Depression possible, but not likely. Carmen Reinhart and Kenneth Rogoff have given us a detailed survey of the economic consequences of financial crises—work which revealed that crisis-driven recessions tend to be longer and deeper than other species.

Today, in the Wall Street Journal , Robert Barro explains the findings of his examination of stock market behaviour and economic downturns. He also sounds a rather ominous warning: In applying our results to the current environment, we should consider that the U. Thus, we get better information about today's prospects by consulting the history of nonwar events -- for which our sample contains stock-market crashes and 59 depressions, with 41 matched by timing.

His study seems to differ from that of Ms Reinhart and Mr Rogoff in that they examine financial crises as precipitators of recession, while Mr Barro examines stock market crashes as barometers of recession. That is, a recession brought on by a collapse in stock prices might or might not be severe, but a recession coincident with a broad and deep market crash suggests dangerous conditions indeed.

Markets recovered much of their value following the crash of , for example, but began a sustained decline in as the extent of the financial damage became clear. What does all this tell us? Well, that there is a real risk of an economic calamity of historic proportions, such that policymakers must work diligently to avoid disastrous errors—sharply contractionary policy, for instance, or a modern day Smoot-Hawley.

But also that things aren't yet that bad. Given the situation—massive losses of housing and equity wealth, financial collapse, implosion of global demand, and so on—that's a pretty impressive statisic.

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Robert Barro Draws a Connection Between Depressions and Stock-Market Crashes - WSJ

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Stock-Market Crashes and Depressions

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