ABSTRACT
The purpose of this contribution is to discuss the origins of the ‘great recession’, emphasizing its main causes. We concentrate on the financial liberalization and income redistribution, which produced the new financial engineering rooted in the US, which led to an extraordinary mispricing of risk. The new financial engineering practice led to the growth of collateralized debt instruments, especially so collateralized mortgages, essentially through the parallel banking sector in the US. When that market collapsed the ‘great recession’ emerged. We discuss the origins of the ‘great recession’ but emphasize the main causes of it. In doing so, we distinguish between main factors and contributory factors. The main factors, as suggested above, were: distributional effects; financial liberalization; financial innovation. The contributory factors were: international imbalances; monetary policy; the role of credit rating agencies. We then turn to economic policy implications where we focus on financial stability and proposals suggested in a number of countries or groups of countries, and the European Union (EU) in particular. Finally, we summarize and conclude.
