Great Recession

Overview

The Great Recession followed a twenty-year period that has been termed the "Great Moderation", during which recessions had been less frequent and less severe than in previous periods, and during which there been a great deal of successful financial innovation. Attitudes and habits of thought acquired during that period were to have a significant influence upon what was to come. Another significant influence was to be the development during that period of major flows of investment capital from the developing to the developed economies, and two further factors were the large-scale granting of credit to households in some of the major economies, and the creation there of house price booms, that have since been categorised as bubbles, but were not recognised as such at the time. It struck the major economies at a time when they were suffering from the impact of a supply shock in which a surge in commodity prices was causing households to reduce their spending, and as a result of which economic forecasters were expecting a mild downturn.

The trigger that set it off was a malfunction of an otherwise globally insignificant market in the United States, but its causes were complex and numerous. It turned out after the event that the financial innovations that had been richly rewarding individual operators in the United States and elsewhere, had at the same time, been threatening their collective survival. The crucial nature of that threat arose from the fact that the global economy had become dependent upon the services of a well-functioning international financial system. The consensus view among economists is that the combination of monetary and fiscal expansion that was then undertaken by policy-