Chapter 4: Fiscal costs of the Global Financial Crisis
Many G20 countries provided significant support to their financial sectors during the GFC. Although the magnitude and nature of support measures varied across countries, with support in advanced countries being preponderant, interventions were generally bold. These support measures included recapitalization and partial nationalization, asset purchases and swaps, asset/liability guarantees, extended deposit insurance, and liquidity support. This chapter does not attempt to go further than identifying direct bail-out costs and does not take account of the fiscal stimuli required after the financial crisis to avert a depression, potentially on the scale of the Great Depression of the 1930s. These fiscal interventions were supported, in contrast to the 1930s, with massive monetary stimuli involving low interest rates and ‘unconventional’ ‘Quantitative (and Qualitative) Easing’ (QE), led by central banks; particularly in the US, the UK and then Japan and, latterly, the EU. Another depression was averted, but nevertheless there was a ‘Great Recession’. The fiscal stimuli led to a rise in government debt, taking the place of falling private, particularly household, debt to avert the depression, but ‘austere’ fiscal consolidation was embarked upon by some countries; arguably too much too soon, resulting in a slow, drawn-out recovery. At the time of writing, ‘normalization’ of interest rates was being contemplated, but would interest rates be raised too far too soon? Fiscal austerity clearly entails ongoing costs of the crisis, and the failure to resume pre-crisis rates of growth points to further losses of tax revenues.
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