2. The Great Recession of 2007–2008

This chapter reviews a range of macroeconomic and financial sector developments leading to the Great Recession and discusses how risk perceptions affect the financial markets. It describes how several European countries went through a similar seesaw of boom and recession, largely driven by the same macroeconomic forces that caused the recession in the USA. It examines the role played by policies, regulation (or lack of it, and poor enforcement), rating agency behavior and executive remuneration incentives. It also describes how various important financial institutions were impacted by the crisis. Finally, it summarizes the timely warnings of a few prominent economists about the dangers facing the economy, which were ignored.