Page 26 - Accelerating out of the Great Recession

THE DAMAGED ECONOMY

of the 1930s. This was the picture painted by Professors Barry
Eichengreen of the University of California, Berkeley, and
Kevin H. O’Rourke of Trinity College in Dublin in their paper,
“A Tale of Two Depressions.” Between 2007 and 2009, produc-
tion and world trade dropped even faster than they did in the
Great Depression. The major difference between then and now
has been the fiscal and monetary policy and the aggressive
measures taken to stabilize the global financial system. In mak-
ing these moves, politicians and bankers did, in fact, heed the
lessons of the Great Depression and the Lost Decade in Japan.
In so doing, they were acting on the recommendations of
Depression-era economists such as Irving Fisher and John
Maynard Keynes. Thanks to these coordinated efforts, a second
Great Depression was avoided.
Even so, we need to recognize that the initiatives to “reflate”
the global economy amount to an unprecedented and historic
experiment. Some of these measures, although discussed theo-
retically, have not been put into practice before. So the big
question remains: Is this the end of the crisis, or will the crisis
simply follow a different pattern?
To answer this question, we need to examine the background
of the current financial and economic upheaval since it burst
into the public consciousness in 2007.

■ HOW IT HAPPENED ■

We all know that a crash in U.S. property prices triggered a
leverage crisis in the subprime-mortgage securitization market.
This, in turn, triggered a global liquidity crisis, which itself con-
tributed to a solvency crisis among some banks and an increase

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