But the link between the housing bubble and the severe financial panic is much weaker than people realize. And the link between the severe financial panic and high unemployment in 2011 is almost nonexistent.
What's holding the economy back despite the easing of the financial crisis per se, the evidence suggests, is the overhang of household debt.
The original narrative of the financial crisis was that the run on the shadow banking system caused risk spreads to rise tremendously. Remember all the talk about using the TED spread (Treasury vs. Eurodollar) as the "thermometer" showing the "fever" from which the financial system was suffering?
The link between these risk spreads and the decline in the real economy typically was not spelled out (although Mark Zandi and Alan Blinder claimed that it was a big part of their modeling exercise that showed that TARP saved us all). Most economists just thought it was intuitively clear that these higher risk spreads killed the economy.
If you look at the financial "thermometers," the crisis exploded in the summer of 2008 and was over by early 2009. If you look at monthly GDP (see Sumner's post), the problem began about April of 2008, the worst was over by early 2009, and real GDP finally turned around in the middle of 2009. To give Sumner his due, I think it is really, really hard to tell a story in which the financial fever affects the real economy with a lag that is very short, or even negative.
Of course I prefer to look at the ratio of employment to population. Relative to monthly GDP, it seems to me that this ratio started falling sooner and kept falling longer.
I think the point to keep in mind is that the narrative for the crisis could really change as the dust settles. Again, I urge you read Sumner's entire post.