Learning tough lessons from crisis of 2008
When the next bust comes, the world will be far better prepared
In September 2008, the collapse of Lehman Brothers triggered the worst economic crisis in the developed world since the Great Depression. Within two quarters, real GDP contracted by 3.3% in the US, by 4.7% in the eurozone and by 7.2% in Japan. The rebound in markets and real economies started over the course of the second quarter of 2009 after the US Fed had signalled its readiness to buy massive amounts of bonds in March that year. Beyond the widespread misery which the crisis caused - for example, for those people who lost their jobs - it turned out to be very expensive. From 2007 to 2013, the ratio of public debt to GDP surged by 41 percentage points in the US and 29 percentage points in the eurozone. What went wrong? Two US policy mistakes caused the catastrophe. First, the US Fed blew up a massive credit bubble with average annual credit growth to the private sector of 9.5% from 2004 through 2007. The Fed mistook the disinflationary impact of positive supply shocks (cheap impor...
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