Hindsight

The Chinese distraction

Right before the crisis the potential threat of a Chinese savings glut distracted economists:

In defense of the macroeconomists it could be said that it was precisely their warnings that caused the risk of a “China sell off” to be closely managed. Hank Paulson was willing to pay virtually any political price to reassure Beijing of America’s ability to cope. As Brad Setser quipped, Fannie Mae and Freddie Mac were too Chinese to fail. Ahead of the crisis Larry Summers characterized the relationship as a balance of financial terror. Though it threatened the end of the world, like the nuclear stand off of the Cold War, it was successfully managed.

Macroeconomics Predicted the Wrong Crisis
By: Alan Tooze – Columbia University

Panic and amplification

[…]the financial panic of 2007-2009, including the runs on wholesale funding and the retreat from securitized credit, was highly disruptive to the real economy and was probably the main reason that the recession was so unusually deep. Presumably, the effects of the panic and the associated disintermediation of credit were transmitted through a spike in the economy-wide external finance premium, together with sharp increases in risk aversion and liquidity preference.

Financial panic and credit disruptions in the 2007-09 crisis
By: Ben Bernanke – Brookings

The 2008 financial crisis and the sovereign debt crisis in the euro area led to major recessions. By contrast, the macroeconomic impact of the bursting of the technology bubble in 2000 was mild. The reason behind these all-or-nothing effects is amplification: a fragile financial system makes economic agents more sensitive to changes in financial conditions.

The economic impact of financial events: an all-or-nothing phenomenon
By: Stéphane Lhuissier – Banque de France