Indelible Lessons from the Great Recession - Introduction

A recession unlike any other

Since August 2007, what originally started as a housing bubble in the USA and Britain quickly became a widespread credit crunch; was followed in 2008 by an unprecedented crisis of confidence in world’s banks, central banks and the governments behind them; was later succeeded by sovereign debt worries for European  countries previously thought to be prosperous and dependable ; unveiled shortly after persistent  frictions on the setting  of global exchange rates and the adequacy of bank capitalizations; and is now  increasingly looking like it will lead to trade conflicts which can inevitably alter the rules of globalization.

In recent memory no other economic crisis managed to confound so many economists, bankers, businessmen and government leaders, in so many countries, so much and for so long. This one hasn’t just caused massive global financial instability, but it will also be remembered for laying the foundation for the emergence of a new world economic order.

Seven years after the crisis, all of the G7 countries representing the advanced economies of the world are unmistakably flirting with deflation.  Even Germany, which best weathered the shock among the G7, is now facing economic stagnation courtesy of  unfavorable currency fluctuations combined with deteriorating demand in its own home turf of Europe.

The Great Crisis of 2008 has had devastating consequences worldwide. But its impact on America has been brutal, comparable only to the economic damage of the Great Depression. Although a global consensus on the causes behind the Great Recession has been particularly difficult to reach, three factors appear to create convergence everywhere:  excessive household debt, overleveraged financial sector and breakdown in accountability (both in the supervisory regulations and the corporate governance of big financial firms) to control an “overdose” condition in the previous two.

All three factors were present to varying degrees on both sides of the Atlantic. The question of “to what extent has lax monetary policy also contributed to stimulate the presence of all three?” is, rather remarkably, still unanswered.

Against this backdrop, there still remains however a few questions of major consequence. Attempting to answer some of them could provide valuable lessons for the future:

• When bubbles stemming from lax credit burst, as in 2007, who gets hurt the most?
• Why free-flow Global Finance, a once hailed concept, hasn’t averted the recession?
• Why is global deleveraging, a post-recession imperative, still very much deferred?
• Can monetary policy geared to currency debasement deliver economic growth?
• Why are all the rich economies of the world struggling with growth renewal?