GREAT ECONOMIC RECESSION: CAUSES AND CONSEQUENCES

Abstract

September 15, 2008 – panic gripped the USA – Americans woke up on that Monday to know  that Lehman Brothers, the leading global bank had collapsed due to bankruptcy – imposing  losses of billions on the already shaken monetary system because of real estate market catering  and credit crisis.  

The 2008 financial crisis – precipitated in the summer of 2007 and heightened in September  2008 – rapidly mutated from the bursting of the subprime mortgage bubble in the US to the  intense global recession. The problem started with the US but cast a dark cloud on the  prominent economies of the world like the European Union and Japan. The old proverb again  comes true – “when America sneezes, the world catches cold”. 

The crisis was mostly unpredicted and surprised many policymakers, economists, multilateral  agencies and financiers who could not understand that the buoyant US economy will turn into  “Great Recession”. But indications were there – trading off in the credit use leading to crowding  out of production financing, the imbalance between the financial sector’s contributions to the  real economy and debt balance1, large current account deficits, loose fiscal policy, and  regulation; all were warnings of the squall.2 

However, this crisis has raised many questions to the policymakers, academicians, investors  and market players. What circumstances have led to this crisis? What have been the  consequences and policy responses? These are the questions that would be explored in this  project.