Understanding why financial crisis are costly requires understanding growth dynamics, the sorting and selection of firms into new, profitable market segments as well as the factors driving nonviable firms out of business. In essence, understanding Schumpetarian growth dynamics is essential. Booms and busts on markets and the associated misallocation of credit not only reflect misaligned prices that can be corrected quickly.
Rather, misallocation of credit leads to the misallocation of investment, both real investment and human capital. Employees are lured into sectors and firms that do not have viable business models. Once prices correct, these investments need to be reversed, with painful adjustments required in terms of employment and skills.