What was the 2008 Great Recession?
The Great Recession began in 2007 and continued for years, affecting the worldwide economy. This is the most significant decline since the Great Depression in the 1930s. The “Great Recession” refers to the December 2007–June 2009 U.S. recession and the 2009 worldwide recession.
The U.S. housing market crash caused a significant decline in the value of mortgage-backed securities (MBS) and derivatives, leading to the economic downturn.
Understanding the Great Recession
The name “Great Recession” references the 1930s “Great Depression,” when GDP dropped over 10% and unemployment reached 25%.
No precise criteria exist to distinguish a depression from a severe recession, but economists agree that 2007–2009 was not a depression. U.S. GDP fell by 0.3% in 2008 and 2.8% during the Great Recession in 2009, while unemployment temporarily hit 10%.
Great Recession Causes
The Financial Crisis Inquiry Commission found the Great Recession preventable in 2011. The six Democrats and four Republican appointees listed three main economic drivers.
First, the research found government financial industry regulation failure. The Fed failed to prevent banks from lending to poor-credit borrowers.
Again, too many financial firms took on risk. The shadow banking industry, which includes investment businesses, has grown to challenge the conventional banking system without the same monitoring or supervision. The collapse of the shadow banking sector affected consumer and commercial credit.
The study also cited excessive consumer and corporate borrowing and policymakers who didn’t grasp the financial system’s collapse. This caused asset bubbles, notably in the housing sector, as ineligible borrowers received low-interest mortgages and defaulted. The selloff lowered housing values and underwatered many homeowners. This significantly impacted the mortgage-backed securities (MBS) market, which relied on banks and institutional investors to provide mortgages to riskier borrowers.
Causes and Effects
The 2001 Dotcom bubble burst, and the 9/11 World Trade Center attacks hurt the U.S. economy. The Fed slashed interest rates to their lowest since Bretton Woods to boost the economy. The Fed kept rates low until mid-2004.
Federal policies encouraging house ownership and cheap interest rates led to a boom in real estate and financial markets, significantly increasing mortgage debt. New financial developments like subprime and adjustable mortgages enabled borrowers to get house loans on favorable terms, assuming low interest rates and rising property prices.
The Federal Reserve hiked interest rates to prevent inflation from 2004 to 2006. Traditional banking loans for real estate stalled as interest rates soared. Higher rates on adjustable mortgages and exotic loans were unexpected by consumers and lenders. Many debtors sold when monthly mortgage payments were too high, and they couldn’t refinance because prices had stopped growing. The rise in supply caused a housing bubble to implode.
Financial institutions marketed mortgage-backed securities and sophisticated derivatives at record levels during the U.S. housing bubble. When the real estate market collapsed in 2007, these securities plummeted. In 2007, the credit markets that financed the housing bubble suffered as home values fell due to the financial crisis. The collapse of Bear Stearns in March 2008 threatened the solvency of over-leveraged banks and financial institutions.
Later that year, Lehman Brothers, the fourth-largest investment bank, filed for bankruptcy in September 2008. The virus swiftly spread to neighboring economies, particularly in Europe. According to the U.S. Bureau of Labor Statistics, the U.S. lost almost 8.7 million jobs during the Great Recession, tripling the unemployment rate. The Treasury Department said that U.S. families lost $19 trillion in net value when the stock market plummeted. The Great Recession ended in June 2009.
The government took over failing financial firms and protected consumers from predatory lending under the 2010 Dodd-Frank Act.
Great Recession Response
The solid monetary policies of the U.S. Federal Reserve Bank and other central banks prevented more harm to the global economy. Some condemned the initiatives, saying they prolonged the crisis and set the stage for future recessions.
Monetary and Fiscal Policy
To increase liquidity, the Fed reduced a key interest rate to practically zero and supplied banks with $7.7 trillion in emergency loans, known as quantitative easing (Q.E.).
The U.S. government invested $787 billion in the American Recovery and Reinvestment Act to revive the economy, in addition to the inflow of money. Monetary and fiscal policy prevented immediate losses for large banks and enterprises.
Dodd-Frank Act
Along with stimulus programs, the government regulated the financial markets. The U.S. abolished the Glass-Steagall Act in the 1990s, depression-era legislation that separated investment and retail banking to avoid systemic risk. This decision may have caused the crisis, say economists. Following the repeal, numerous significant U.S. banks merged and formed larger organizations, many of which collapsed and required bailouts.
In 2010, Congress and President Obama signed the Dodd-Frank Act, granting the government more authority over the financial industry, especially institutions at risk of failure. It also protected consumers from exploitative financing.
Critics of Dodd-Frank note that the financial sector players and institutions that actively drove and profited from predatory lending and related practices during the housing and financial bubbles were deeply involved in the law’s drafting and implementation.
According to the Congressional Budget Office, the American Recovery and Reinvestment Act cost $787 billion to stimulate the economy during the Great Recession.
The Great Recession Recovery
These initiatives helped the economy recover. Real GDP bottomed out in the second quarter of 2009 and reached its pre-recession peak in the second quarter of 2011, three and a half years after the official recession. The cash flow on Wall Street revived financial markets.
After losing nearly half its value since August 2007, the Dow Jones Industrial Average (DJIA) began to rebound in March 2009 and broke its 2007 high in March 2013.
Worker and household prospects were less favorable. The recession began in 2007, and unemployment hit 10% in October 2009. Nearly eight years later, it did not return to 5% until 2015. Real median household income did not return to pre-recession levels until 2016.
Critics of the policy response and how it influenced the recovery say liquidity and deficit spending favored politically connected financial institutions and large businesses over regular people. It may have delayed recovery by keeping economic resources in sectors and activities that deserved to fail when other enterprises could have expanded and created employment.
How long was the Great Recession?
Official Federal Reserve data shows the Great Recession lasted 18 months, from December 2007 to June 2009.
Were there recessions after the Great Recession?
Not formally. After the worldwide COVID-19 epidemic began in early 2020, the economy and markets collapsed, although stimulus initiatives prevented a U.S. recession. Some experts worry about a late 2022 recession.
How Much Did the Great Recession’s Stock Market Crash?
At 14,164.53 on October 9, 2007, the Dow Jones Industrial Average hit its pre-recession peak. By March 5, 2009, the index had plunged over 50% to 6,594.44.
On September 29, 2008, one-day Dow Jones losses reached 778 points. It was the greatest point decline ever before the market meltdown in March 2020 due to the COVID-19 pandemic.
Bottom Line
The Great Recession hit the U.S. from 2007 to 2009 but expanded worldwide, so some economies suffered longer. The lender’s risk rose due to excessive mortgage lending to applicants who would not qualify for a house loan. Lenders took this risk because they could bundle the loans into an instrument they sold, shifting the risk to investors. After the Glass-Steagall Act was repealed, low-interest rates and poor regulatory oversight made credit cheap and freed lending institutions from regulations that would have prevented them from mixing commercial and investment banking.
A $787 billion American Recovery and Reinvestment Act bailout scheme helped consumers and the jobless when the economy collapsed and financial institutions faltered. Most agree that the bailouts and ARRA helped the public and saved the financial industry (and others) from total collapse, but some say the money could have gone to more productive businesses.
Conclusion
- The Great Recession occurred from 2007 to 2009 when the U.S. housing bubble broke, and there was a worldwide financial crisis.
- The Great Recession was the worst U.S. recession since the 1930s.
- Federal authorities launched extraordinary fiscal, monetary, and regulatory action after the Great Recession, which some credit with the recovery.
