Do financial crises really cause a drop in output?

The following was posted inThe Economist comments  to an artice “Lessons of the 1930s” in the December 10, 2011 edition.

“As in 1931 and 2008, a grave financial crisis may cause a large drop in output.”

This short sentence in this article reflects what appears to be conventional economic wisdom and  needs to be challenged because it could be that a drop in output causes financial crises.  Or it could be that one feeds the other.

During the 1930s America experienced its most severe ever drought and there may have been other problems in the physical side of the economy. Most of us are too old to remember.

Today there are people who claim we are using resources at a rate that is 150 percent of the sustainable rate.  If that is so, or even partly so, it is not surprising we are in an economic crisis.

If it is true that current problems are because our use of resources is unsustainable, then quite different policies are required.

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