- 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 United States recover from the Great Recession of 2008?
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.
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 was the US government’s response to the 2008 financial crisis?
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.
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.
What triggered the 2008 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.
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.)
How long did the 2008 financial crisis last?
During the financial crisis of 20072009, the US bear market of 20072009 lasted 17 months, from October 9, 2007 to March 9, 2009.
What was the government’s response to the financial crisis in the United States?
On September 29, 2008, the US Federal Reserve announced plans to double its Term Auction Facility to $300 billion in order to enhance accessible funding for commercial banks and lower the fed funds rate. The Federal Reserve also announced that it will boost its swap facilities with foreign central banks from $290 billion to $620 billion, citing a perceived lack of US dollars in Europe at the time.
On November 25, 2008, the Federal Reserve stated that it would purchase $800 billion in debt and mortgage-backed assets in a fund distinct from Congress’s 700-billion-dollar Troubled Asset Relief Program (TARP).
The money was used to buy $100 billion in debt from Fannie Mae and Freddie Mac and $500 billion in mortgage-backed securities, according to the BBC. To assist unfreeze the consumer debt market, the fund would also lend $200 billion to holders of assets backed by other types of consumer loans, including as credit cards and school loans. According to a Des Moines Register editorial, it’s unclear whether the TARP oversight organizations will also review Paulson’s administration of the Fed’s $800 billion loan and bond moves.
The Federal Reserve had spent $1.2 trillion as of December 24, 2008, using its independent authority to purchase various financial assets and make emergency loans to solve the financial crisis, substantially beyond the $700 billion approved by Congress from the federal budget. The bailouts of American International Group (AIG), Fannie Mae and Freddie Mac, and Citigroup comprised emergency loans to banks, credit card companies, and general businesses, temporary swaps of Treasury bills for mortgage-backed securities, the sale of Bear Stearns, and the sale of Bear Stearns.
The potential of the Federal Reserve beginning to reduce its economic stimulus efforts began to enter the estimates of investment experts in May 2013, when the stock market was hitting record highs and the housing and employment markets were strengthening significantly. This affected worldwide markets.