Tuesday, November 3, 2009

The Great Recession Explained

A few weeks ago I edited a paper "Understanding the Great Global Contagion and Recession" by Heritage Foundation analyst JD Foster that made a lot of sense to me, even though it was a bit above my head. I don't normally promote papers that I edit on this blog, but this one particularly impressed me and answered a few questions I have had about the current recession. I consider it well worth reading (and rereading).

Here's the abstract:
The Great Global Contagion and Recession was largely the result of a sustained global savings glut combined with excessive monetary accommodation by the Federal Reserve and other central banks. These two complementary and reinforcing forces artificially depressed the price of risk globally, leading to the widespread mis-pricing of assets and misallocation of investment. These effects were enhanced by rapid financial innovation and breathtaking arrogance of leading financial market participants in believing that they understood these innovations. It was also facilitated by a succession of policy failings, most importantly the failure of the United States and Europe to modernize their financial regulatory structures to keep pace with developments in financial markets.

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