The crisis that stormed the world economy starting in the summer of 2007 is now past the acute phase. Some countries, notably the large emerging economies, are back to pre-crisis growth rates. Nevertheless, the US recovery is surprisingly weak, and its unemployment rate still unacceptably high. The euro zone went through a sequence of sovereign debt crises that highlighted problems in coordination and economic governance, posing a remote but concrete risk that the single currency would collapse. The bold intervention by the European Central Bank (ECB), in September 2012, cooled the worst speculation but European economies remain on life support.

The first phase of the crisis has been extensively discussed, the salient facts being familiar: a crisis in speculative market for subprime loans in the United States generated a cascading effect on the rest of the global financial system. The contagion was mostly due to deregulation that allowed the proliferation of increasingly opaque financial instruments, spreading toxic assets in the portfolios of often unaware owners, and leading at the same time to excessive risk-taking and debt. When the housing bubble in the US burst, financial institutions worldwide, but also households and companies, rushed to sell their assets, whose quality was uncertain, in order to restore more prudent ratios between debt and liabilities. This deleveraging led to a credit crunch and a drastic reduction of investment and consumption. The financial crisis spilled to the real economy, becoming the worst recession since the 1930s.

The policy response followed typical textbook recipes that have been known since Keynes wrote “The General Theory of Employment, Interest and Money” in 1936: on the one hand, the massive intervention of central banks flooded financial institutions with liquidity that prevented the meltdown of the financial sector. This injection of liquidity, nevertheless, was ineffective to restart the economy. The deleveraging of banks, businesses and families led a rush to safe assets as the liquidity made available by central banks was hoarded, without being turned into demand for goods and services. This liquidity trap, familiar to historians, made monetary policy lose traction. As Keynes would have prescribed, in the spring of 2009, most advanced and emerging economies implemented massive stimulus plans that supported demand and put economies on a recovery path, even if at the price of a generalized deterioration of public finances.