CHAPTER 5

The Great Contraction and Its Aftermath

From December 2007 to June 2009, the United States went through the “Great Contraction,” so named because of the severity of the financial crisis by which it was precipitated and the severe contraction in GDP and employment that resulted over the period following its onset. In this chapter, we consider the history of the Great Contraction some 11 years since it began. We discuss the current state of the U.S. economy in this context because of the fact that the effects of the Great Contraction and of the policies adopted to ameliorate it continue to influence the economy today.

Origins of the Contraction

The crisis resulted from the collapse of housing prices and the resulting losses experienced ...

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