The Global Economic System: How Liquidity Shocks Affect Financial Institutions and Lead to Economic Crises

Chapter 5. The Great Recession

As the most recent episode of a liquidity crisis, the U.S. Great Recession provides another ready example to illustrate our argument.¹ Between 2008 and 2009, the United States experienced the worst economic downturn since the Great Depression. Stock and home prices plunged, wiping out trillions of dollars of wealth in a short period of time. As we write this in early 2011, there have been signs of recovery, but unemployment levels (traditionally a lagging indicator) remained around 10% at the end of 2010, more than double late-2006 levels of around 4% to 5%.

5.1 The Stages of a Liquidity Shock—Same Applies Now as with the Great Depression

Our discussion of the U.S. Great Recession is structured as in the previous ...