Like earthquakes, financial crises seem to be accompanied by aftershocks, like the one we\u2019ve been living through this week. They can feel every bit as bad as the crisis itself. But economic history and academic research suggest they can set the stage for a sustainable recovery \u201d\u201d and eventual sharp stock market gains.<\/p>\n
The events of the last few weeks \u201d\u201d gridlock in Washington, brinksmanship over raising the debt ceiling, Standard & Poor\u2019s downgrade of long-term Treasuries, renewed fears about European debt and a dizzying plunge in the stock market \u201d\u201d bear an intriguing resemblance to some of the events of 1937-38, the so-called recession within the Depression, with a major caveat: it was a lot worse back then. The Dow Jones industrial average dropped 49 percent from its peak in 1937. Manufacturing output fell by 37 percent, a steeper decline than in 1929-33. Unemployment, which had been slowly declining, to 14 percent from 25 percent, surged to 19 percent. Price declines led to deflation.<\/p>\n
\u201cThe parallels to what is happening now are very strong,\u201d\u009d Robert McElvaine, author of \u201cThe Great Depression: America, 1929-1941\u201d\u009d and a professor of history at Millsaps College, said this week. Then as now, policy makers were struggling with how and when to turn off the fiscal stimulus and monetary easing that had been used to combat the initial crisis.<\/p>\n