The Great Recession and Economic Policy Implications

The purpose of this contribution is to iscuss the origins of the current crisis followed by an extensive treatment of the relevant economic policy implications. Over the period prior to the ‘great recession’ and after the intense period of financial liberalisation, especially in the the great strides were seen in the development and extension of new forms of securitisation and use of derivatives. This was a financial engineering practice, which led to the growth of collateralised debt instruments, especially so in the form of collateralised mortgages. However, financial liberalization alone cannot fully explain the ‘great recession’ crisis. These were the main causes of the crisis; but there were also, we argue, contributory factors. We isolate three of them: the international imbalances, mainly due to the growth of China; the monetary policy pursued by countries over the period leading to the crisis; and the role played by the credit rating agencies. The ‘great recession’ led to massive state support along with a subsequent deterioration of the public finances in most of the affected countries.