The crisis had an impact on all countries in some form, but some countries were hit more than others. A picture of financial devastation emerges as currency depreciation, stock market declines, and government bond spreads rise. These three indicators, considered combined, convey the impact of the crisis since they show financial weakness. Ukraine, Argentina, and Jamaica are the countries most hit by the crisis, according to the Carnegie Endowment for International Peace’s International Economics Bulletin. Ireland, Russia, Mexico, Hungary, and the Baltic nations are among the other countries that have been severely affected. China, Japan, Brazil, India, Iran, Peru, and Australia, on the other hand, are “among the least affected.”
Who was the hardest hit by the Great Recession of 2008?
17951), co-authors Hilary Hoynes, Douglas Miller, and Jessamyn Schaller found that the Great Recession (December 2007 to June 2009) had a bigger impact on men, black and Hispanic workers, young workers, and workers with less education than other workers.
Which EU country was hardest hit by the financial crisis of 2008?
The debt crisis began in 2008 with the collapse of Iceland’s banking system, then extended to Portugal, Italy, Ireland, Greece, and Spain in 2009, prompting the coining of an insulting term (PIIGS). 1 It has resulted in a loss of faith in European companies and economies.
What impact did the global recession of 2008 have?
When the decade-long expansion in US housing market activity peaked in 2006, the Great Moderation came to an end, and residential development began to decline. Losses on mortgage-related financial assets began to burden global financial markets in 2007, and the US economy entered a recession in December 2007. Several prominent financial firms were in financial difficulties that year, and several financial markets were undergoing substantial upheaval. The Federal Reserve responded by providing liquidity and support through a variety of measures aimed at improving the functioning of financial markets and institutions and, as a result, limiting the damage to the US economy. 1 Nonetheless, the economic downturn deteriorated in the fall of 2008, eventually becoming severe and long enough to be dubbed “the Great Recession.” While the US economy reached bottom in the middle of 2009, the recovery in the years that followed was exceptionally slow in certain ways. In response to the severity of the downturn and the slow pace of recovery that followed, the Federal Reserve provided unprecedented monetary accommodation. Furthermore, the financial crisis prompted a slew of important banking and financial regulation reforms, as well as congressional legislation that had a substantial impact on the Federal Reserve.
Rise and Fall of the Housing Market
Following a long period of expansion in US house building, home prices, and housing loans, the recession and crisis struck. This boom began in the 1990s and accelerated in the mid-2000s, continuing unabated through the 2001 recession. Between 1998 and 2006, average home prices in the United States more than doubled, the largest increase in US history, with even bigger advances in other locations. During this time, home ownership increased from 64 percent in 1994 to 69 percent in 2005, while residential investment increased from around 4.5 percent of US GDP to nearly 6.5 percent. Employment in housing-related sectors contributed for almost 40% of net private sector job creation between 2001 and 2005.
The development of the housing market was accompanied by an increase in household mortgage borrowing in the United States. Household debt in the United States increased from 61 percent of GDP in 1998 to 97 percent in 2006. The rise in home mortgage debt appears to have been fueled by a number of causes. The Federal Open Market Committee (FOMC) maintained a low federal funds rate after the 2001 recession, and some observers believe that by keeping interest rates low for a “long period” and only gradually increasing them after 2004, the Federal Reserve contributed to the expansion of housing market activity (Taylor 2007). Other researchers, on the other hand, believe that such variables can only explain for a small part of the rise in housing activity (Bernanke 2010). Furthermore, historically low interest rates may have been influenced by significant savings accumulations in some developing market economies, which acted to keep interest rates low globally (Bernanke 2005). Others attribute the surge in borrowing to the expansion of the mortgage-backed securities market. Borrowers who were deemed a bad credit risk in the past, maybe due to a poor credit history or an unwillingness to make a big down payment, found it difficult to get mortgages. However, during the early and mid-2000s, lenders offered high-risk, or “subprime,” mortgages, which were bundled into securities. As a result, there was a significant increase in access to housing financing, which helped to drive the ensuing surge in demand that drove up home prices across the country.
Effects on the Financial Sector
The extent to which home prices might eventually fall became a significant question for the pricing of mortgage-related securities after they peaked in early 2007, according to the Federal Housing Finance Agency House Price Index, because large declines in home prices were viewed as likely to lead to an increase in mortgage defaults and higher losses to holders of such securities. Large, nationwide drops in home prices were uncommon in US historical data, but the run-up in home prices was unique in terms of magnitude and extent. Between the first quarter of 2007 and the second quarter of 2011, property values declined by more than a fifth on average across the country. As financial market participants faced significant uncertainty regarding the frequency of losses on mortgage-related assets, this drop in home values contributed to the financial crisis of 2007-08. Money market investors became concerned of subprime mortgage exposures in August 2007, putting pressure on certain financial markets, particularly the market for asset-backed commercial paper (Covitz, Liang, and Suarez 2009). The investment bank Bear Stearns was bought by JPMorgan Chase with the help of the Federal Reserve in the spring of 2008. Lehman Brothers declared bankruptcy in September, and the Federal Reserve aided AIG, a significant insurance and financial services firm, the next day. The Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation were all approached by Citigroup and Bank of America for assistance.
The Federal Reserve’s assistance to specific financial firms was hardly the only instance of central bank credit expansion in reaction to the crisis. The Federal Reserve also launched a slew of new lending programs to help a variety of financial institutions and markets. A credit facility for “primary dealers,” the broker-dealers that act as counterparties to the Fed’s open market operations, as well as lending programs for money market mutual funds and the commercial paper market, were among them. The Term Asset-Backed Securities Loan Facility (TALF), which was launched in collaboration with the US Department of Treasury, was aimed to relieve credit conditions for families and enterprises by offering credit to US holders of high-quality asset-backed securities.
To avoid an increase in bank reserves that would drive the federal funds rate below its objective as banks attempted to lend out their excess reserves, the Federal Reserve initially funded the expansion of Federal Reserve credit by selling Treasury securities. The Federal Reserve, on the other hand, got the right to pay banks interest on their excess reserves in October 2008. This encouraged banks to keep their reserves rather than lending them out, reducing the need for the Federal Reserve to offset its increased lending with asset reductions.2
Effects on the Broader Economy
The housing industry was at the forefront of not only the financial crisis, but also the broader economic downturn. Residential construction jobs peaked in 2006, as did residential investment. The total economy peaked in December 2007, the start of the recession, according to the National Bureau of Economic Research. The drop in general economic activity was slow at first, but it accelerated in the fall of 2008 when financial market stress reached a peak. The US GDP plummeted by 4.3 percent from peak to trough, making this the greatest recession since World War II. It was also the most time-consuming, spanning eighteen months. From less than 5% to 10%, the jobless rate has more than doubled.
The FOMC cut its federal funds rate objective from 4.5 percent at the end of 2007 to 2 percent at the start of September 2008 in response to worsening economic conditions. The FOMC hastened its interest rate decreases as the financial crisis and economic contraction worsened in the fall of 2008, bringing the rate to its effective floor a target range of 0 to 25 basis points by the end of the year. The Federal Reserve also launched the first of several large-scale asset purchase (LSAP) programs in November 2008, purchasing mortgage-backed assets and longer-term Treasury securities. These purchases were made with the goal of lowering long-term interest rates and improving financial conditions in general, hence boosting economic activity (Bernanke 2012).
Although the recession ended in June 2009, the economy remained poor. Economic growth was relatively mild in the first four years of the recovery, averaging around 2%, and unemployment, particularly long-term unemployment, remained at historically high levels. In the face of this sustained weakness, the Federal Reserve kept the federal funds rate goal at an unusually low level and looked for new measures to provide extra monetary accommodation. Additional LSAP programs, often known as quantitative easing, or QE, were among them. In its public pronouncements, the FOMC began conveying its goals for future policy settings more fully, including the situations in which very low interest rates were likely to be appropriate. For example, the committee stated in December 2012 that exceptionally low interest rates would likely remain appropriate at least as long as the unemployment rate remained above a threshold of 6.5 percent and inflation remained no more than a half percentage point above the committee’s longer-run goal of 2 percent. This “forward guidance” technique was meant to persuade the public that interest rates would remain low at least until specific economic conditions were met, exerting downward pressure on longer-term rates.
Effects on Financial Regulation
When the financial market upheaval calmed, the focus naturally shifted to financial sector changes, including supervision and regulation, in order to avoid such events in the future. To lessen the risk of financial difficulty, a number of solutions have been proposed or implemented. The amount of needed capital for traditional banks has increased significantly, with bigger increases for so-called “systemically essential” institutions (Bank for International Settlements 2011a;2011b). For the first time, liquidity criteria will legally limit the amount of maturity transformation that banks can perform (Bank for International Settlements 2013). As conditions worsen, regular stress testing will help both banks and regulators recognize risks and will require banks to spend earnings to create capital rather than pay dividends (Board of Governors 2011).
New provisions for the treatment of large financial institutions were included in the Dodd-Frank Act of 2010. The Financial Stability Oversight Council, for example, has the authority to classify unconventional credit intermediaries as “Systemically Important Financial Institutions” (SIFIs), putting them under Federal Reserve supervision. The act also established the Orderly Liquidation Authority (OLA), which authorizes the Federal Deposit Insurance Corporation to wind down specific institutions if their failure would pose a significant risk to the financial system. Another section of the legislation mandates that large financial institutions develop “living wills,” which are detailed plans outlining how the institution could be resolved under US bankruptcy law without endangering the financial system or requiring government assistance.
The financial crisis of 2008 and the accompanying recession, like the Great Depression of the 1930s and the Great Inflation of the 1970s, are important areas of research for economists and policymakers. While it may be years before the causes and ramifications of these events are fully known, the attempt to unravel them provides a valuable opportunity for the Federal Reserve and other agencies to acquire lessons that can be used to shape future policy.
Who was affected by the financial crisis of 2008?
On its own terms, this history is completely correct. When the government permitted thousands of banks to fail in the early 1930s, the unemployment rate surged to about 25%, and soup kitchens and shantytowns sprouted up all over the country. There was plenty of hardship in the aftermath of the 2008 financial crisismillions of Americans lost their homes to mortgage foreclosures, and the unemployment rate had increased to nearly 10% by the summer of 2010but nothing on the same scale. The jobless rate has now dropped to just 3.9 percent.
There’s a lot more to the story than this upbeat Washington-based narrative, though. In his book “Crashed: How a Decade of Financial Crises Changed the World,” Columbia economic historian Adam Tooze points out that the ramifications of 2008, particularly political ones, are still being felt today. It was inherently political to use taxpayer money to bail out greedy and inept bankers. Quantitative easing was likewise a failure, despite the fact that other central banks followed the Fed’s lead. It largely functioned by inflating the value of financial assets, which were mostly held by the wealthy.
The bailout effort sparked populist backlash on both sides of the Atlantic as wages and incomes continued to fall. Austerity policies, particularly in Europe, gave a gloomy twist to the political polarization process. As a result, the “financial and economic crisis of 2007-2012 morphed between 2013 and 2017 into a comprehensive political and geopolitical crisis of the postcold war order,” according to Tooze, one that helped Donald Trump win the White House and propelled right-wing nationalist parties to power across Europe. “Of course, things could be worse,” Tooze observes. “In 1939, a book commemorating the ten-year anniversary of 1929 would have been published. We haven’t quite arrived, at least not yet. But this is unquestionably a more uncomfortable and unsettling moment than could have been anticipated before the crisis.”
Many US policymakers and pundits, Tooze reminds us, were focused on the incorrect global threat in the years preceding up to September 2008: the potential that China, by lowering its massive holdings of US Treasury notes, would wreck the dollar’s value. Meanwhile, the United States’ authorities largely overlooked the craziness unfolding in the housing market and on Wall Street, where bankers were slicing and dicing millions of subprime mortgages and selling them to investors as mortgage-backed securities. This was the case for seven out of ten new mortgages in 2006.
Tooze does a good job of navigating readers through Wall Street’s deadly alphabet soup of mortgage-backed securities: M.B.S.s, C.D.O.s, C.D.S.s, and so on. He questions the transformation of commercial banks like Citigroup from long-term lenders to financial supermarkets”service providers for a fee”in the decades leading up to 2008, and he correctly emphasizes the enabling role that successive Administrations, most notably Bill Clinton’s, played in this process.
Did the Great Recession have an impact on other nations?
The recession spread as the financial crisis moved from the United States to other countries, particularly western Europe (where several big banks had extensively invested in American MBSs). Most developed countries experienced economic slowdowns of different severity (China, India, and Indonesia being prominent exceptions), and many of them responded with stimulus programs similar to the ARRA. The recession had major political ramifications in various nations. Iceland’s government disintegrated, and the country’s three largest banks were nationalized, as the country was particularly badly impacted by the financial crisis and experienced a severe recession. Latvia’s GDP dropped by more than 25% in 200809, and unemployment reached 22%. Latvia, like the other Baltic countries, was hit hard by the financial crisis. Meanwhile, sovereign debt problems erupted in Spain, Greece, Ireland, Italy, and Portugal, necessitating involvement by the European Union, the European Central Bank, and the International Monetary Fund (IMF) and the implementation of draconian austerity measures. Recovery was slow and uneven in all of the countries affected by the Great Recession, and the broader social consequences of the downturnincluding lower fertility rates, historically high levels of student debt, and diminished job prospects among young adults in the United Stateswere expected to last for many years.
What was the impact of the 2008 recession on Canada?
Canada was one of the last developed countries to experience a downturn. GDP growth was negative in the first quarter of 2008, but positive in the second and third quarters. In the fourth quarter, the recession officially began. Two variables account for the nearly one-year delay in the commencement of the recession in Canada compared to the United States. First, Canada has a solid banking system that is not burdened by the same level of consumer debt problems as the United States. The US economy was collapsing from within, while Canada’s economic connection with the US was hurting the country’s economy. Second, commodity prices rose steadily until June 2008, bolstering a significant component of the Canadian economy and postponing the onset of the crisis. The Bank of Canada announced in early December 2008 that it was dropping its central bank interest rate to its lowest level since 1958, as well as declaring that Canada’s economy was entering a recession. Since then, the Bank of Canada has stated that the country’s economy has shrunk for two months in a row (Oct -0.1 percent & Nov -0.7 percent ). According to the most recent OECD report, the country’s unemployment rate could grow to 7.5 percent in the following two years.
The Bank of Canada pronounced the recession in Canada to be finished on July 23, 2009. However, it was not until November 30, 2009 that the actual economic recovery began. In the first quarter of 2010, the Canadian economy grew at an annualized pace of 6.1 percent, exceeding analyst estimates and recording the strongest growth rate since 1999. Economists anticipated annualized GDP growth of 5.9% in the fourth quarter, up from 5% in the fourth quarter of the previous year (SeptemberDecember 2009). Following three quarters of contraction, Canada’s economy expanded for the third time in a row in the first quarter. March growth was 0.6 percent, which was higher than the 0.5 percent forecast. In the winter and early spring months of 2010, alone, 215,900 new employment were generated, despite the fact that this is traditionally the season when the Canadian economy is at its most moribund.
During the first two quarters of 2015, Canada was also in a recession, with GDP falling by 0.1 percent on average.
In 2008, how many countries experienced a recession?
According to the conventional recession definition, a recession occurs when seasonally adjusted real GDP contracts quarter on quarter for at least two consecutive quarters. The table below shows all national recessions that occurred between 2006 and 2013 (for the 71 countries with available data). In this time span, only 11 of the 71 nations with quarterly GDP statistics (Poland, Slovakia, Moldova, India, China, South Korea, Indonesia, Australia, Uruguay, Colombia, and Bolivia) avoided a recession.
Only two nations (Iceland and Jamaica) were in recession in Q4-2007, demonstrating that the few recessions that appeared early in 2006-07 are rarely related with the Great Recession.
Only six countries were in recession a year before the peak, in Q1-2008 (Iceland, Sweden, Finland, Ireland, Portugal and New Zealand). In Q2 2008, 25 countries were in recession, 39 in Q3 2008, and 53 in Q4 2008. During the worst of the Great Recession, in Q1 2009, a total of 59 out of 71 countries were in recession at the same time. In Q2 2009, 37 countries were in recession, 13 in Q3 2009, and 11 in Q4 2009. Only seven countries were in recession in Q1 2010 a year after the peak (Greece, Croatia, Romania, Iceland, Jamaica, Venezuela and Belize).
The Great Recession was a global recession from Q3 2008 to Q1 2009, according to recession data for the whole G20-zone (covering 85 percent of all GWP).
Following recessions in 20102013 affected only Belize, El Salvador, Paraguay, Jamaica, Japan, Taiwan, New Zealand, and 24 of the 50 European countries (including Greece). Only five of the 71 nations having quarterly data (Cyprus, Italy, Croatia, Belize, and El Salvador) were still in recession as of October 2014. Many of the European countries’ subsequent recessions are generally regarded to as direct effects of the European sovereign debt crisis.
Where did the worldwide recessions of 2008 and 2009 begin?
- The Great Recession refers to the global financial crisis that occurred in 2008-2009.
- It all started with the housing market bubble, which was fueled by an overabundance of mortgage-backed securities (MBS) that packaged high-risk loans together.
- Reckless lending resulted in an unprecedented number of defaulted loans; when the losses were added up, several financial institutions failed, necessitating a government rescue.
- The American Recovering and Reinvestment Act of 2009 was enacted to help the economy recover.
Is Greece in default on its obligations?
Greece defaulted on its debt in 2015. While some have dismissed Greece’s “arrears,” its 1.6 billion payment to the International Monetary Fund (IMF) was the first time a wealthy country has missed such a payment in history. Greece joined the Eurozone in 2001, and some believe the Eurozone is largely to blame for the country’s demise. However, before to adopting the single currency, the Greek economy was experiencing fundamental issues, and the economy was left to collapsealbeit for a variety of causes.
What was the primary cause of the United States’ economic catastrophe 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.