Abstract
The Great Recession in the USA began in December 2007. When it formally ended 18 months later (June 2009), it proved to be the longest economic contraction since the Great Depression. The 16-month recessions of 1973–1975 and 1981–1983, although close in duration to this Great Recession, did not parallel the severe financial crisis of the kind the USA experienced throughout 2008. The federal government’s refusal to rescue the collapsing investment giant Lehman Brothers in September 2008 heightened the level of uncertainty regarding the depth and duration of the new recession, which in turn led to a freezing of the credit market. Giant financial institutions such as Citigroup, Bank of America, and American International Group (AIG) were in imminent danger of insolvency. Within 2 years, a significant gap (8 %) opened between the economy’s potential and actual output despite efforts of the monetary and fiscal policymakers to reverse the decline.
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Notes
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1 See Blinder and Zandi (2010).
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3 See his presentation at the American Economic Association Annual Conference, Denver, January 7, 2011 which was based on http://econ-www.mit.edu/files/6348. See many blog posts from Krugman on inequality and (lack of) social mobility, including http://krugman.blogs.nytimes.com/2007/12/22/inequality-denial/ and http://krugman.blogs.nytimes.com/2008/02/10/income-and-consumption-inequality/.
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5 While banks played this strategy everywhere, for their tricks on California’s government see http://www.allgov.com/Top_Stories/ViewNews/Wall_Street_Bets_on_Cities_and_States_Failing_100427.
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7 See Krugman (2009b).
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9 Christiano et al. (2009) find that “If it [government spending] comes on line in future periods when the nominal interest rate is zero then there is a large effect on current output. If it comes on line in future periods where the nominal interest rate is positive, then the current effect on government spending is smaller.”
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10 See an interesting discussion on how Say had later changed his view, in deLong (2009a).
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11 See Valletta and Kuang (2010).
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12 Krugman (2009b), “So, it’s an amazing thing: Obama and company have managed to convince people that big government failed, without actually delivering big government.”
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13 Also see papers from a “Symposium on the Financial Crisis and the Teaching of Macroeconomics,” published by the Journal of Economic Education, Fall 2010.
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14 Simon Johnson nicely relates the disastrous failure of regulation to the theory of regulatory capture first advanced in 1971 by the conservative economist George Stigler in his “The Theory of Economic Regulation”. See Bill Moyers’ interview with Kwak and Johnson: http://www.pbs.org/moyers/journal/blog/2010/04/financial_regulation_regulator.html. The theory says that individuals or corporations who are directly affected by a policy decision will devote a great deal of resources to achieve their preferred policy outcomes while general public will ignore it. Regulatory capture occurs when the groups seeking desired (or diluted) regulation succeed in their efforts. The theory seems highly relevant in explaining the evolution of regulatory regime during the decade leading up to the recent crisis.
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15 Akerlof and Shiller (2009) analyze the substantial effect of psychology behind animal spirits of investors that they claim can engender a crisis of the magnitude the world has just seen.
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16 Kumhof and Ranciere (2010): In 1983, the top 5% exhibited a debt to income ratio of 80% and the bottom 95% a ratio of 60%. Twenty five years later, the situation is dramatically reversed with a ratio of 65% for the top 5% and of 140% for the bottom 95%. (Voxeu.org article, “Inequality, leverage, and crises,” February 4, 2011).
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Upadhyay, M., Mason, T. (2013). The Financial Crisis and the Great Recession in the United States. In: Verma, N. (eds) Recession and Its Aftermath. Springer, India. https://doi.org/10.1007/978-81-322-0532-6_2
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