ed Lazear should have heeded R&R a bit more.
From “Credit: A Starring Role in the Downturn,” by Òscar Jordà, based on an examination of 14 advanced economies over 140 years:
We are unlikely to learn how the United States will recover from the Great Recession by examining other post-World War II downturns. In the United States, the past six decades have completely lacked another financial event like the one experienced from 2007 to 2009. …
Professor Jorda’s reasoning:
Is the intensity of credit creation in the expansion phase systematically related to the severity of the subsequent recession? And is there a difference between how credit behaves in an ordinary recession versus how it performs in a recession associated with a financial crisis? The answers to both questions appear to be yes, and therein lie the lessons that can inform the economic outlook.
Broadly speaking, in a financial crisis, a large fraction of banking system capital becomes depleted. However, directly measuring such an effect can be difficult. An alternative is to look at the responses to capital depletion. Laeven and Valencia (2010) argue that, in a financial crisis, the banking system experiences significant financial distress that compels banking authorities to intervene. Examples of such intervention include liquidity support, guarantees on bank liabilities, asset purchases, nationalizations, restructuring, deposit freezes, and bank holidays. All these occurred after Lehman Brothers failed. Some were implemented even earlier, with the sale of Bear Stearns.
Jordà, Schularick, and Taylor (2011) find that, regardless of the genesis of the recession, more leverage results in deeper recessions and slower recoveries. Moreover, in financial crises, leverage is associated with a steeper and more persistent decline in consumption as households try to repair their balance sheets. Since consumption constitutes more than two-thirds of GDP, it is not surprising that losses in output follow a similar pattern.