The Great Contraction

The Great Contraction is the recession of December 2007 to June 2009, so named because of the severity of financial crisis by which it was precipitated and the severe contraction in GDP and employment that took place over the period following its onset. The crisis affected dozens of countries around the world. In this chapter, we focus on the United States and on the policies it adopted in reaction to the crisis. We expand the discussion to include 20 additional countries in the following chapter.

Origins of the Contraction

The crisis resulted from the collapse of housing prices and the resulting losses experienced by holders of subprime mortgages. The S&P Case–Shiller 20-City Home Price index fell by 34 percent ...

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