- The 2008 Great Recession may have developed into the second Great Depression if TARP, ARRA, and the Economic Stimulus Plan had not been adopted.
How long did it take to recover from the 2008 financial crisis?
Only in the calendar year 2009 did the Great Recession meet the IMF’s criteria for being a worldwide recession. According to the IMF, a decrease in yearly real world GDP per capita is required. Despite the fact that all G20 countries, accounting for 85 percent of global GDP, utilize quarterly GDP data to define recessions, the International Monetary Fund (IMF) has chosen not to declare or quantify global recessions based on quarterly GDP data in the absence of a complete data set. The seasonally adjusted PPPweighted real GDP for the G20zone, on the other hand, is a good predictor of global GDP, and it was measured to have declined directly quarter on quarter over the three quarters from Q3 2008 to Q1 2009, which more properly marks when the global recession began.
The recession began in December 2007 and ended in June 2009, according to the National Bureau of Economic Research (the official judge of US recessions). It lasted eighteen months.
What did the government do during the financial crisis of 2008?
The Federal Reserve’s decisive response, along with huge government expenditure, averted the US economy from collapsing completely.
The Federal Reserve cut interest rates to zero for the first time in history and initiated a quantitative easing program, in which it bought financial assets to inject additional money into the economy.
The federal government, on the other hand, is launching two major programs to help people in need:
- The Struggling Asset Relief Program (TARP) helped to stabilize the economy by allowing the government to buy up to $700 billion in toxic assets, the majority of which was used to bail out troubled banks.
- The American Recovery and Reinvestment Act (ARRA) is a federal law that was passed in 2009 to help the economy recover. ARRA was established in 2009 as part of a stimulus package that included tax cuts, government spending mandates, loan guarantees, and unemployment benefits.
These steps were successful in keeping the recession from becoming a decade-long affair, as was the case during the Great Depression. In 2009, the stock market began to recover. Other areas of the economy, however, took several years to recover, resulting in what economists call an L-shaped recovery.
What was the government’s response to the financial crisis of 2008?
19 President Bush enacted a $168 billion program of federal spending and temporary tax rebates in February 2008 as the first significant federal reaction to the crisis.
20
The Housing and Economic Recovery Act (HERA) of July 2008, which addressed the subprime mortgage crisis, was the second major reaction. It allows the Federal Housing Administration to guarantee up to $300 billion in new 30-year fixed-rate mortgages for subprime borrowers if commercial lenders write down principal loan balances to 90% of current home appraisal values. By strengthening controls and investing capital into Fannie Mae and Freddie Mac, HERA was meant to restore confidence in these organizations. States were given permission to use mortgage revenue bonds to refinance subprime loans. HERA also created a $6 billion Neighborhood Stabilization Fund to assist local governments in purchasing repossessed houses. However, more than $1 billion of these monies remained unspent as of July 2010, and the federal government may revoke them. Part of the difficulty was a lack of clarity about the laws, but a bigger issue was that towns couldn’t buy foreclosed properties as quickly as private corporations could. The US Department of Housing and Urban Development (HUD) introduced a First Look program in September 2010, giving towns a 48-hour head start on purchasing foreclosed properties at a 1% discount. Banks, on the other hand, are unlikely to offer many of their foreclosed houses to the program.
21State housing finance agencies have long provided low-cost housing loans without the foreclosure issues that come with federally supported subprime loans. Fannie Mae has recently stepped in to assist in the funding of an Affordable Advantage effort based on state programs. Idaho, Massachusetts, Minnesota, and Wisconsin are the only states that have signed on so far.
22The Troubled Asset Relief Program (TARP) of October 2008 was the third major reaction. Because the US Treasury was unable to price toxic mortgage derivatives, it invested TARP funds in banks and other financial and non-financial firms, gaining equity in those firms that would allow them to gradually write off those assets against profits earned from the Federal Reserve’s zero interest rate policy. The federal government aims to recoup its funds and possibly make a profit by selling its stock shares over time. The federal government had regained the majority of the TARP monies, as well as interest income, by late 2010.
23However, these policies failed to halt the flood of recession and anti-Bush sentiment, propelling Obama to the White House. Many Americans viewed TARP as a rescue for Wall Street oligarchs that left the average American still in financial distress.
What happened to the economy after 2008?
Many conservatives believe that our economy can only thrive if the federal government stays out of the way. Many progressives argue that in our free market system, the government must intervene at times to defend the public welfare and ensure broad-based economic growth. Today’s politics are defined by this discussion.
Americans of all political stripes should agree, however, that between 2008 and 2010, swift and decisive government action was required to avoid a second Great Depression and to aid our economy’s recovery from the biggest recession since the 1930s. After all, the evidence shows that between 2008 and 2010, three acts of Congress signed by two presidents led to the conclusion of the Great Recession of 20072009 and the ensuing economic recovery. Specifically:
- The Troubled Asset Relief Program (TARP) of 2008 saved our financial system from near-certain collapse, sparing the United States’ financial system from tragedy.
- The American Recovery and Reinvestment Act of 2009 averted a second Great Depression and ushered in a new era of economic development.
- By lowering the payroll tax and extending prolonged unemployment insurance benefits, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 bolstered the economy’s fragile recovery.
The top ten reasons why these three major government interventions in the economy were effective will be discussed in this column. But first, let’s go through why such government intervention was required in the first place.
Do you recall the circumstances in 2008? Our economy, job market, and Wall Street were all on the verge of collapsing. Between then and today, there was a strong economic contraction accompanied by large job losses and steep stock market losses, which was followed by slow, uneven, but nonetheless steady economic growth and labor and financial market recoveries. Federal government actions played a significant role in ensuring that the deep dive was not prolonged and that the recovery occurred sooner than it would have otherwise. The job market, the economy, and the financial markets are all showing signs of improvement. This is a tremendous improvement over the condition in 2008.
The Troubled Asset Relief Program of 2008, the American Recovery and Reinvestment Act of 2009, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 all contributed to the United States’ economic recovery. These three moves happened at a critical juncture in the economy’s development, when the economy was on the verge of significant damage unless policymakers took decisive, targeted, and swift action.
The Troubled Asset Relief Program (TARP) was established in October 2008 to allow the federal government to utilize $700 billion to help the banking system recover. During the last months of 2008, much of that money was spent infusing capital into failing banks, ensuring that our financial system would not collapse. In February 2009, the American Recovery and Reinvestment Act was signed into law, enacting a package of tax cuts and expenditure initiatives totaling $787 billion that would last almost two years, through the end of 2010. The Recovery Act provided additional unemployment insurance and Social Security benefits almost immediately, but infrastructure funding did not begin until the summer of 2009. As the Recovery Act’s benefits expired in December 2010, Congress enacted fresh payroll tax cuts and provided extended unemployment insurance benefits.
The result: After each measure was passed, financial markets, the economy, and the labor market began to improve fast, and money began to flow into critical ailing markets. These three policy measures did exactly what they were supposed to do: policymakers intervened to prevent the economy from deteriorating.
To be true, if these policy initiatives had provided more bang for their money, they would have been more effective and efficient. More assistance for distressed homeowners may have been included in the Troubled Asset Relief Program. More infrastructure money might have been included in the Recovery Act, and payroll tax cuts and prolonged unemployment insurance benefits should have been separated from needless tax cuts for the wealthy. However, conservative hostility to more effective and efficient policy interventions made none of this additional assistance for our economy and workers conceivable.
Nonetheless, the Troubled Asset Relief Program averted the financial system’s collapse. While there are reasonable concerns about the program’s design, whether the benefits were distributed equally, and if the monies were spent as efficiently as possible in the long term, there’s little doubt that it benefited the economy. A new Great Depression was averted thanks to the Recovery Act. The payroll tax cuts and prolonged unemployment insurance benefits are still helping to boost the economy today.
Starting with the Troubled Asset Relief Program, the Recovery Act, and the most recent payroll tax cuts and extended unemployment insurance benefits, here’s a review of the 10 ways recent economic and financial data prove that each of these three policy initiatives succeeded as intended.
Loan tightening eased with the introduction of the Troubled Asset Relief Program
In the fourth quarter of 2008, a net high of 83.6 percent of senior loan officers said they were tightening lending conditions for commercial and industrial loans, up from 19.2 percent in the fourth quarter of 2007. Throughout 2009, this ratio decreased steadily. The senior loan officer ratio is an oblique but informative indicator of how simple or difficult it is for firms and individuals to obtain a bank loan.
Similarly, in the fourth quarter of 2008, a net 69.2 percent of senior loan officers said they were tightening prime mortgage criteria, up from 40.8 percent in December 2007, before declining to 24.1 percent in the fourth quarter of 2009. After the Troubled Asset Relief Program stabilized the US financial sector, banks began to relax lending criteria. Following TARP, the business and mortgage credit markets became less tight.
Interest rates ease shortly after the Troubled Asset Relief Program is enacted
The risk premium, or the difference between the interest rate on risk-free U.S. Treasury bonds and the interest rate on mortgages, peaked at 2.2 percent in December 2010, up from 1.5 percent when the Great Recession began in December 2007. After money from the Troubled Asset Relief Program came into credit markets, the gap narrowed to 1.6 percent by January 2009. During normal economic times, this risk premium is normally approximately 1%.
Corporate bond risk premiums rose from 0.9 percent in December 2007 to 1.9 percent in December 2008, before decreasing to 1.6 percent in January 2009. The risk premium rose at first as lenders became concerned about the health of other banks, then declined as the Troubled Asset Relief Program stepped in to help struggling institutions. Because the program’s effectiveness reduced financial market risk, homeowners and businesses had to pay less for their loans.
The specter for deflation disappeared after the passage of the Troubled Asset Relief Program and the Recovery Act
Falling inflationary expectations have the potential to lead to deflation, or a downward spiral in prices. Deflation exacerbates a recession by causing firms and consumers to postpone big purchases in the hope of lower costs. In the fall of 2008 and winter of 2009, the United States’ economy was threatened by deflation; however, the adoption of the Troubled Asset Relief Program and the Recovery Act put people’s minds at ease.
Based on the difference between inflation-protected and noninflation-protected U.S. Treasury bonds, the predicted inflation rate for the next five years was -0.24 percent in December 2008, down from 2.2 percent in December 2007, indicating that deflation was a real concern among investors. The difference between Treasury Inflation Protected Securities and Treasury bonds of the same maturity is what determines the predicted inflation rate for that particular maturityin this case, five years. By May 2009, inflation predictions had surpassed 1% once more, and by December 2009, they had risen to 1.9 percent. Expected price rises of roughly 2% will encourage businesses to invest more and consumers to spend more than they would otherwise, while lesser price increases will cause them to hold off on their purchases.
Economic growth prospects brightened with the passage of the Recovery Act
Expectations for future economic growth are important for actual growth because businesses will invest more, banks will lend more, and consumers would spend more than they would otherwise if they believe the economy will improve more quickly. The nonpartisan Congressional Budget Office raised its growth forecasts for 2010the first full year following the Recovery Act’s enactmentfrom 1.5 percent to 2.9 percent in March 2009. And, sure enough, economic activity accelerated.
Three of the four quarters of 2008 saw the economy contract, and annual inflation-adjusted GDP growth in the first quarter of 2009 was -6.7 percent. However, once the Recovery Act was signed into law in the second quarter of 2009, our GDP only shrank by 0.7 percent in that quarter as government spending increased. The economy then increased by 1.7 percent and 3.8 percent in the third and fourth quarters of 2009, owing in large part to the tax cuts and expenditure measures approved under the Recovery Act starting to trickle into people’s and businesses’ pockets.
Job losses quickly abated due to Recovery Act spending
Job losses fell by 82.3 percent in the final three months of 2009, from an average of 780,000 per month in the first three months of 2009, when the law was passed, to 138,000 per month in the final three months of 2009. During the same time period, employment losses in the private sector fell by 83.2 percent, from 784,000 to 131,000 on average. The first quarter of 2009 was a clear turning point in the labor market, with the steepest employment losses of the Great Recession.
Personal disposable incomes started to rise again with help from the Recovery Act
People lost jobs in droves from the middle of 2008 to the first quarter of 2009, resulting in a drop in personal disposable after-tax income. Higher unemployment insurance benefits, bigger Social Security payments, and lower personal taxes, all of which were part of the Recovery Act, boosted personal disposable earnings in the second quarter of 2009. This provided immediate assistance to families in need.
Families ended up with more money in their pockets as a result of the new law’s immediate expenditure, despite job losses continuing at the same time. However, other Recovery Act provisions that took a bit longer to promote consumer spending aided in improving employment prospects by putting more money in people’s pockets.
Industrial production turned around with infrastructure spending spurred by the Recovery Act
From December 2007 to June 2009, industrial productionthe output of manufacturing and utilitiesdeclined steadily. When infrastructure expenditure from the Recovery Act began to pour into the economy in July 2009, industrial production began to grow again. After six months of sustained growth, industrial production was 3.7 percent higher in December 2009 than in June 2009.
After-tax income grew more quickly following the payroll tax cut
In the first quarter of 2011, when the payroll tax cut and an extension of extended unemployment insurance benefits were granted, after-tax income increased by 1.3 percent, the quickest rate of growth since the second quarter of 2010. As the labor market continued to add new positions at a modest pace, the payroll tax cut put more money in people’s pockets. The new funds bolstered an economy that was still struggling to establish its feet, assisting in the expansion of jobs.
Job growth accelerated with the payroll tax cut
Indeed, during the first three months of 2011, the labor market added an average of 192,000 jobs each month, up from 154,000 jobs in the previous three months. The payroll tax cut gave a sluggish labor market some more impetus.
Household debt burdens fell more quickly with the payroll tax cut
Households had more money in their pockets, and they used some of it to pay down their crushing debts. In the first quarter of 2011, the ratio of total household debt to after-tax income declined 2.5 percentage points, more than twice as fast as in the fourth quarter of 2010 and quicker than in any other quarter of 2010.
These ten reasons why the federal government’s rapid and decisive action changed an impending second Great Depression into the difficult but steady economic recovery we are witnessing today are based on credible economic statistics. There is plenty of room for argument regarding the amount to which the government should be involved in the day-to-day operations of the economy, but there is no reason to doubt why our economy isn’t locked in a long-term depression like to the Great Depression of the 1930s. In this situation, well-intentioned government measures did exactly what they were designed to do.
Endnotes
The net percentage is the difference between the share of loan officers who say lending standards are tightening and the share who say lending standards are loosening. A positive number indicates that more loan officers tightened lending criteria than loosened them, whereas a negative number indicates that more loan officers softened loan standards. The Federal Reserve Board of Governors, Board of Governors of the Federal Reserve System, Board of Governors of the Federal Reserve System, Board of Governor “Senior Loan Officer Opinion Survey on Bank Lending Practices,” Federal Reserve Board Docs, http://www.federalreserve.gov/boarddocs/snloansurvey/201205/fullreport.pdf.
Calculations are based on the following: “http://www.federalreserve.gov/releases/H15/, “H.15 ReleaseSelected Interest Rates.” The interest rates on conventional mortgages are shown below. Bond rates are for corporate bonds with a AAA rating.
The interest rate differential between nominal five-year US Treasury bonds and inflation-indexed five-year Treasury bonds is known as inflation expectations. Similar tendencies can be seen when comparing Treasury bonds of various maturities. Calculations are based on the following: “H.15 Interest RatesSelected Rates.”
New growth data for 2008 and 2009 was added by the Congressional Budget Office, indicating that the recession was worse than previously anticipated. Congressional Budget Office, “Budget and Economic Outlook” (2009); Congressional Budget Office, “A Preliminary Analysis of the President’s Budget and an Update on CBO’s Budget and Economic Outlook” (2009); Congressional Budget Office, “A Preliminary Analysis of the President’s Budget and an Update on CBO’s Budget and Economic Outlook” (2009). (2009). For 2010, the real inflation-adjusted economic growth rate was 3%. National Income and Product Accounts, Bureau of Economic Analysis (Department of Commerce, 2012). The brighter forecast for 2010 helped to offset a recession that was worse than expected. The CBO lowered the 2009 growth rate from -2.2 percent in January to -3 percent in March. However, the CBO forecasted a -1.5 percent growth rate from December 2008 to December 2009 in both January and March 2009. If the economy is predicted to enter a worse recession and then recover more swiftly in 2009, the changes from December to December can stay the same, even if total year growth rates fall. That is, the CBO predicted that the Recovery Act would add quickly to growth in the second half of 2009, offsetting a higher forecast fall in the first half. However, there are no quarterly growth predictions provided.
National Income and Product Accounts of the Bureau of Economic Analysis were used to compile this data.
Calculations based on Current Employment Statistics from the Bureau of Labor Statistics (Department of Labor, 2011). Because monthly job changes are rather unpredictable, the bullet point shows three-month averages. However, monthly job changes follow the same pattern as quarterly averages.
Calculations based on Current Employment Statistics from the Bureau of Labor Statistics.
Lower taxes and other forms of social spending had a greater impact on rising personal disposable incomes in the second quarter of 2009 than in the following quarters. In the following quarters, neither taxes nor other forms of social spending decreased. Instead, taxes remained low, and social spending remained high, with the exception of Social Security, health care, and unemployment insurance. Throughout the rest of 2009, as more people retired and claimed unemployment insurance benefits, Social Security and unemployment insurance payouts grew. Calculations based on National Income and Product Accounts from the Bureau of Economic Analysis.
Calculations are based on the following: “http://www.federalreserve.gov/releases/g17/default.htm, “Industrial Production and Capacity Utilization G-17.”
Calculations based on National Income and Product Accounts from the Bureau of Economic Analysis.
What triggered the recession of 2008?
The housing bubble burst in 2007 and 2008, triggering a protracted recession that saw the jobless rate rise to 10.0 percent in October 2009, more than double its pre-crisis level.
Was the 2008 recession ever fully recovered?
Although the recession ended in the second quarter of 2009, the economy of the United States remained in “economic malaise” in the second quarter of 2011. The post-recession years have been dubbed the “weakest recovery” since the Great Depression and World War II, according to some experts. One analyst dubbed the sluggish recovery a “Zombie Economy,” because it was neither dead nor living. Household incomes continued to decline after the recession ended in August 2012, falling 7.2 percent below the December 2007 level. Furthermore, long-term unemployment reached its highest level since World War II in September 2012, while the unemployment rate peaked many months after the crisis ended (10.1 percent in October 2009) and remained above 8% until September 2012. (7.8 percent ). From December 2008 to December 2015, the Federal Reserve kept interest rates at a historically low 0.25 percent, before starting to raise them again.
The Great Recession, however, was distinct from all previous recessions in that it included a banking crisis and the de-leveraging (debt reduction) of highly indebted people. According to research, recovery from financial crises can take a long time, with long periods of high unemployment and poor economic development. In August 2011, economist Carmen Reinhart stated: “It takes around seven years to deleverage your debt… And you tend to expand by 1 to 1.5 percentage points less in the decade after a catastrophic financial crisis, since the previous decade was powered by a boom in private borrowing, and not all of that growth was real. After a dip, the unemployment figures in advanced economies are likewise pretty bleak. Unemployment is still around five percentage points higher than it was a decade ago.”
Several of the economic headwinds that hindered the recovery were explained by then-Fed Chair Ben Bernanke in November 2012:
- Because the housing sector was seriously harmed during the crisis, it did not recover as it had in previous recessions. Due to a huge number of foreclosures, there was a large excess of properties, and consumers preferred to pay down their loans rather than buy homes.
- As banks paid down their obligations, credit for borrowing and spending by individuals (or investing by firms) was scarce.
- Following initial stimulus attempts, government expenditure restraint (i.e. austerity) was unable to counteract private sector shortcomings.
For example, federal expenditure in the United States increased from 19.1 percent of GDP in fiscal year (FY) 2007 to 24.4 percent in FY2009 (President Bush’s final budget year), before declining to 20.4 percent GDP in 2014, closer to the historical average. Despite a historical trend of an approximately 5% annual increase, government spending was significantly higher in 2009 than it was in 2014. Between Q3 2010 and Q2 2014, this slowed real GDP growth by about 0.5 percent per quarter on average. It was a recipe for a delayed recovery if both people and the government practiced austerity at the same time.
Several key economic variables (e.g., job level, real GDP per capita, stock market, and household net worth) reached their lowest point (trough) in 2009 or 2010, after which they began to rise, recovering to pre-recession (2007) levels between late 2012 and May 2014 (close to Reinhart’s prediction), indicating that all jobs lost during the recession were recovered. In 2012, real median household income hit a low of $53,331 before rising to an all-time high of $59,039 by 2016. The gains made during the recovery, on the other hand, were extremely unequally distributed. According to economist Emmanuel Saez, from 2009 to 2015, the top 1% of families accounted for 52% of total real income (GDP) increase per family. Following the tax increases on higher-income individuals in 2013, the gains were more fairly divided. According to the Federal Reserve, median household net worth peaked around $140,000 in 2007, dropped to $84,000 in 2013, and only partially recovered to $97,000 in 2016. When the housing bubble burst, middle-class families lost a large portion of their wealth, contributing to most of the downturn.
In the years following the Great Recession (20082012), the growth of healthcare costs in the United States declined. At this time, the rate of rise in aggregate hospital costs was slowed due to lower inflation and fewer hospital stays per population. Surgical stays slowed the most, whereas maternal and neonatal stays slowed the least.
As of December 2014, President Obama pronounced the rescue actions that began under the Bush Administration and continued under his Administration to be completed and generally beneficial. When interest on loans is taken into account, the government had fully recovered bailout monies as of January 2018. Various rescue initiatives resulted in a total of $626 billion being invested, borrowed, or awarded, with $390 billion being repaid to the Treasury. The Treasury has made a profit of $87 billion by earning another $323 billion in interest on rescue loans.
Who profited from the financial crisis of 2008?
In October 2008, Warren Buffett released an article in the New York TimesOp-Ed section claiming he was buying American equities 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.)
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.
Why did the economy collapse in 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.
How did we get back on our feet after the Great Depression?
A frequent misconception is that World War II’s massive spending ended the Great Depression. However, World War II entrenched the steep drop in living standards brought on by the Great Depression. Contrary to the interpretation of Keynesian so-called economists, the Depression was actually ended, and prosperity was restored, by sharp reductions in expenditure, taxation, and regulation at the close of World War II.
True, at the commencement of World War II, unemployment was on the decline.
However, sending millions of young American men to fight and die in the war left a statistical imprint.
As demonstrated after the war, there are better approaches to minimize unemployment.