- The 2008 Great Recession may have developed into the second Great Depression if TARP, ARRA, and the Economic Stimulus Plan had not been adopted.
When did the US recession of 2008 end?
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.
Who put an end to the 1970s recession?
This far more painful recession followed closely on the heels of the brief 1980 recession, giving rise to the term “double-dip recession” among Americans.
An oil crisis was one of the recessionary drivers for the third time in a decade. The Iranian Revolution was done, but Ayatollah Khomeini’s new regime continued to export oil infrequently and at reduced levels, keeping gas prices high.
Simultaneously, the Fed’s cautious interest rate hikes in 1980 were insufficient to curb inflation, so Fed Chairman Paul Volcker pushed rates to record highs21.5 percent in 1982. The astronomically high rate lowered inflation, but it had a negative impact on the economy, which shrank by 3.6 percent during the 16-month recession and saw unemployment rise to nearly 10%.
Ronald Reagan used a mix of tax cuts and defense spending to bring the lengthy and deep recession to a conclusion.
What steps did the United States take to address the Great Recession?
During times of national crises, Congress has responded by directing federal resources and programs to help struggling Americans. While it is critical to respond rapidly to crises, it is also critical to ensure that federal programs and public resources are used as intended.
The GAO’s involvement during times of crisis is examined in today’s WatchBlog piece, which focuses on the federal response to the Great Depression, the Great Recession, and the coronavirus outbreak.
When the stock market crashed in 1929, precipitating the lengthy period of economic decline known as the Great Depression, GAO was still a relatively young organization.
In reaction to the Great Depression, Congress passed President Franklin D. Roosevelt’s New Deal, which included $41.7 billion in funding for domestic initiatives such as unemployment compensation.
GAO’s workload grew as federal funds were poured into the 1930s’ recovery and relief efforts. GAO, which had around 1,700 employees at the time, quickly ran out of employees and needed to hire more to handle paperwork such as vouchers. Our staff had nearly tripled to 5,000 by 1939.
Our auditors began extending their involvement in overseeing federal programs at the same time. Fieldwork in Kentucky and numerous southern states began in the mid-1930s, and included examinations of government agriculture programs. This steady shift in goal from acting as federal accountants to serving as program and policy analysts would last until 2003, when the General Accounting Office was renamed the Government Accountability Office.
The Great Recession, which began in December 2007, was widely regarded as the country’s worst economic downturn since the Great Depression.
As a result, Congress passed the American Recovery and Reinvestment Act of 2009, which contained $800 billion in stimulus funding to help the economy recover.
GAO was given a number of tasks under the Recovery Act to help enhance accountability and openness in the use of those funds. For example, we conducted bimonthly assessments of how monies were spent by various states and municipalities. In addition, we conducted specialized research in areas such as small company loans, education, and trade adjustment aid.
Despite the fact that the Great Recession ended in 2009, we are still investigating its effects on the soundness of our financial system and related government support. For example, in response to the 2008 housing crisis, the Treasury Department established three housing programs utilizing TARP funds to assist struggling homeowners avoid foreclosure and keep their homes. TARP programs were assessed every 60 days during the recession and subsequent years, and we proposed steps to improve Treasury’s management and use of funds. This effort continues today, with annual audits of TARP financial statements and updates on active TARP projects. In December 2020, we released our most current report.
We’re also keeping an eye on the health of the nation’s housing finance system, which includes Fannie Mae and Freddie Mac, which buy mortgages from lenders and either hold them or bundle them into mortgage-backed securities that can be sold.
Fannie Mae and Freddie Mac were taken over by the federal government in 2008, and the role has remained unchanged for the past 13 years, keeping taxpayers on the line for any possible losses sustained by the two corporations. We wrote about the dangers of this prolonged conservatorship and the need to overhaul the home finance system in January 2019.
Congress approved $4.7 trillion in emergency funding for people, businesses, the health-care system, and state and municipal governments in response to the pandemic. We’ve been following the federal response by, among other things, providing reports on the pandemic’s and response efforts’ effects on federal programs and operations on a regular basis.
Vaccine development and distribution, small business lending, unemployment payments, economic relief checks, tax refund delays, K-12 and higher education’s response to COVID-19, housing protections, and other topics have all been covered in our work.
On July 19, we released our most recent report on the federal response, as well as our recommendations for how this effort might be improved further. In October, we will publish our next report. Visit our Coronavirus Oversight page often because we’ll keep you updated on the federal reaction to COIVD-19 as the situation unfolds.
GAO has played a key role in overseeing federal expenditures and programs during times of crisis, and we continue to do so in more normal times. We produce hundreds of reports each year and testify before dozens of congressional committees and subcommittees on problems that affect our country. We saved taxpayers $77.6 billion in government spending in fiscal year 2020. For every dollar Congress invests in us, we get $114!
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.
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.
Key Points
- Volcker is credited with bringing the United States’ high inflation levels of the 1970s and early 1980s to an end while serving as chairman of the Federal Reserve.
- Inflation was high when he became chairman in 1979, peaking at 13.5 percent in 1981. The inflation rate fell to 3.2 percent by 1983, thanks to Volcker and the rest of the board’s efforts.
- In June of 1981, Volcker increased the federal funds rate from 11.2 percent to 20%. During this time, the jobless rate surpassed 10% for the first time.
- During the economic upturn, Volcker elected to implement a policy of preemptive restraint, which raised real interest rates.
- Volcker’s Federal Reserve board garnered some of the biggest political criticisms and protests in the Federal Reserve’s history, despite his level of accomplishment. The demonstrations erupted as a result of the high interest rates’ harmful impact on the building and farming businesses.
Key Terms
- Stagflation is defined as inflation that is accompanied by slow growth, unemployment, or a recession.
- Inflation is defined as a rise in the overall level of prices or the cost of living.
What caused the recession of the 1980s?
The 1981-82 recession was the greatest economic slump in the United States since the Great Depression, prior to the 2007-09 recession. Indeed, the over 11% unemployment rate attained in late 1982 remains the postwar era’s pinnacle (Federal Reserve Bank of St. Louis). During the 1981-82 recession, unemployment was widespread, but manufacturing, construction, and the auto industries were especially hard hit. Despite the fact that goods manufacturers accounted for only 30% of overall employment at the time, they lost 90% of their jobs in 1982. Manufacturing accounted for three-quarters of all job losses in the goods-producing sector, with unemployment rates of 22% and 24%, respectively, in the home building and auto manufacturing industries (Urquhart and Hewson 1983, 4-7).
The economy was already in poor health prior to the slump, with unemployment hovering at 7.5 percent following a recession in 1980. Tight monetary policy in an attempt to combat rising inflation sparked both the 1980 and 1981-82 recessions. During the 1960s and 1970s, economists and politicians thought that raising inflation would reduce unemployment, a tradeoff known as the Phillips Curve. In the 1970s, the Fed used a “stop-go” monetary strategy, in which it alternated between combating high unemployment and high inflation. The Fed cut interest rates during the “go” periods in order to loosen the money supply and reduce unemployment. When inflation rose during the “stop” periods, the Fed raised interest rates to lessen inflationary pressure. However, as inflation and unemployment rose concurrently in the mid-1970s, the Phillips Curve tradeoff proved unstable in the long run. While unemployment was on the decline towards the end of the decade, inflation remained high, hitting 11% in June 1979. (Federal Reserve Bank of St. Louis).
Because of his anti-inflation ideas, Paul Volcker was chosen chairman of the Federal Reserve in August 1979. He had previously served as president of the New York Fed, where he had expressed his displeasure with Fed actions that he believed contributed to rising inflation expectations. In terms of future economic stability, he believes that rising inflation should be the Fed’s top concern: “It is what is going to give us the most troubles and cause the biggest recession” (FOMC transcript 1979, 16). He also thought the Fed had a credibility problem when it comes to controlling inflation. The Fed had proved in the preceding decade that it did not place a high priority on maintaining low inflation, and the public’s belief that this conduct would continue would make it increasingly difficult for the Fed to drive inflation down. “Failure to continue the fight against inflation now would simply make any subsequent effort more difficult,” he said (Volcker 1981b).
Instead of focusing on interest rates, Volcker altered the Fed’s policy to aggressively target the money supply. He chose this strategy for two reasons. To begin with, rising inflation made it difficult to determine which interest rate targets were suitable. Due to the expectation of inflation, the nominal interest rates the Fed targeted could be relatively high, but the real interest rates (that is, the effective interest rates after adjusting for inflation) could still be quite low. Second, the new policy was intended to show the public that the Federal Reserve was serious about keeping inflation low. The anticipation of low inflation was significant, as present inflation is influenced in part by future inflation forecasts.
Volcker’s initial efforts to reduce inflation and inflationary expectations were ineffective. The Carter administration’s credit-control scheme, which began in March 1980, triggered a severe recession (Schreft 1990). As unemployment rose, the Fed relented, reverting to the “stop-go” practices that the public had grown accustomed to. The Fed tightened the money supply further in late 1980 and early 1981, causing the federal funds rate to approach 20%. Long-term interest rates, despite this, have continued to grow. The ten-year Treasury bond rate surged from around 11% in October 1980 to more than 15% a year later, probably due to market expectations that the Fed would soften its restrictive monetary policy if unemployment soared (Goodfriend and King 2005). Volcker, on the other hand, was insistent that the Fed not back down this time: “We have set our course to control money and credit growth.” We intend to stay the course” (Volcker 1981a).
High interest rates put pressure on sectors of the economy that rely on borrowing, such as manufacturing and construction, and the economy officially entered a recession in the third quarter of 1981. Unemployment increased from 7.4% at the beginning of the recession to nearly 10% a year later. Volcker faced repeated calls from Congress to loosen monetary policy as the recession worsened, but he insisted that failing to lower long-run inflation expectations now would result in “more catastrophic economic situations over a much longer period of time” (Monetary Policy Report 1982, 67).
This perseverance paid off in the end. Inflation had dropped to 5% by October 1982, and long-term interest rates had begun to fall. The Fed permitted the federal funds rate to drop to 9%, and unemployment fell fast from over 11% at the end of 1982 to 8% a year later (Federal Reserve Bank of St. Louis; Goodfriend and King 2005). Inflation was still a threat, and the Fed would have to deal with several “inflation scares” during the 1980s. However, Volcker’s and his successors’ dedication to actively pursue price stability helped ensure that the 1970s’ double-digit inflation did not reappear.
What presidents were responsible for recessions?
Ten of the last eleven recessions began under Republican presidents, according to CNN, and “every Republican president since Benjamin Harrison, who served from 1889 to 1893, had a recession begin in their first term in office.” The National Bureau of Economic Research (NBER) tracks the start of recessions, and the following list includes the president in office at the time, as well as their political party:
According to Blinder and Watson, the economy was in recession for 49 quarters between 1949 and 2013, with 8 quarters under Democratic leadership and 41 under Republican leadership.
Who profited 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.)