BPEA | Fall 2018

The real effects of the financial crisis

A pedestrian walks in front of the BankUnited headquarters in Coral Gables, Florida May 21, 2009. U.S. bank regulators on Thursday closed troubled lender BankUnited Financial Corp, Florida's largest bank, and sold its banking operations to a private equity consortium that includes WL Ross & Co. BankUnited, which had $12.8 billion in assets and $8.6 billion in retail deposits, is the biggest of 34 U.S. banks to fail so far this year. The Federal Deposit Insurance Corp said it estimates BankUnited's failure will cost its insurance fund $4.9 billion. REUTERS/Carlos Barria (UNITED STATES BUSINESS POLITICS) - GM1E55M0MI401
Editor's note:

This paper is part of the Fall 2018 edition of the Brookings Papers on Economic Activity, the leading conference series and journal in economics for timely, cutting-edge research about real-world policy issues. Research findings are presented in a clear and accessible style to maximize their impact on economic understanding and policymaking. The editors are Brookings Nonresident Senior Fellow and Northwestern University Economics Professor Janice Eberly and James Stock, Brookings Nonresident Senior Fellow and Harvard University economics professor. Read summaries of all five papers from the journal here.


Economists both failed to predict the global financial crisis and underestimated its consequences for the broader economy. Focusing on the second of these failures, this paper make two contributions. First, I review research since the crisis on the role of credit factors in the decisions of households, firms, and financial intermediaries and in macroeconomic modeling. This research provides broad support for the view that credit-market developments deserve greater attention from macroeconomists, not only for analyzing the economic effects of financial crises but in the study of ordinary business cycles as well. Second, I provide new evidence on the channels by which the recent financial crisis depressed economic activity in the United States. Although the deterioration of household balance sheets and the associated deleveraging likely contributed to the initial economic downturn and the slowness of the recovery, I find that the unusual severity of the Great Recession was due primarily to the panic in funding and securitization markets, which disrupted the supply of credit. This finding helps to justify the government’s extraordinary efforts to stem the panic in order to avoid greater damage to the real economy.


Bernanke, Ben. 2018. “The Real Effects of the Financial Crisis.” Brookings Papers on Economic Activity, Fall, 251-342.

Conflict of Interest Disclosure

Dr. Ben S. Bernanke is a Distinguished Fellow in residence with the Economic Studies Program at the Brookings Institution, as well as a Senior Advisor to PIMCO and Citadel. The author did not receive financial support from any firm or person for this paper or from any firm or person with a financial or political interest in this paper. With the exception of the aforementioned, he is currently not an officer, director, or board member of any organization with an interest in this paper. No outside party had the right to review this paper before circulation.