The likely reason is that pre-crisis growth in the former case is based on an illusion of rising wealth and is more artificial.

I wonder if there aren't also psychological factors involved in the heavier impact of burst financial bubbles. Any time major banks fail in the modern world, and bank runs are threatened or narrowly averted, then old primal fears of Disaster and Depression, seared into the national consciousness of many peoples around the world, are reactivated. Fear soars and confidence plunges; savings are hoarded. It takes Homo Economicus some time to recover from these kinds of traumas.

When a provincial outpost is sacked during a war, people are concerned. When the capital is burned, the populace panics. Similarly, when a bubble bursts in a single sector like dot.coms, only some in the citadels of capital are affected. The big financial firms stay calm, and sail fairly steadily through the rough storms of readjustment. But when the citadel itself is the central site of the collapse, then the public sees the generally sober leaders of the economy running around with their hair on fire. When the Grand Central Banker appears before Congress and says "My whole philosophy was wrong," that sends the chilling message that the high command of the economy is unreliable and unequal to their task.

When historians study this recession, they will look at the broad-based, global freak-out of last fall, and the enduring impact the sheer panic had on business and consumer behavior.

Dani said, "When historians study this recession, they will look at the broad-based, global freak-out of last fall, and the enduring impact the sheer panic had on business and consumer behavior."

Remember reading a Missouri economics professor and expert in high-finance fraud saying that all the indicators of what happened last fall looked exactly like what he would have expected had the mechanics and timing of the freakout been planned and directed toward the end of socialism for the rich.

Mike Whitney makes some good points on the so called recovery. I especially like this part.

As for the recovery, market analyst Edward Harrison sums it up like this:

"This is a fake recovery because the underlying systemic issues in the financial sector are being papered over through various mechanisms designed to surreptitiously recapitalize banks while monetary and fiscal stimulus induces a rebound before many banks' inherent insolvency becomes a problem. This means the banking system will remain weak even after recovery takes hold. The likely result of the weak system will be a relapse into a depression-like circumstances once the temporary salve of stimulus has worn off. Note that this does not preclude stocks from large rallies or a new bull market from forming because as unsustainable as the recovery may be, it will be a recovery nonetheless." (Edward Harrison, "The Fake Recovery", Credit Writedowns)

The rally in the stock market will not fix the banking system, slow the crash in housing, patch-together tattered household balance sheets, repair failing industries or reverse the precipitous decline in consumer confidence. The rising stock market merely indicates that speculators are back in business taking advantage of the Fed's lavish capital injections which are propelling equities into the stratosphere. Meanwhile, the unemployment lines continue to swell, the food banks to run dry and the homeless shelters to burst at the seams. So far, $12 trillion has been pumped into the financial system while less than $450 billion fiscal stimulus has gone to the "real" economy where workers are struggling just to keep food on the table. The Fed's priorities are directed at the investor class not the average working Joe. Bernanke is trying to keep Wall Street happy by goosing asset values with cheap capital, but the increases to the money supply are putting more downward pressure on the dollar. The Fed chief has also begun purchasing US Treasuries, which is the equivalent of writing a check to oneself to cover an overdraft in one's own account. This is the kind of gibberish that passes as sound economic policy. The Fed is incapable if fixing the problem because the Fed is the problem.

Well said.

C

The likely reason is that pre-crisis growth in the former case is based on an illusion of rising wealth and is more artificial.

If you accept the notion of the growth as having been artificial and then act in a way that attempts to retain that artificial growth but do it only for selected segments where growth occurred you modify the relative wealth holdings across all growth segments.

I believe that statement captures exactly what is going on. Except what this yields is actually worse than it sounds. The reason for that is losses initially were spread all across the economy. The bailouts have sought to restore to shareholders and bondholders their losses by picking the pockets of citizens. In the end citizens are being forced to absorb their own losses via savings losses, job losses etc as well as the losses of shareholders and bondholders.

This is nothing less that a major transferrence of wealth. It is one where the wealth transferrence that accrues is backward relative to a discovery process to determine accountability for what created this trauma. That this discovery process has been held in secret or not at all and where the outcome of that process would reveal serious transgressions by the financial community and our regulatory agencies, there exists a more than obvious potential for criminal liability.

Even if the trauma were to be considered an outcome of grossly negligent financial management the same cannot be said for the solution. Where the solution resolves to the scenario I describe, it becomes immediately obvious the solution is ethically and most probably legally corrupt. The assignment of liability to the injured party is a major injustice. And where the central players in the commission of this injustice are our elected and appointed officials, the citizens of this country are presented with a major dilemma of vast consequence.

At the center of the coming shitstorm is our new president. Obama has yet to show he undertands the relationship I have outlined. Obama and democrats in general are going to suffer serious consequences by their handing the tab for the very serious shortcomings of the Bush administration to the citizens of this country. Republican fortunes are currently in the shitter because Americans objected to the outcomes and lack of accountability practiced during the Bush administration. I've no doubt the present path will render an even worse backlash against Obama and democrats. Where any administration fails to hold persons accountable for creating undesirable events citizens will fill that accountability gap. In one way or another.

Also, many of the main counters to economic slump -- deficit spending and low interest rates, were already heavily tapped before Sept 08. These factors also play into the problem, it would seem to this layperson.

One would think that the balance of fabulously expensive bank bailout on one hand and stimulus money/ecoindustrializing investment on the other (now HEAVILY tilted toward bailout money) is crucial. From what I've been reading, there's much reason to believe that stimulus spending, including more money to state governments and other curtailed measures is likely to be far more effective both at blunting the pain of slump and in an earlier recovery.

It would seem that the same political balance of power and pressures that brought about the deregulation and other policy patterns that lead to the current crisis are determining the outlines of the response (bailout) -- the same politics of the disease predominating in both

This is, again, the impression of a layperson from the substantial amount I've been reading since the crisis struck