How Did The Great Recession Happen?

By The Money Farm Team

What’s the bottom line? Banks were overly reliant on derivatives. To keep the supply of derivatives flowing, they sold far too many bad mortgages. The underlying reason of the recession was this. This financial disaster swiftly expanded beyond the housing market and into the banking system, bringing down financial behemoths in the process. Lehman Brothers and Merrill Lynch were among those judged “too big to fail.” As a result, the problem spread over the world.

What happened to cause the Great Recession?

The Great Recession, which ran from December 2007 to June 2009, was one of the worst economic downturns in US history. The economic crisis was precipitated by the collapse of the housing market, which was fueled by low interest rates, cheap lending, poor regulation, and hazardous subprime mortgages.

Who is responsible for the 2008 Great Recession?

The Lenders are the main perpetrators. The mortgage originators and lenders bear the brunt of the blame. That’s because they’re the ones that started the difficulties in the first place. After all, it was the lenders who made loans to persons with bad credit and a high chance of default. 7 This is why it happened.

What triggered the financial crisis of 2008?

Years of ultra-low interest rates and lax lending rules drove a home price bubble in the United States and internationally, sowing the seeds of the financial crisis. It began with with intentions, as it always does.

Was there a worldwide recession?

During the late 2000s, the Great Recession was characterized by a dramatic drop in economic activity. It is often regarded as the worst downturn since the Great Depression. The term “Great Recession” refers to both the United States’ recession, which lasted from December 2007 to June 2009, and the worldwide recession that followed in 2009. When the housing market in the United States transitioned from boom to bust, large sums of mortgage-backed securities (MBS) and derivatives lost significant value, the economic depression began.

Who was affected by the Great Recession?

Rising unemployment, dropping property values, and the stock market decline all had an impact on those approaching retirement, either directly or indirectly. Furthermore, many elderly persons who were not directly impacted by the recession had children or other relatives who were. For many older persons, the recession’s financial difficulties resulted in changes in wealth and spending patterns, as well as physical and mental health issues with long-term effects.

Who profited the most from the financial crisis of 2008?

Warren Buffett declared in an op-ed piece in the New York Times in October 2008 that he was buying American stocks during the equity downturn brought on by the credit crisis. “Be scared when others are greedy, and greedy when others are fearful,” he says, explaining why he buys when there is blood on the streets.

During the credit crisis, Mr. Buffett was particularly adept. His purchases included $5 billion in perpetual preferred shares in Goldman Sachs (NYSE:GS), which earned him a 10% interest rate and contained warrants to buy more Goldman shares. Goldman also had the option of repurchasing the securities at a 10% premium, which it recently revealed. He did the same with General Electric (NYSE:GE), purchasing $3 billion in perpetual preferred stock with a 10% interest rate and a three-year redemption option at a 10% premium. He also bought billions of dollars in convertible preferred stock in Swiss Re and Dow Chemical (NYSE:DOW), which all needed financing to get through the credit crisis. As a result, he has amassed billions of dollars while guiding these and other American businesses through a challenging moment. (Learn how he moved from selling soft drinks to acquiring businesses and amassing billions of dollars.) Warren Buffett: The Road to Riches is a good place to start.)

How did we get back on our feet after the Great Recession?

The Great Recession lasted from December 2007 to June 2009, making it the longest downturn since World War II. The Great Recession was particularly painful in various ways, despite its short duration. From its peak in 2007Q4 to its bottom in 2009Q2, real gross domestic product (GDP) plummeted 4.3 percent, the greatest drop in the postwar era (based on data as of October 2013). The unemployment rate grew from 5% in December 2007 to 9.5 percent in June 2009, before peaking at 10% in October 2009.

The financial repercussions of the Great Recession were also disproportionate: home prices plummeted 30% on average from their peak in mid-2006 to mid-2009, while the S&P 500 index dropped 57% from its peak in October 2007 to its trough in March 2009. The net worth of US individuals and charity organizations dropped from around $69 trillion in 2007 to around $55 trillion in 2009.

As the financial crisis and recession worsened, worldwide policies aimed at reviving economic growth were enacted. Like many other countries, the United States enacted economic stimulus measures that included a variety of government expenditures and tax cuts. The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 were two of these projects.

The Federal Reserve’s response to the financial crisis varied over time and included a variety of unconventional approaches. Initially, the Federal Reserve used “conventional” policy actions by lowering the federal funds rate from 5.25 percent in September 2007 to a range of 0-0.25 percent in December 2008, with the majority of the drop taking place between January and March 2008 and September and December 2008. The significant drop in those periods represented a significant downgrading in the economic outlook, as well as increasing downside risks to output and inflation (including the risk of deflation).

By December 2008, the federal funds rate had reached its effective lower bound, and the FOMC had begun to utilize its policy statement to provide future guidance for the rate. The phrasing mentioned keeping the rate at historically low levels “for some time” and later “for an extended period” (Board of Governors 2008). (Board of Governors 2009a). The goal of this guidance was to provide monetary stimulus through lowering the term structure of interest rates, raising inflation expectations (or lowering the likelihood of deflation), and lowering real interest rates. With the sluggish and shaky recovery from the Great Recession, the forward guidance was tightened by adding more explicit conditionality on specific economic variables such as inflation “low rates of resource utilization, stable inflation expectations, and tame inflation trends” (Board of Governors 2009b). Following that, in August 2011, the explicit calendar guidance of “At least through mid-2013, the federal funds rate will remain at exceptionally low levels,” followed by economic-threshold-based guidance for raising the funds rate from its zero lower bound, with the thresholds based on the unemployment rate and inflationary conditions (Board of Governors 2012). This forward guidance is an extension of the Federal Reserve’s conventional approach of influencing the funds rate’s current and future direction.

The Fed pursued two more types of policy in addition to forward guidance “During the Great Recession, unorthodox” policy initiatives were taken. Credit easing programs, as explored in more detail in “Federal Reserve Credit Programs During the Meltdown,” were one set of unorthodox policies that aimed to facilitate credit flows and lower credit costs.

The large scale asset purchase (LSAP) programs were another set of non-traditional policies. The asset purchases were done with the federal funds rate near zero to help lower longer-term public and private borrowing rates. The Federal Reserve said in November 2008 that it would buy US agency mortgage-backed securities (MBS) and debt issued by housing-related US government agencies (Fannie Mae, Freddie Mac, and the Federal Home Loan banks). 1 The asset selection was made in part to lower the cost and increase the availability of finance for home purchases. These purchases aided the housing market, which was at the heart of the crisis and recession, as well as improving broader financial conditions. The Fed initially planned to acquire up to $500 billion in agency MBS and $100 billion in agency debt, with the program being expanded in March 2009 and finished in 2010. The FOMC also announced a $300 billion program to buy longer-term Treasury securities in March 2009, which was completed in October 2009, just after the Great Recession ended, according to the National Bureau of Economic Research. The Federal Reserve purchased approximately $1.75 trillion of longer-term assets under these programs and their expansions (commonly known as QE1), with the size of the Federal Reserve’s balance sheet increasing by slightly less because some securities on the balance sheet were maturing at the same time.

However, real GDP is only a little over 4.5 percent above its prior peak as of this writing in 2013, and the jobless rate remains at 7.3 percent. With the federal funds rate at zero and the current recovery slow and sluggish, the Federal Reserve’s monetary policy plan has evolved in an attempt to stimulate the economy and meet its statutory mandate. The Fed has continued to change its communication policies and implement more LSAP programs since the end of the Great Recession, including a $600 billion Treasuries-only purchase program in 2010-11 (often known as QE2) and an outcome-based purchase program that began in September 2012. (in addition, there was a maturity extension program in 2011-12 where the Fed sold shorter-maturity Treasury securities and purchased longer-term Treasuries). Furthermore, the increasing attention on financial stability and regulatory reform, the economic consequences of the European sovereign debt crisis, and the restricted prospects for global growth in 2013 and 2014 reflect how the Great Recession’s fallout is still being felt today.

What influence did the Great Recession have?

This RFP has now been closed. The general rationale for the 30 project wins made in 2011 through early 2012 can be found in the original RFP outlined below.

The United States is now two years past the official end of the Great Recession, which lasted the longest and deepest since the 1930s. Although GDP and the stock market have risen since the recession ended in June 2009, the social and economic consequences of the downturn continue to ripple across the US economy. According to labor market data, more than 14 million Americans are unemployed, with 6.3 million of them out of work for more than six months. Another 11.3 million people are working less than they would like either part-time or looking for work but not finding it. Job growth is encouraging but sluggish, and at current rates of growth, reestablishing the pre-recession unemployment rate of 5% could take a decade or longer. Although the unprecedented number of home foreclosures experienced during the recession and its immediate aftermath has lessened, the housing market remains stagnant, with home prices hitting new lows in the first quarter of 2011. State and local budgets have seen huge gaps between revenues and expenditures as a result of the economic downturn, and stock market losses have exposed unfunded pension plans across the country. To attain balanced budgets, governments at all levels will have to undertake a mix of discretionary cuts and higher taxes, as predicted by the long-term repercussions of this recession. Public sector job losses have canceled out 40% of private sector employment increases in the two-year recovery, and government workforces are set to be under pressure for some time to come.

Given the likelihood of continued slow growth, high unemployment, low home values, and severe government fiscal limitations, the Russell Sage Foundation has opted to fund a series of studies on the social and economic consequences of the Great Recession. Long-term economic stagnation will most likely change American institutions and significantly impair many Americans’ life chances. We’re looking for studies that look at these effects across a broad spectrum of social and economic life, including, but not limited to, effects on individual aspirations and optimism about the future; health and mental health; family formation and stability, as well as children’s well-being; the viability of communities, particularly those hardest hit by the foreclosure crisis; the performance of the educational system at all levels; the incidence of crime and the performance of the criminal justice system. The Appendix demonstrates the types of topics that the Foundation is concerned about in each of these social and economic spheres. These are examples of the types of challenges the Foundation is interested in solving, although they are not meant to be exhaustive or exclusive.

In general, the Foundation will consider funding for a variety of projects, including:

Long-term studies on the effects of the Great Recession over the next three to five years. As a result, the effects of the fiscal crisis on state budgets, for example, may take some time to manifest. A comparison of the decisions governments make in balancing their budgets, as well as the implications of those choices, may not be significant for several years after the current crisis has ended. In another area, the consequences of the recession on families may not become apparent until after families have exhausted their resources in dealing with unstable work or housing, and if there are lasting repercussions on children, these may take even longer to manifest.
Analytic research that look at the long-term repercussions of the Great Recession across a variety of social and economic realms. An examination of how the recession affects underprivileged adolescents, for example, could look into the probable link between local variation in unemployment, school dropout, and criminal involvement. Alternatively, a study of older Americans’ labor market participation might look into the consequences of changes in pension wealth and the early receipt of Social Security benefits after a job loss.
Innovative investigations of the Great Recession’s deeper, more subtle consequences on psychological attitudes and social norms. Will the exceptionally high rates of long-term unemployment that have characterized this recession and its aftermath, for example, result in long-term scarring and decreased aspirations? Will high rates of overdue debt and “underwater” mortgages impair financial responsibility in general and undermine default norms? Or will the need to deleverage lead to a more conservative and cautious approach to household financial decisions in the United States? To assess the subjective impact of changed financial conditions, studies of these subjective issues may require a creative combination of qualitative and quantitative methodologies.
Studies of how the Great Recession has affected American institutions, particularly in reaction to economic and other challenges that have arisen during the crisis and its aftermath. Universities, for example, have faced severe budget restrictions as a result of state budget cuts or private endowment losses at a time when student financial aid needs are rising. What has been the impact of universities’ responses to these pressures? To establish generalizations about institutional change, studies of institutional adaptation of topics like these may rely on case studies of specific institutions or the collecting of administrative data across institutions.

In general, we’re looking for creative research projects that go beyond simple trend analysis to look at unintended consequences of the Great Recession. Such study might use comparisons of present conditions with what is known about the results of previous recessions to make testable predictions about the current slump’s likely effects. We expect many of the funded initiatives to employ publicly available data sets, but we also understand that valid assessments of predictions regarding the effects of the Great Recession may require conducting new waves of past surveys or replicating data from other sources that give pre-recession baselines. We are happy to evaluate ideas for restricted data acquisition or collection in such instances. The Foundation’s funding will be limited to research help, data analysis expenditures, and limited release time for analyzing and writing up results in all other circumstances. We anticipate that all working papers and research briefs from projects financed under this initiative will be published (non-exclusively) on the RSF website.

The second round of funding for this endeavor is now underway. After the first round, we sponsored ten initiatives in nine of the appendix’s domains (a description of projects funded in the first round can be found here). We will consider projects from all domains in this round, but we are particularly interested in projects that address the following topics that were not addressed in the first round: changes in attitudes and norms caused by the economic downturn, effects on communities particularly hard hit by foreclosures and/or unemployment, changes in the incidence of crime linked to recessionary conditions, and effects of the fiscal crisis on state and local budgets. We’re also interested in study on the labor market’s performance in the United States throughout this extended era of high unemployment. Although there are no restrictions on the quantity of funding requests that will be considered, cost/benefit analysis will be a major factor in the evaluation of all projects. For your information, prizes accepted in the first round typically ranged from $75,000 to $250,000 for project periods ranging from one to four years.

We ask all academics interested in being a part of this program to send us a letter of inquiry of no more than three single-spaced pages explaining the research topic on the effects of the Great Recession that you would want to do. Your letter should explain and estimate the research expenditures involved, as well as outline and motivate the hypothesis concerning the effects of the Great Recession that you are interested in exploring. It should also specify out the empirical work required and the data sources to be used.

All letters of enquiry will be reviewed by the Foundation’s Advisory Committee, and detailed proposals will be solicited for the initiatives that appear to be the most promising.

Over the last decade, poverty in the suburbs has soared by more than a third. Although poverty rates in the inner city are still greater, the gap is closing. Earlier downturns mainly evaded the effects of suburban areas, but not this time.

What happens when a community’s unemployment rate and foreclosure rate are both high? What effect will it have on housing stock, home values, fiscal capacity, out-migration, and more ephemeral issues such as social capital and social efficacy?
What impact has the recession had on the poor’s regional distribution and concentration?
How would a decrease in residential mobility influence a community’s social infrastructure?

From less than 3% of disposable personal income in 2005-2007 to nearly 6% of disposable income in 2010, the personal savings rate has increased. Furthermore, the total quantity of outstanding consumer credit has decreased for the first time since 1940 as a result of the present crisis.

What has the recession’s overall impact been on personal finances, consumer spending, and consumer confidence?
How did households cut back on their consumption? Are these solutions viable in the event that revenues do not recover?
Have people lowered or raised their savings and retirement contributions? To stay afloat, have families taken out loans against their current investment and retirement accounts? What are the ramifications?
Are these patterns indicating a fundamental shift in consumer and financial behavior?

For the better part of the last decade, crime rates in the United States have remained steady or even decreased marginally. According to some research, those tendencies may be in peril. While the general crime rate in New York City stays steady, the most current statistics shows that the murder rate has increased by 15% over the previous year.

Will crime rates that have been declining or constant in the long run continue in the same path or change?
With fewer resources and higher demands, how well will police, courts, and prison institutions be able to function?
Will states employ early release procedures to reduce the number of people incarcerated and their costs? Is it likely that caseloads for probation and parole will vary, and if so, how will this affect technical violation rates?
What will happen if a larger number of incarcerated people are released into economically challenged communities? What will happen to those people, their families, and their communities?

Families are likely to be affected in a wide range of ways. Job losses and unemployment, one of the most apparent characteristics of the recession, have been linked to higher stress, poorer health outcomes, decreases in children’s academic achievement and educational attainment, marriage age delays, and changes in household structure. According to recent statistics, the number of multigenerational homes increased by 12% between 2006 and 2010.

What impact has it had on marriage, divorce, cohabitation, fertility, and family structure? Has this had a greater impact on some groups than others?
What have been the ramifications for home labor division? Are fathers more likely than mothers to get laid off? Is it true that mothers work more when their fathers work less?
What impact has this had on young adult children? Are more people staying at home longer because of poor career prospects? Do they need more financial and social assistance?
What has been the impact on family function, particularly the quality of parents’ relationships, parent-child connections, and parenting?
What impact has this had on children’s immediate results, such as academic performance, behavior, and delinquency, as well as their long-term life prospects?

States faced overall budget shortfalls of nearly $300 billion between 2009 and 2012 due to a drop in revenue and higher demand for state services. The American Recovery and Reinvestment Act (ARRA) brought temporary relief, but it has finally come to an end.

What policy adjustments have states implemented to overcome substantial budget deficits, given that nearly all states are suffering significant budget gaps? What are the distributional effects of policy changes at the state level?
How will governments allocate the more constrained resources associated with diminishing tax receipts, given that health and prisons have been the fastest rising parts of state budgets over the last several decades? Which states are most likely to enact tax increases rather than spending cuts, and what effect will this have on the state’s economy?
The financial crisis has brought to light the underfunding of pension systems across the country. What are the chances that states will follow through on promised benefits? What effect will it have on state budgets?

Thirty-five states reduced education budgets totalling roughly $8 billion in K-12 and higher education in 2010, and 31 states are seeking more cutbacks in 2011.

What impact do budget cuts have on the delivery of public K-12 education? What impact has graduation rates, class sizes, school closures, and teacher employment and turnover had?
What has happened to the quality of public higher education at all levels, from four-year universities to community colleges?
Has there been a rise in the demand for a college education? Has it changed as a result of the family’s socioeconomic condition or the demography of the students?
What has changed in terms of the net cost of a college education, and what are the implications for students from various socioeconomic backgrounds?

Between 2006 and 2009, the number of home foreclosure filings grew from from 1.2 million to over 4 million per year, with black and Hispanic areas being disproportionately affected. Home losses of this magnitude and concentration are likely to cause more community upheaval and deterioration. Home ownership is also one of the most common means of accumulating wealth in the United States, meaning more financial insecurity for millions of Americans in the short and long term.

Which people and communities have been the most affected by foreclosures? What have been the ramifications for both those who have lost their homes and the localities that have seen the highest rates of home loss?
Have the losses in wealth caused by home foreclosures been allocated differently across different groups?
Have housing policies aimed at reducing home foreclosures been successful? Who has benefited the most?

Job loss is a major source of stress, and it has been linked to a variety of health effects, including an increased risk of heart attack and stroke, diabetes, arthritis, and psychiatric issues, as well as increased melancholy, anxiety, and sleep loss.

What kinds of health and mental-health changes can be ascribed to the Great Recession’s economic uncertainty and its aftermath?
Has there been a psychological shift in the general public’s aspirations, optimism for the future, and expectations for performance and upward mobility, particularly among the young?
What are the health ramifications in neighborhoods that have been impacted especially hard by the recession?
What are the anticipated ramifications of health-care and mental-health service cuts?

As the recession has set in, the number of economic migrants crossing the Mexican border into the United States has dramatically decreased, and internal migration patterns may have transformed as typical employment possibilities for migrants have decreased.

What are the current trends in immigration and internal migration? What will the ramifications be for immigrant communities?
What has been the impact of the collapse of the building industry on internal migration? Is there a link between changes in other industries and changes in internal migration?
How has extended economic suffering and uncertainty influenced Americans’ attitudes toward immigrants, immigration, and the immigration debate?
Are the lasting consequences of the recession affecting return migration patterns?

The official poverty rate rose from 13.2% in 2008 to 14.3% in 2009, with roughly 4 million more people living in poverty than the previous year. Since 1969, nearly every recession has resulted in considerable rises in poverty rates, with the consequences disproportionately affecting children.

What impact has the recession had on the income and wealth of people at various levels of the income distribution? Which individuals and groups have experienced the most transformation? Which assets (for example, retirement assets, property, and investments) have been most sensitive to the downturn if diverse vehicles for wealth generation have been disproportionately impacted?
Has the rate of poverty changed, and who is more likely to slip into or stay in poverty?
Is the greater concentration of incomes at the top of the income distribution a result of the recession?
Has the gradual increase in economic inequality that has marked the United States since the 1970s been aggravated, reduced, or remained unchanged?

A lengthy period of high unemployment, typified by historically high long-term unemployment rates, is expected to have far-reaching implications for the operation of the US labor market, as well as the lives of the unemployed, their families and communities, and the institutions that support them.

How bad are the ramifications of long-term unemployment? Who are the people who are most affected? What policies and programs work best to re-employ long-term unemployed people?
Is the size of the recession a sign of a massive reorganization of the US labor market? To what extent are structural mismatches between skill demand and supply, rather than weak demand, the causes of long-term unemployment?
What geographical areas and localities have the highest levels of unemployment, and why? What are their chances of getting back on their feet?

During the Great Recession, American politics was extremely turbulent, with rising populist fury directed at incumbents blamed for the crisis, significant electoral swings, and new forms of political organizing and fundraising.

In the aftermath of the recession, how are political attitudes, party affiliation, and political involvement changing?
What role do business and government play in producing the problem and resolving it, according to Americans?

State and municipal pension liabilities are anticipated to be close to $4 trillion, while private pension account balances are down approximately $800 billion from pre-recession levels, notwithstanding the stock market recovery.

What effect do pension losses have on pensioners’ projected retirement income? Which groups have been hurt the hardest?
What impact does the loss of pensions and jobs have on older Americans’ retirement decisions? Is there a shift in the distribution of retirement age based on income or education?

Approximately 46% of the 14.6 million unemployed people have been jobless for 27 weeks or longer, and 31% have been jobless for 52 weeks or longer.

How well did the social safety net in the United States perform during the recession and the subsequent period of high unemployment? How has the recession affected the need for emergency and safety-net services? How well have different programs (such as TANF, SSI, and SNAP) responded to increased demand?
Have community nonprofits been able to address any gaps that exist? Is it possible that the impact of the recession on such NGOs has reduced their ability to respond to rising need?
In a high-unemployment environment, what happens to welfare claimants whose time-limited benefits expire?
What was the American Recovery and Reinvestment Act’s impact? What will happen to state welfare programs now that the ARRA is no longer in effect?

Is there going to be a recession in 2021?

Unfortunately, a worldwide economic recession in 2021 appears to be a foregone conclusion. The coronavirus has already wreaked havoc on businesses and economies around the world, and experts predict that the devastation will only get worse. Fortunately, there are methods to prepare for a downturn in the economy: live within your means.

Quizlet: What Caused the Great Recession?

What were some of the factors that contributed to the Great Recession? The decline in real estate values in 2007 was one of the key causes. This resulted in a systemic crisis in the financial markets of the United States. Because these markets are so intertwined, the problem has become a global one.