In the period leading up to the 2008 global financial crisis, regulations in principle limited the activities of banks and securities firms, but regulators were encouraged to minimise the extent to which they intervened in free markets. The crisis, and the recession which followed it, illustrated quite how short-sighted this view had been.
In the UK, the government had to step in to stop many of the major UK banks from collapsing. The government spent around 5% of UK national income rescuing and recapitalising the banking system. But much greater than these direct costs were the effects on economic growth, and critically the national output lost as a result of the crisis. This was estimated at 25% of its pre-crisis level. The position in the rest of the developed world was equally dramatic. In fact, the forgone gross domestic product (GDP) in Ireland, during the 3 years following the crisis, was a colossal 106% of its pre-crisis level. Table 1 shows how the crisis affected selected countries.
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