credit crunch leads to recession???

Credit conditions in financial markets have tightened and there has been a weakening of the capital positions of many major banks in the wake of recent financial market turbulence. These developments raise the question of whether a “credit crunch”—a severe declinein the supply of credit—is looming in the United States and other advanced economies and, if so, what adverse impact this will haveon economic activity. Past periods of financial market stress have not generally had a major impact on broader economic activity, largely because different segments of the financial system have been able, at least partly, to compensate for difficulties in others. However, there have been episodes associated with major bank strains and sharp declines in asset prices when activity has been more seriously affected. In the current context, an overarching concernis that credit creation may have been impaired because of the faltering of the twin engines ofthe financial system—the banking system and the securities markets.
Writing for the voxeu, Nicholos Bloom argues that the wave of uncertainty troubling the markets will likely induce a recession – and render policy instruments powerless to prevent it

Note: Prior to 1986, “annualised standard deviation” is calculated as the percentage actual volatility of monthly returns on the S&P500 index of the US stock market. After 1986, it is calculated using the percentage “implied volatility” from an option on the S&P100 index.

Note: The vertical axis shows a measure of volatility derived from Schwert (1990), which contains daily stock returns to the Dow Jones composite portfolio from 1885 to 1927, and to the Standard and Poor’s composite portfolio from 1928 to 1962.