The First Great Recession of the 21st Century

The First Great Recession of the 21st Century

Competing Explanations

Edited by Óscar Dejuán, Eladio Febrero and Maria Cristina Marcuzzo

The 2008–10 financial crisis and the global recession it created is a complex phenomenon that warrants detailed examination. The various essays in this book utilise several alternative paradigms to provide a plausible explanation and a credible cure. Great detail is given to this important analysis from different theoretical perspectives, presenting a clearer understanding of what went wrong and expounding misinterpretations of current theories and practices.

Chapter 14: The Aftermath of a Long Decade of Real Nil Interest Rates (Spain 1996–2008)

Óscar Dejuán and Eladio Febrero

Subjects: economics and finance, financial economics and regulation, history of economic thought


Óscar Dejuán and Eladio Febrero 14.1 INTRODUCTION1 In Westerns, when the sheriff enters a rowdy saloon he shoots the pianist in order to appease the crowd and gain its respect. In sports, when the team is doing badly, it is obvious that the coach should be fired. In a similar fashion, when an economic crisis occurs, politicians, economists and lay people work out who should take the blame. It seems convenient to single out one culprit and punish him firmly in order to restore social confidence and start anew. Apparently, the culprit of the Great Depression of 1929 was the Chairman of the US Federal Reserve (Fed). According to Milton Friedman (an opinion that has gained followers with the passage of time), the Fed printed out too much money during the 1920s and, suddenly, it cut off the money supply (Friedman and Schwartz, 1963). For many scholars the villain of the Great Recession of 2008 is, once more, the Chairman of the Fed (and the presidents of other central banks who followed suit). They kept the official interest rates too low for too long (from 2002 till the end of 2005, although the policy of low interest rates started in the mid-1990s). On 7 April 2010, Alan Greenspan (Chairman of the Fed in 1987–2006) was called by Congress to give a public testimony before the Financial Crisis Inquiry Commission.2 He admitted that the crisis was triggered by the bursting of the bubble in the real estate market and...

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