What has been said in previous chapters about economic theory and modelling could have been just an idle mental exercise if the 2008 financial crisis had never happened. But it did, and it happened in such a way that we were shocked for months, uncertain about what was actually occurring. In this chapter we are going to review what the policymakers did during that time from the point of view of economic theory and modelling. In previous chapters we have looked at what we really know about economic processes. Now we are going to compare this with what policymakers did during that time, and examine which of these models and theories will survive the ‘stress test’ of the Great Recession. Of course this will not be a complete account of the entire sequence of events starting in 2007. Rather, it is simply a brief journey through a select number of policymaking decisions which marked a salient departure from the ‘rules of the game’. It will not be a thorough historical examination of what was done in that time.

Economic Policies during the Crisis

During the months before and after the fall of Lehman Brothers, policymakers worldwide had to face the political challenges of the most unexpected of all of the economic and financial crises up to that point. We have shown (see Chapter 1) that no economic theory or model was able to predict the Great Recession, with the exception of some insightful authors.