There are two sorts of downturn. There’s the garden-variety type where businesses, having over-expanded, retrench, laying off workers and provoking a downward spiral of income, investment, output and employment. Expansionary fiscal and monetary policies (automatic stabilizers and a falling federal funds rate) then kick in, demand and supply expand, and the economy returns to growth. Such downturns are painful, but government has well-honed tools for addressing them with a minimum of political consternation.

The other type of downturn arises from an asset market collapse—the bursting of an asset bubble or a string of bank runs, for example—that wipes out vast quantities of wealth. Recovery then awaits reestablishment by households and/or businesses of prior wealth positions, an inherently long, drawn-out process. Government can help debtors recover their wealth through bailouts, stimulus, and expansionary monetary policy. But monetary policy can be of limited effectiveness in such circumstances, especially if the federal funds rate hits the zero lower bound, and bailouts and stimulus tend to be politically fraught.

Kenneth Rogoff and Carmen Reinhart, in their book This Time is Different, exhaustively survey downturns of the latter sort. They summarize their findings as follows:

Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics. First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment. Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes.

And how does the U.S. experience compare with the historical data presented by Rogoff and Reinhart? It’s early to compare rising government debt to the historical norm. But with respect to the other dimensions of their analysis, we find:

• Unsurprisingly, among asset markets it’s housing that’s dropped most sharply. Nevertheless it appears house prices will bottom out before hitting the Rogoff-Reinhart average.
• Equity markets, after a collapse at least as severe as the norm, have come roaring back.
• Employment was hit much harder than output, and part of that may be unusually fast productivity growth. Yet employment appears to be ahead of schedule in returning to tolerable levels.
• Possibly the great untold story of the downturn, when placed in context, is how quickly GDP growth recovered. Tepid though GDP growth remains by normal standards, it’s off the charts in the context of typical asset market collapses.