Introduction

With the deep economic crisis of 2008–09, the developed world has experienced the deepest recession since World War II. What started as a minor correction in U.S. house prices quickly turned into a systemic financial crisis with serious repercussions for the real economy. At first, the downward dynamic of many indicators mirrored that in the Great Depression. However, as asset price deflation and real economic contraction after 2007 did not lead to goods market deflation and the world economy quickly recovered, the period is now generally referred to as the 'Great Recession'.

In fact, the worst seems to have been averted: Goods market deflation is fatal for any positive economic development. It increases the real debt burden and in a situation of high debt it leads to the collapse of the financial system – as can be seen in the Great Depression. The difference between the two big crises in the last hundred years is that governments during the Great Recession passed fiscal stimulus packages and measures to stabilise the financial systems. Such policies must be considered of paramount importance in preventing an economic, social and political disaster comparable to the one in the 1930s. The Great Depression had a lasting structural impact on the economy.

The New Deal in the U.S. under President Roosevelt with his aggressive policy to reduce the power of the elites in the financial system and restructure finance, regulate labour markets and change income distribution brought fundamental changes which paved the way for the prosperous development after World War II. During the Great Recession, while short-run policies were much more sound and prevented a cumulativedownturn spiral, at least until 2012 no systemic steps were taken to change the underlying factors of the crises as was done in the 1930s. Also, it remains open how long and even if governments are able and willing to use fiscal stimulation and bailouts of financial institutions if the currently observed relapse of the crisis (in 2012) continues or deepens.

Medium- and even potentially long-term difficult times seem to be ahead in the U.S., Europe and Japan. There is the danger of a 'lost decade' of little or no economic growth as has been experienced in Japan since the local price bubbles burst in the 1980s and early 1990s. In this contribution, we explain why the Great Recession became possible and how to avoid its prolongation and deterioration into a 'lost decade'. To that end, the roots of the crisis will be discussed in Section 2. Section 3 analyses how the Great Recession was handled, while Section 4 offers a number of possible solutions to counter a 'lost decade'.