The Great Recession
What Was the Great Recession?
The Great Recession was the sharp decline in economic activity during the late 2000s. It is viewed as the main downturn since the Great Depression. The term "Great Recession" applies to both the U.S. recession, officially lasting from December 2007 to June 2009, and the following global recession in 2009.
The economic slump started when the U.S. housing market went from boom to bust, and large measures of mortgage-backed securities (MBS) and derivatives lost critical value.
Grasping the Great Recession
The term "Great Recession" is a play on the term "Great Depression". An official depression happened during the 1930s and included a gross domestic product (GDP) decline of over 10% and an unemployment rate that at one point came to 25%.
While no explicit criteria exist to separate a depression from a serious recession, there is a close to consensus among financial specialists that the downturn of the late-2000s, was not a depression. During the Great Recession, U.S. GDP declined by 0.3% in 2008 and 2.8% in 2009, while unemployment momentarily came to 10%. In any case, the event is certainly the most horrendously terrible economic downturn in the mediating years.
Reasons for the Great Recession
As indicated by a 2011 report by the Financial Crisis Inquiry Commission, the Great Recession was avoidable. The appointees, which included six Democrats and four Republicans, refered to several key contributing factors that they guaranteed prompted the downturn.
In the first place, the report distinguished failure with respect to the government to regulate the financial industry. This failure to regulate incorporated the Fed's inability to curb toxic mortgage lending.
Next, there were too numerous financial firms taking on too much risk. The shadow banking system, which included investment firms, developed to rival the depository banking system yet was not under a similar examination or regulation. At the point when the shadow banking system failed, the outcome impacted the flow of credit to consumers and businesses.
Different causes recognized in the report included exorbitant borrowing by consumers and corporations and lawmakers who couldn't completely grasp the falling financial system. This made asset bubbles, particularly in the housing market as mortgages were extended at low interest rates to unqualified borrowers who couldn't repay them. This made housing prices fall and left numerous different homeowners underwater. This, thus, seriously impacted the market for mortgage-backed securities (MBS) held by banks and other institutional investors.
Beginnings and Consequences
In the wake of the 2001 Dotcom bubble and subsequent recession, along with the World Trade Center assaults 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 period trying to keep up with economic stability. The Fed held low interest rates through mid-2004.
Combined with federal policy to support homeownership, these low interest rates helped spark a lofty boom in real estate and financial markets and a sensational expansion of the volume of total mortgage debt. Financial innovations, for example, new types of subprime and adjustable mortgages allowed borrowers, who in any case probably won't have qualified in any case, to get liberal home loans in view of expectations that interest rates would stay low and home prices would keep on rising endlessly.
In any case, from 2004 through 2006, the Federal Reserve consistently increased interest rates trying to keep up with stable rates of inflation in the economy. As market interest rates increased in response, the flow of new credit through traditional banking channels into real estate moderated. Maybe more truly, the rates on existing adjustable mortgages and, surprisingly, more exotic loans started to reset at a lot higher rates than numerous borrowers expected or were directed to anticipate. The outcome was the blasting of what was later widely recognized to be a housing bubble.
During the American housing boom of the mid-2000s, financial institutions had started marketing mortgage-backed securities and sophisticated derivative products at phenomenal levels. At the point when the real estate market collapsed in 2007, these securities declined sharply in value. The credit markets that had financed the housing bubble, immediately followed housing prices into a downturn as a credit crisis started unfurling in 2007. The solvency of over-utilized banks and financial institutions came to a breaking point beginning with the collapse of Bear Stearns in March 2008.
Things reached a critical stage later that year with the bankruptcy of Lehman Brothers, the country's fourth-largest investment bank, in September 2008. The contagion immediately spread to different economies around the world, most eminently in Europe. Because of the Great Recession, the United States alone shed more than 8.7 million positions, as per the U.S. Bureau of Labor Statistics, causing the unemployment rate to double. Further, American households lost generally $19 trillion of net worth because of the stock market plunge, as per the U.S Department of the Treasury. The Great Recession's official end date was June 2009.
The Dodd-Frank Act enacted in 2010 by President Barack Obama gave the government control of failing financial institutions and the ability to lay out consumer protections against predatory lending.
Response to the Great Recession
The aggressive monetary policies of the Federal Reserve and other central banks in reaction to the Great Recession, albeit widely credited with preventing even greater damage to the global economy, have additionally been scrutinized for expanding the time it took the overall economy to recuperate and laying the basis for later recessions.
Monetary and Fiscal Policy
For instance, the Fed lowered a key interest rate to almost zero to advance liquidity and, in an exceptional move, gave banks a faltering $7.7 trillion of emergency loans in a policy known as quantitative easing (QE). This gigantic monetary policy response here and there addressed a doubling down on the mid 2000's monetary expansion that powered the housing bubble in any case.
Along with the immersion of liquidity by the Fed, the U.S. Federal government left on a huge program of fiscal policy to try to stimulate the economy as the $787 billion in deficit spending under the American Recovery and Reinvestment Act, as per the Congressional Budget Office. These monetary and fiscal policies decreased the immediate losses to major financial institutions and large corporations, yet by preventing their liquidation they likewise keep the economy locked in too a significant part of the very economic and organizational structure that contributed to the crisis.
The Dodd-Frank Act
Besides the fact that the government brought stimulus bundles into the financial system, however new financial regulation was additionally put into place. As per a few financial specialists, the cancelation of the Glass-Steagall Act — the depression-time regulation — during the 1990s helped cause the recession. The cancelation of the regulation allowed a portion of the United States' larger banks to consolidation and form larger institutions. In 2010, President Barack Obama marked the Dodd-Frank Act to give the government expanded regulatory power over the financial sector.
The act allowed the government some control over financial institutions that were considered on the cusp of failing and to assist with putting in place consumer protections against predatory lending.
Nonetheless, pundits of Dodd-Frank note that the financial sector players and institutions that actively drove and benefitted from predatory lending and related practices during the housing and financial bubbles were likewise profoundly associated with both the drafting of the new law and the Obama administration agencies accused of its implementation.
The U.S. Federal government burned through $787 billion in deficit spending with an end goal to stimulate the economy during the Great Recession under the American Recovery and Reinvestment Act, as per the Congressional Budget Office.
Recovery From the Great Recession
Following these policies (some would contend, despite them) the economy bit by bit recuperated. Real GDP reached as far down as possible in the second quarter of 2009 and recovered its pre-recession top in the second quarter of 2011, three and a half years after the initial beginning of the official recession. Financial markets recuperated as the flood of liquidity washed over Wall Street above all else.
The Dow Jones Industrial Average (DJIA), which had lost over half its value from its August 2007 pinnacle, started to recuperate in March 2009 and, four years later, in March 2013, broke its 2007 high. For workers and households, the image was less ruddy. Unemployment was at 5% toward the finish of 2007, arrived at a high of 10% in October 2009, and didn't recuperate to 5% until 2015, anywhere close to eight years after the beginning of the recession. Real median household income didn't outperform its pre-recession level until 2016.
Pundits of the policy response and how it molded the recovery contend that the tsunami of liquidity and deficit spending did a lot to prop up politically associated financial institutions and big business to the detriment of ordinary individuals and may have actually delayed the recovery by tying up real economic resources in industries and activities that had the right to fail and see their assets and resources put in the hands of new owners who could utilize them to make new businesses and occupations.
- The Great Recession alludes to the economic downturn from 2007 to 2009 after the blasting of the U.S. housing bubble and the global financial crisis.
- The Great Recession was the most extreme economic recession in the United States since the Great Depression of the 1930s.
- In response to the Great Recession, uncommon fiscal, monetary, and regulatory policy was released by federal specialists, which some, yet not all, credit with the subsequent recovery.
The amount Did the Stock Market Crash During the Great Recession?
On October 9, 2007, the Dow Jones Industrial Average hit its pre-recession high and closed at 14,164.53. By March 5, 2009, the index had fallen by over half to 6,594.44.On September 29, 2008. The Dow Jones fell by almost 778 points intraday. Until the market crash of March 2020 toward the beginning of the COVID-19 pandemic, it was the largest point drop ever.
Have There Been Recessions Since the Great Recession?
Not officially. While the economy did endure and markets fell following the beginning of the global COVID-19 pandemic in mid 2020, stimulus efforts were effective in preventing an all out recession in the U.S. A few financial experts, notwithstanding, fear that a recession might in any case be on the horizon as of mid-2022.
How Long Did the Great Recession Last?
As indicated by official Federal Reserve data, the Great Recession lasted eighteen months, from December 2007 through June 2009.