what was the great recession

The Great Recession was brutal based on its sheer length, but when it comes to unemployment, our current COVID-19-induced recession has actually been far more extreme. The solvency of over-leveraged banks and financial institutions came to a breaking point beginning with the collapse of Bear Stearns in March 2008. The U.S. Federal government spent $787 billion in deficit spending in an effort to stimulate the economy during the Great Recession under the American Recovery and Reinvestment Act, according to the Congressional Budget Office. Great Recession, economic recession that was precipitated in the United States by the financial crisis of 2007–08 and quickly spread to other countries. The financial crisis, a severe contraction of liquidity in global financial markets, began in 2007 as a result of the bursting of the U.S. housing bubble. From 2001 successive decreases in the prime rate (the interest rate that banks charge their “prime,” or low-risk, customers) had enabled banks to issue mortgage loans at lower interest rates to millions of customers who normally would not have qualified for them (see subprime mortgage; subprime lending), and the ensuing purchases greatly increased demand for new housing, pushing home prices ever higher. The 2007-09 economic crisis was deep and protracted enough to become known as "the Great Recession" and was followed by what was, by some measures, a long but unusually slow recovery. As millions of people lost their homes, jobs, and savings, the poverty rate in the United States increased, from 12.5 percent in 2007 to more than 15 percent in 2010. The U.S. economy had been experiencing a boom for many years. Accordingly, businesses were forced to reduce their expenses and investments, leading to widespread job losses, which predictably reduced demand for their products, because many of their former customers were now unemployed or underemployed. However, the event is unquestionably the worst economic downturn in the intervening years. Things came to a head later that year with the bankruptcy of Lehman Brothers, the country’s fourth-largest investment bank, in September 2008. Brian Duignan is a senior editor at Encyclopædia Britannica. The Temporary Liquidity Guarantee Program (TLGP) was instituted in 2008 by the FDIC during the worldwide financial crisis. Following these policies (some would argue, in spite of them) the economy gradually recovered. During all of this, consumer confidence in the economy was understandably reduced, leading most Americans to curtail their spending in anticipation of harder times ahead, a trend that dealt another blow to business health. It is considered the most significant downturn since the Great Depression. Not only did the government introduce stimulus packages into the financial system, but new financial regulation was also put into place. The housing bubble and bust were the proximate Permanent Open Market Operations (POMO) Definition, Temporary Liquidity Guarantee Program (TLGP), The Best Investing Strategy for Recessions, Characteristics of Recession-Proof Companies, Investors Profiting from the Global Financial Crisis. For workers and households, the picture was less rosy. But the economic gain was wiped out in a matter of months. Job seekers line up to apply for positions at an American Apparel store April 2, 2009, in New York City. Catalyzed by the crisis in subprime mortgage-backed securities, the crisis spread to mutual funds, pensions, and the corporations that owned these securities, with widespread national and global impacts. Perhaps more seriously, the rates on existing adjustable mortgages and even more exotic loans began to reset at much higher rates than many borrowers expected or were led to expect. Lasting from late 2007 until mid-2009, it was the longest and deepest economic downturn in many countries, including the … The term The Great Recession is a play on the term The Great Depression. In 2010 the wealth of the median household headed by a person born in the 1980s was nearly 25 percent below what earlier generations of the same age group had accumulated; the shortfall increased to 41 percent in 2013 and remained at more than 34 percent as late as 2016. As the portfolios of even prestigious banks and investment firms were revealed to be largely fictional, based on nearly worthless (“toxic”) assets, many such institutions applied for government bailouts, sought mergers with healthier firms, or declared bankruptcy. According to one study, during the first two years after the official end of the recession, from 2009 to 2011, the aggregate net worth of the richest 7 percent of households increased by 28 percent while that of the lower 93 percent declined by 4 percent. In the wake of the 2001 recession and the World Trade Center attacks of 9/11/2001, the U.S. Federal Reserve pushed interest rates to the lowest levels seen up to that time in the post-Bretton Woods era in an attempt to maintain economic stability. Permanent open market operations (POMO) is when the central bank always engages in open market operations (OMO). The major causes of the initial subprime mortgage crisis and following recession include the Federal Reserve lowering the Federal funds rate and creating a flood of liquidity in the economy, international trade imbalances, and lax lending standards contributing to high levels of developed country household debt and real-estate bubbles that have since burst; U.S. government housing policies; and … Technically speaking, the financial crisis of 2008, the biggest economic meltdown in the U.S. since the Great Depression, lasted a little more than 18 months, and ended long ago. The Great Recession: A Primer If the Great Recession was a long-term degenerative illness, then the coronavirus economic downturn is like a natural disaster that takes out everything at once, says Mr Harvey. The economic slump began when the U.S. housing market went from boom to bust, and large amounts of mortgage-backed securities (MBS's) and derivatives lost significant value. The credit markets that had financed the housing bubble, quickly followed housing prices into a downturn as a credit crisis began unfolding in 2007. A stimulus package is a package of economic measures put together by a government to stimulate a struggling economy. The countries listed are those that officially announced that they were in recession. The Great Recession was the sharp decline in economic activity during the late 2000s. Through an in-depth review of the crisis in terms of the causes, consequences and The Great Recession, in the United States, started in December 2007 and lasted until June 2009. During the American housing boom of the mid-2000s, financial institutions had begun marketing mortgage-backed securities and sophisticated derivative products at unprecedented levels. From the beginning of the recession in December 2007 to its official end in June 2009, real gross domestic product (GDP)—i.e., GDP as adjusted for inflation or deflation—declined by 4.3 percent, and unemployment increased from 5 percent to 9.5 percent, peaking at 10 percent in October 2009. During the 2007–09 recession,3the unemployment rate more than doubled. (See figure 1.) As a result of the Great Recession, the United States alone shed more than 8.7 million jobs, according to the U.S. Bureau of Labor Statistics, causing the unemployment rate to double. December, 2007: The National Bureau of Economic Research (NBER) retrospectively declares that the economic downturn, which was later dubbed the “ … The appointees, which included six Democrats and four Republicans, cited several key contributing factors that they claimed led to the downturn. The Subprime Mortgage Crisis. By signing up for this email, you are agreeing to news, offers, and information from Encyclopaedia Britannica. The Great Recession of 2008-2009: Causes, Consequences and Policy Responses* Starting in mid-2007, the global financial crisis quickly metamorphosed from the bursting of the housing bubble in the US to the worst recession the world has witnessed for over six decades. Beginning in late 2007 and lasting until mid-2009, it was the longest and deepest economic downturn in many countries, including the United States, since the Great Depression (1929–c. The result was the bursting of what was later widely recognized to be a housing bubble. The aggressive monetary policies of the Federal Reserve and other central banks in reaction to the Great Recession, although widely credited with preventing even greater damage to the global economy, have also been criticized for extending the time it took the overall economy to recover and laying the ground work for later recessions. As market interest rates rose in response, the flow of new credit through traditional banking channels into real estate moderated. Critics of the policy response and how it shaped the recovery argue that the tidal wave of liquidity and deficit spending did much to prop up politically connected financial institutions and big business at the expense of ordinary people and may have actually delayed the recovery by tying up real economic resources in industries and activities that deserved to fail and see their assets and resources put in the hands of new owners who could use them to create new businesses and jobs. Corrections? Beyond its duration, the … The Great Recession proved to be the worst American and world wide economic downturn since the 1930’s era Great Depression.It began within the U.S. in December of 2007 and is said to have ended in June of 2009 officially. In all the countries affected by the Great Recession, recovery was slow and uneven, and the broader social consequences of the downturn—including, in the United States, lower fertility rates, historically high levels of student debt, and diminished job prospects among young adults—were expected to linger for many years. It was the longest and deepest in its contraction of output that the global capitalist economy, as represented by the 30 advanced capitalist nations of the OECD, has experienced since the Great Depression of 1929­32. Next, there were too many financial firms taking on too much risk. Updates? The Fed held low interest rates through mid-2004. The unemployment rate represents the number of people who are jobless, looking for a job, and available for work, as a percentage of the labor force (all people who are employed or unemployed). Other major businesses whose products were generally sold with consumer loans suffered significant losses. Real GDP bottomed out in the second quarter of 2009 and regained its pre-recession peak in the second quarter of 2011, three and a half years after the initial onset of the official recession. Great Recession and spur recovery. An economic collapse is a breakdown of a national, regional, or territorial economy that typically follows or spurs a time of crisis. A financial crisis is a situation where the value of assets drop rapidly and is often triggered by a panic or a run on banks. The Dow Jones Industrial Average (DJIA), which had lost over half its value from its August 2007 peak, began to recover in March 2009 and, four years later, in March 2013, broke its 2007 high. It was the longest and deepest in its contraction of output that the global capitalist economy, as represented by the 30 advanced capitalist nations of the OECD, has experienced since the Great Depression of 1929-32. The Great Depression was the greatest and longest economic recession in modern world history. Furthermore, by definition PCE includes other expenditures, such as employer contributions for health insurance and workers’ compensation, imputed rent of owner-occupied housing, indirect financial services, in-kind social benefits, and expenses for pensions and life … This massive monetary policy response in some ways represented a doubling down on the early 2000's monetary expansion that fueled the housing bubble in the first place. Yet, many people are unsure of how it happened and what caused the contraction. When the economy slows, the Federal Reserve can set interest rates lower, making money cheaper and thus encouraging growth. The richest 7 percent thus increased their share of the nation’s total wealth from 56 percent to 63 percent. The 'subprime mortgage crisis' was brought about by banks and financial institutions... Fed Interest Rates and Stimulus Package. According to some economists, the repeal of the Glass-Steagall Act—the depression-era regulation—in the 1990s helped cause the recession. The term Great Recession applies to both the U.S. recession, officially lasting from December 2007 to June 2009, and the ensuing global recession in 2009. Weekly unemployment claims have reached a 26-year high. The shadow banking system, which included investment firms, grew to rival the depository banking system but was not under the same scrutiny or regulation. By June 2009, it had risen to 9.5%. This peak marked the highest unemployment rate since the aftermath … The Great Recession's official end date was June 2009. The repeal of the regulation allowed some of the United States' larger banks to merge and form larger institutions. Stemming the slide also involved rescuing the nation’s housing and auto industries. Nor could they save themselves, as they formerly could, by borrowing against the increased value of their homes or by selling their homes at a profit. Partly because of the higher interest rates, most subprime borrowers, the great majority of whom held adjustable-rate mortgages (ARMs), could no longer afford their loan payments. Combined with federal policy to encourage home ownership, these low interest rates helped spark a steep boom in real estate and financial markets and a dramatic expansion of the volume of total mortgage debt. After a few years of a robust and flourishing economy, the wheels of industry take a brief rest. The Great Recession lasted from December 2007 to June 2009, the longest contraction since the Great Depression. Altogether, between late 2007 and early 2009, American households lost an estimated $16 trillion in net worth; one quarter of households lost at least 75 percent of their net worth, and more than half lost at least 25 percent. Just before the recession began, US unemployment stood at 5%. economy officially slipped into recession, spurred particularly by the decline in the housing market and the subprime mortgage crisis and worsened by the collapse of the global financial services firm Lehman Brothers in September 2008. For such reasons, it is generally agreed that the Great Recession worsened inequality of wealth in the United States, which had already been significant. However, 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 also deeply involved in both the drafting of the new law and the Obama administration agencies charged with its implementation. As the financial crisis spread from the United States to other countries, particularly in western Europe (where several major banks had invested heavily in American MBSs), so too did the recession. Another study found that between 2010 and 2013 the aggregate net worth of the richest 1 percent of Americans increased by 7.8 percent, representing an increase of 1.4 percent in their share of the nation’s total wealth (from 33.9 percent to 35.3 percent). In response to the Great Recession, unprecedented fiscal, monetary, and regulatory policy was unleashed by federal authorities, which some, but not all, credit with the subsequent recovery. According to the most recent data from the Bureau of Economic Analysis, total economic activity contracted by 5.1 percent during the recession; as a result, unemployment jumped from 5 percent in December 2007 to 10.1 percent by October 2009. A non-standard monetary policy is a tool used by a central bank or other monetary authority that falls out of the scope of traditional measures. Because they were confident that home mortgages were sound collateral for MBS, banks and other financial corporations invested in these in the form of derivatives. Indeed, this is the year, the eleventh after the start of the crisis, when national income per worker relative to its pre-crisis benchmark begins to lose the race to recovery relative to the Great … The latter occurred during the 1930s and featured a gross domestic product (GDP) decline of more than 10% and an unemployment rate that at one point reached 25%. The rate increased by 5.3 percentage points since November 2007, peaking at 10.0 percent in October 2009, when more than 15 million people were unemployed. The subprime mortgage crisis triggered a global bank credit crisis in 2007. Omissions? Notwithstanding those measures, during 2007–10 poverty among both children and young adults (those aged 18–24) reached about 22 percent, representing increases of 4 percent and 4.7 percent, respectively. According to Federal Reserve History: “Lasting from De… It was the longest recession since the Great Depression in the 1930s. It has lasted longer than most recessions because economically damaged households were unwilling or unable to increase spending, thus perpetuating the recession by a mechanism known as th… As the number of foreclosures increased, banks ceased lending to subprime customers, which further reduced demand and prices. Be on the lookout for your Britannica newsletter to get trusted stories delivered right to your inbox. Economists now believe it was caused by a perfect storm of declining home prices, a financial system heavily invested in house-related assets and a shadow banking system highly vulnerable to bank runs or rollover risk. However, from 2004 through 2006, the Federal Reserve steadily increased interest rates in an attempt to maintain stable rates of inflation in the economy. The Great Recession refers to the economic downturn from 2007 to 2009 after the bursting of the U.S. housing bubble and the global financial crisis. The Great Recession When the Great Recession started, Germany was in an unprecedented competitive position, with established trade links “ready to go”. Ring in the new year with a Britannica Membership, https://www.britannica.com/topic/great-recession, Federal Reserve History - The Great Recession. Understanding the Great Recession . We are still haunted by it. The contagion quickly spread to other economies around the world, most notably in Europe. In some countries the recession had serious political repercussions. To fully explain the banking crisis, one must account for … When the shadow banking system failed, the outcome affected the flow of credit to consumers and businesses. The Great Recession of 2008­9 really was great. First, the report identified failure on the part of the government to regulate the financial industry. The subprime mortgage crisis in 2006 signaled the beginning of the Great Recession. In October 2009, it peaked at 10%. Financial markets recovered as the flood of liquidity washed over Wall Street first and foremost. In the opinion of some experts, a greater increase in poverty was averted only by federal legislation, the 2009 American Recovery and Reinvestment Act (ARRA), which provided funds to create and preserve jobs and to extend or expand unemployment insurance and other safety net programs, including food stamps. In 2010, President Barack Obama signed the Dodd-Frank Act to give the government expanded regulatory power over the financial sector. In the aftermath of the crisis, the global economy entered a recession that we can rightly characterize as “great.” Economic activity in the G-7 countries dropped by more than 5 per cent. This strategy, one that was used for nearly 100 years before th… Meanwhile, Spain, Greece, Ireland, Italy, and Portugal suffered sovereign debt crises that required intervention by the European Union, the European Central Bank, and the International Monetary Fund (IMF) and resulted in the imposition of painful austerity measures. Let’s take a look at what preceded the recession. Germany’s export markets were not much affected by the crash in the housing market, neither was Germany, and it was only a question of time for these markets to recover Much wealth was lost as U.S. stock prices—represented by the S&P 500 index—fell by 57 percent between 2007 and 2009 (by 2013 the S&P had recovered that loss, and it soon greatly exceeded its 2007 peak). Households headed by younger adults, particularly by persons born in the 1980s, lost the most wealth, measured as a percentage of what had been accumulated by earlier generations in similar age groups. Even though it’s often referred to as the Great Recession of 2008, the seeds were sown before that, dating back to 2006 when early-warning bells went off regarding trouble in the housing sector. Get a Britannica Premium subscription and gain access to exclusive content. The offers that appear in this table are from partnerships from which Investopedia receives compensation. They also took the longest time to recover, and some of them still had not recovered even 10 years after the end of the recession. These monetary and fiscal policies had the effect of reducing the immediate losses to major financial institutions and large corporations, but by preventing their liquidation they also keep the economy locked in to much of the same economic and organization structure that contributed to the crisis. 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