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 ...

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