While I'm a big believer in staying positive, I'm also a smart enough sailor to read the weather forecast before heading offshore. Small craft advisory usually means stow all your gear and hang on to your a**, it's going to be a bumpy ride. This cliff notes summary of a Reinhart/Rogoff paper was presented at a meeting of economists (AEA) in December. It uses historical results of previous cycles to to predict what likely lies ahead:
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 postWorld War II episodes. Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn.