Abstract

The ongoing sovereign debt crisis in Europe and U.S. is challenging the conventional wisdom and is creating fears of a double dip recession in 2012. Massive levels of debt and consumption beyond means and speedy financial innovation with lax regulation has put major economies in a deep hole. Monetary policy with ease in rates had been ineffective, to say the least, in generating new jobs in the last few years when interest rates were kept at near zero level since 2008 in United State. Fiscal stimulus again targeted the undisciplined financial sector which did not use the stimulus for extending credit to the private sector as much as was required. With business cycle fluctuations, mounting consumer and fiscal debt is unsustainable and one lesson of the crisis is that business cycles are for real and here to stay. The securitization of consumer debt magnified the losses and created negative unjust effects on savers and taxpayers which had nothing to do with the mess in the first place. Against this backdrop, a new paradigm is needed which will put the focus back on productive enterprise, bring recovery with job creation, limit and regulate speculative financial institutions and instruments, and improve corporate governance by influencing the incentives more deeply and proactively.

Key words: Great recession, great depression, financial crisis, credit crunch, subprime mortgage crisis, housing market bubble, securitization, leveraging, shadow banking.