As the Great Recession unfolded or should I say EXPLODED over the U.S. economy, there was a debate over whether we were experiencing a credit crisis or a liquidity crisis.
Following are several discussions of why the Great Recession occurred.
The first is from the Muddy Water Macro paper posted at Washington University in St. Louis MO: Causes of the Great Recession.
During the ‘Consumer Age” period from the early 1980s through 2007, much of U.S. demand growth was generated by the rapid growth of consumer spending financed by unprecedented increases in household debt.
Another opinion is posted by Ravi Jagannathan, Mudit Kapoor and Ernst Schaumburg: What really spurred the Great Recession?
Real recovery, Jagannathan argues, requires policies in the U.S. and abroad that take account of the new global reality.
Markus K. Brunnermeier referred to a liquidity crisis in his paper: Deciphering the Liquidity and Credit Crunch 2007-2008.
An increase in mortgage delinquencies due to a nationwide decline in housing prices was the trigger for a full-blown liquidity crisis that emerged in 2007…
Stephen G. Cecchetti wrote in the Journal of Economic Perspectives:
when this kind of event happens, the job of the central bank is to assure that financial institutions have the necessary funds to conduct their daily business; that they have the “liquidity” they need to make timely payment and transfers.
Since there are references to Keynesian theory in the papers offered in this post, I offer a link to Keynesian theory. To sum up Keynesian theory, a quote from “What is Keynesian Economics?“, an article written by Sarwat Jahan, Ahmed Saber Mahmud, and Chris Papageorgiou at the International Monetary Fund website:
The central tenet of this school of thought is that government intervention can stabilize the economy.