The American Recovery and Reinvestment Act (ARRA) provided cash to create and maintain jobs, as well as to extend or increase unemployment insurance and other safety-net programs, such as food stamps. Despite these efforts, poverty rates among children and young people (those aged 1824) reached around 22% in 200710, representing rises of 4% and 4.7 percent, respectively. Between 2007 and 2009, stock prices in the United States plunged by 57 percent, as measured by the S&P 500 index (by 2013 the S&P had recovered that loss, and it soon greatly exceeded its 2007 peak). Between late 2007 and early 2009, American households lost an estimated $16 trillion in net value, with one quarter losing at least 75 percent of their net worth and more than half losing at least 25 percent. Households led by younger adults, especially those born in the 1980s, lost the most wealth, assessed as a percentage of what previous generations in similar age groups had earned. They also took the longest to recover, with several still not fully recovered even ten years after the recession ended. In 2010, the wealth of the median household led by a person born in the 1980s was about 25% lower than that of previous generations of the same age group; the gap widened to 41% in 2013 and stayed at more than 34% as late as 2016. Because of these losses, some economists have spoken of a “lost generation” of young people who, as a result of the Great Recession, will be poorer for the rest of their lives than previous generations.
What was the cost of the Great Recession?
The failure of Lehman Brothers, the country’s fourth-largest investment bank, in September 2008 brought things to a climax later that year. The virus swiftly spread to other economies around the world, including Europe. According to the US Bureau of Labor Statistics, the Great Recession resulted in the loss of more than 8.7 million jobs in the United States alone, forcing the unemployment rate to double. According to the US Department of the Treasury, American households lost nearly $19 trillion in net value as a result of the stock market crash. June 2009 was the formal end of the Great Recession.
How much did people lose during the 2008 financial crisis?
The crisis caused the Great Recession, which was the worst worldwide downturn since the Great Depression at the time. It was followed by the European debt crisis, which began with a deficit in Greece in late 2009, and the 20082011 Icelandic financial crisis, which saw all three of Iceland’s major banks fail and was the country’s largest economic collapse in history, proportionate to its size of GDP. It was one of the world’s five worst financial crises, with the global economy losing more than $2 trillion as a result. The proportion of home mortgage debt to GDP in the United States climbed from 46 percent in the 1990s to 73 percent in 2008, hitting $10.5 trillion. As home values climbed, a surge in cash out refinancings supported an increase in consumption that could no longer be sustained when home prices fell. Many financial institutions had investments whose value was based on home mortgages, such as mortgage-backed securities or credit derivatives intended to protect them against failure, and these investments had lost a large amount of value. From January 2007 to September 2009, the International Monetary Fund calculated that large US and European banks lost more than $1 trillion in toxic assets and bad loans.
In late 2008 and early 2009, stock and commodities prices plummeted due to a lack of investor trust in bank soundness and a reduction in credit availability. The crisis quickly grew into a global economic shock, resulting in the bankruptcy of major banks. Credit tightened and foreign trade fell during this time, causing economies around the world to stall. Evictions and foreclosures were common as housing markets weakened and unemployment rose. A number of businesses have failed. Household wealth in the United States decreased $11 trillion from its peak of $61.4 trillion in the second quarter of 2007, to $59.4 trillion by the end of the first quarter of 2009, leading in a drop in spending and ultimately a drop in corporate investment. In the fourth quarter of 2008, the United States’ real GDP fell by 8.4% from the previous quarter. In October 2009, the unemployment rate in the United States reached 11.0 percent, the highest since 1983 and about twice the pre-crisis rate. The average number of hours worked per week fell to 33, the lowest since the government began keeping track in 1964.
The economic crisis began in the United States and quickly extended throughout the world. Between 2000 and 2007, the United States accounted for more than a third of global consumption growth, and the rest of the world relied on the American consumer for demand. Corporate and institutional investors around the world owned toxic securities. Credit default swaps and other derivatives have also enhanced the interconnectedness of huge financial organizations. The de-leveraging of financial institutions, which occurred as assets were sold to pay back liabilities that could not be refinanced in frozen credit markets, intensified the solvency crisis and reduced foreign trade. Trade, commodity pricing, investment, and remittances sent by migrant workers all contributed to lower growth rates in emerging countries (example: Armenia). States with shaky political systems anticipated that, as a result of the crisis, investors from Western countries would withdraw their funds.
Governments and central banks, including the Federal Reserve, the European Central Bank, and the Bank of England, provided then-unprecedented trillions of dollars in bailouts and stimulus, including expansive fiscal and monetary policy, to offset the decline in consumption and lending capacity, avoid a further collapse, encourage lending, restore faith in the vital commercial paper markets, and avoid a repeat of the Great Recession. For a major sector of the economy, central banks shifted from being the “lender of last resort” to becoming the “lender of only resort.” The Fed was sometimes referred to as the “buyer of last resort.” These central banks bought government debt and distressed private assets from banks for $2.5 trillion in the fourth quarter of 2008. This was the world’s largest liquidity injection into the credit market, as well as the world’s largest monetary policy action. Following a strategy pioneered by the United Kingdom’s 2008 bank bailout package, governments across Europe and the United States guaranteed bank debt and generated capital for their national banking systems, ultimately purchasing $1.5 trillion in newly issued preferred stock in major banks. To combat the liquidity trap, the Federal Reserve produced large sums of new money at the time.
Trillions of dollars in loans, asset acquisitions, guarantees, and direct spending were used to bail out the financial system. The bailouts were accompanied by significant controversy, such as the AIG bonus payments scandal, which led to the development of a range of “decision making frameworks” to better balance opposing policy objectives during times of financial crisis. On the day that Royal Bank of Scotland was bailed out, Alistair Darling, the UK’s Chancellor of the Exchequer at the time of the crisis, stated in 2018 that Britain came within hours of “a breakdown of law and order.”
Instead of funding more domestic loans, several banks diverted part of the stimulus funds to more profitable ventures such as developing markets and foreign currency investments.
The DoddFrank Wall Street Reform and Consumer Protection Act was passed in the United States in July 2010 with the goal of “promoting financial stability in the United States.” Globally, the Basel III capital and liquidity criteria have been adopted. Since the 2008 financial crisis, consumer authorities in the United States have increased their oversight of credit card and mortgage lenders in attempt to prevent the anticompetitive activities that contributed to the catastrophe.
What was the cost of the Great Recession?
The tremendous economic burden of the 2008 financial crisis is difficult to overstate. The cost of the US government’s increased spending and lost receipts as a result of the crisis from 2008 to 2010 is expected to be well over $2 trillion, more than double the cost of the 17-year-long war in Afghanistan. Even more devastating are broader measures. By 2016, the crisis had cost the United States 15 percent of GDP, or $4.6 trillion, as measured by a drop in per capita GDP compared to the pre-crisis trend. Such numbers are much too large to be comprehended in any meaningful way, but a lesser scale could be even more effective. According to a 2018 research by the Federal Reserve Board, the crisis cost each and every American over $70,000. The crisis was likely the most momentous event of the twenty-first century thus far, and the largest single economic downturn since the Great Depression, just in monetary terms. Even if the financial crisis’ main consequences were economic, it would be worth examining ten years later.
The most significant consequences of the financial crisis, however, may be political and social rather than economic. Political polarization and the rise of populist movements on both the left and right in Europe and the United States increased dramatically in the years following the crisis, culminating in Brexit in the United Kingdom and the election of Donald Trump in the United States by some measures the country’s most polarizing president ever. Increases in political polarization are a typical response to financial crises across history and across countries. Even the economic recovery seen by the United States and, to a lesser extent, the United Kingdom is unable to offset the collapse’s long-term political and social consequences.
Because of the severity of the crisis, no government reaction was likely to be able to prevent these political and social implications; when the economy fails, people would suffer, and they will blame those in power. The Bush and Obama administrations’ responses to the crisis, in my judgment, dramatically worsened the crisis-induced transformation in American political culture.
Fundamentally, the acts of the leaders of the American banking sector devastated the American (and global) economy, and the US government elected to intervene “Bailouts “punish” those elites by providing them with large sums of money. This could have been the best choice. To avoid a second Great Depression, it may have been required. It might even have been economically optimal, in the sense that it avoided a worse outcome at the lowest possible cost (I don’t think this, but for the purpose of argument, let’s pretend it’s true). Despite this, the majority of Americans believe it is inherently unjust.
In most cases, justice is conceived in one of two ways. The first, and most common, is that justice is equal opportunity. Good behavior is rewarded in a fair environment, whereas evil behaviors (typically defined as acts that violate universally accepted norms) are punished. Economists and those with a strong economics background, on the other hand, frequently think of justice in terms of efficiency that is, the just conclusion is the one that maximizes welfare. Although this is how most economists see it, the majority of people have a totally different viewpoint. Most people including monkeys! believe that justice is fairness, and they believe it so deeply that they are willing to pay a high price to protest unfair outcomes. When given the opportunity to punish someone who has deceived them in a game, for example, most people will accept it, even if it means they will be worse off. They make a conscious decision to prioritize fairness over efficiency.
The arguments in support of the government’s reaction to the financial crisis from TARP to nationalizing AIG to allowing bailed-out banks to keep paying bonuses to their staff all rested on the logic of justice as the rescue of the American economy at the lowest possible cost. These arguments, on the other hand, completely overlook the robust and widely held idea that justice is synonymous with fairness. It may have been more efficient to reward those who had acted badly while penalizing others who were blameless, but it did not make it fair.
One approach to illustrate the magnitude of this injustice is to compare how bailed-out banks and car firms were treated. When the government bailed out big American banks, none of their CEOs were fired. The bailouts didn’t stop banks from lavishing compensation on their CEOs and distributing dividends to shareholders rather than keeping cash to improve stability. The government did not impose any losses on AIG’s creditors when it bailed out the company. If you were a participant in the American financial system, the government went to great lengths to ensure that you were spared the consequences of the collapse your industry had produced.
On the other hand, when GM and Chrysler were bailed out, their CEOs were sacked and their unionized workforces were compelled to accept significant salary cuts, despite the fact that they had little to do with the crisis’s origins. When assessed just in terms of economic efficiency, each individual decision may have been correct in certain ways. In the aggregate, though, they conveyed the impression of a government eager to go to any length to protect Wall Street from the repercussions of its own blunders while mostly refusing to do the same for others.
Perhaps even worse was the government’s concentration on financial sector stability rather than actually assisting the majority of Americans. Former Treasury Secretary Timothy Geithner’s attitude to the financial crisis was the clearest example of this. He explained, for example, why the Home Affordable Modification Program (HAMP), which was designed to assist Americans facing eviction due to their inability to pay their mortgages, had done so little, because its true purpose was to help the wealthy “foam the runway” for banks that had made the loans that is, he saw it as a program designed to benefit banks rather than the customers to whom they had made predatory loans.
Even if we accept the notion that focusing almost solely on the financial sector’s health was the best way to deal with the crisis, this strategy leads to a slew of issues. It substantially relieves the sector of any pressure to reform the habits that contributed to the crisis. Worse, it damaged the trust relationships that are necessary for democracy to work.
It’s understandable that many voters would lose faith in the ruling class. When that trust is lost, democratic communities will gravitate to leaders like Donald Trump, Bernie Sanders, Boris Johnson, and Nigel Farage who threaten to overthrow the establishment. Outsiders are frequently used to lead populist movements. However, the difficulty with voting for pure outsiders is that they have no track record. You have no idea what they truly believe. They also don’t always know how to operate the power levers. They can flip on you and pursue policies that are diametrically opposed to those they promised, they can be persuaded by insiders, or they can simply be ineffectual in enacting their agenda while in government. The end outcome is either more of the same or a government that is too disorganized to function.
Different versions of this are currently playing out in the United States and the United Kingdom. Leading Brexiteers in the UK began taking back key campaign promises to shift EU spending into Britain’s national health care, restrict immigration, and stiffen Britain’s borders just days after winning the referendum to leave the EU. The administration has been unable to reach an agreement to exit the EU two years after the referendum. As a result, the government is paralyzed in inaction, with continual threats to Prime Minister Teresa May’s power, key officials resigning, and the public unsure of what to do next.
With the exception of limiting refugee admissions and, to some extent, placing tariffs on international trade, Donald Trump has been unable or unwilling to vigorously pursue the populist measures he promised during the campaign. Trump promised to raise taxes on the wealthy during his campaign and constantly targeted Goldman Sachs (and attacked his opponent for giving paid speeches to them). He has lowered taxes for the wealthiest, stocked his government with Goldman Sachs alums, and attempted to weaken the power of the Consumer Banking Protection Bureau since taking office, essentially rewarding the financial elites whose failure helped him win.
The challenge ahead of May’s and Trump’s successors is straightforward. This loop must be broken by him or her, whether Democrat or Republican, Labour or Tory. He or she will need both the will and the ability to solve important economic challenges, such as stagnant median income, rising inequality, and most people’s underlying economic insecurity. Beyond that, the two successors must govern in a fair and equitable manner. This could include demonstrating that people who flout the law will face consequences, even if they are wealthy and powerful. To allay such fears, a leader can stress white-collar crime, which is still too often overlooked by prosecutors and for which the overall number of prosecutions in the United States is at a 20-year low. Whatever strategy they take, future leaders should be guided by a principle that has always been at the heart of democratic societies: fairness is about far more than economic efficiency. Fundamentally, it necessitates fairness.
During the Great Recession, how much money did Americans receive?
At the height of the crisis, the large investment banks were able to get significant capital via overnight repo markets, which were affected by the crisis. In effect, a run was launched on the largely unregulated shadow banking (non-depository) banking system, which had grown to outnumber the regulated depository system. They amalgamated (in the instance of Bear Stearns and Merrill Lynch), declared bankruptcy (Lehman Brothers), or secured federal depository bank charters and private loans because they couldn’t get financing (Goldman Sachs and Morgan Stanley). AIG, an insurance company that had guaranteed many of these and other banks’ liabilities through credit default swaps, was also bailed out and taken over by the government at a cost of more than $100 billion. Because the money was utilized by AIG to make good on its promises, the bailout of AIG was basically a conduit for the US government to bail out banks all over the world.
The following is a chronology of some of the major events in the crisis from 2007 to 2008:
- Before the official October 3 bailout, there were a series of smaller bank rescues totaling about $800 billion from late 2007 through September 2008.
- Countrywide Financial received a $11 billion line of credit in the summer of 2007 and a $12 billion rescue in September. This might be regarded as the beginning of the crisis.
- Washington Mutual Bank lost almost 3,000 employment and shut down its sub-prime mortgage operations in mid-December 2007.
- Bear Stearns was bailed out in mid-March 2008 with a gift of $29 billion in non-recourse treasury bill debt assets.
- Depositors at IndyMac Bank’s Los Angeles offices frantically lined up in the street to withdraw their money in early July 2008. On July 11, federal regulators seized IndyMac, a Countrywide offshoot, and demanded a $32 billion bailout as the mortgage lender succumbed to the strains of tighter lending, falling property prices, and growing foreclosures. The stock market plummeted on that day as investors waited to see if the government would try to save mortgage giants Fannie Mae and Freddie Mac. On September 7, 2008, the two were placed under conservatorship.
- During the weekend of September 1314, 2008, Lehman Brothers declared bankruptcy after failing to find a buyer; Bank of America agreed to buy investment bank Merrill Lynch; insurance giant AIG sought a bridge loan from the Federal Reserve; and a consortium of ten banks created an emergency fund of at least $70 billion to deal with the effects of Lehman’s closure, similar to the consortium formed by J.P. Morgan during the stock market panic of 1907 and the crassness of the Great Depression On Monday, September 15, stock prices on Wall Street plummeted.
- The Federal Reserve was said to be considering a $85 billion bailout package for AIG on September 16, 2008, and this was verified on September 17, 2008. The Federal Reserve would gain an 80 percent public ownership in the company under the terms of the deal. On September 25, JP Morgan Chase agreed to buy Washington Mutual’s banking assets, making it the largest bank failure in history.
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.)
What caused the financial crisis of 2008?
The Federal Reserve hiked the fed funds rate in 2004 at the same time that the interest rates on these new mortgages were adjusted. As supply outpaced demand, housing prices began to decrease in 2007. Homeowners who couldn’t afford the payments but couldn’t sell their home were imprisoned. When derivatives’ values plummeted, banks stopped lending to one another. As a result, the financial crisis erupted, resulting in the Great Recession.
How much did the banks get in the 2008 bailout?
Treasury Secretary Henry Paulson sponsored the Emergency Economic Stabilization Act of 2008, which was passed by the 110th United States Congress and signed into law by President George W. Bush. In the middle of the financial crisis of 20072008, the act was signed into law as part of Public Law 110-343 on October 3, 2008. The $700 billion Troubled Asset Relief Program (TARP) was established by the law to purchase toxic assets from banks. While the Treasury continued to evaluate the value of targeted asset purchases, the money for distressed asset purchases were primarily allocated to infuse capital into banks and other financial institutions.
During 2007 and 2008, a financial crisis emerged, owing in part to the subprime mortgage crisis, which resulted in the failure or near-failure of major financial firms such as Lehman Brothers and American International Group. To prevent the financial system from collapsing, Treasury Secretary Henry Paulson proposed that the US government buy hundreds of billions of dollars in distressed assets from banking companies. Congress initially rejected Paulson’s idea, but the deepening financial crisis and President Bush’s lobbying eventually led Congress to approve Paulson’s proposal as part of Public Law 110-343.
TARP recovered $441.7 billion from $426.4 billion invested, making a $15.3 billion profit or an annualized rate of return of 0.6 percent, and possibly a loss when adjusted for inflation.
What triggered the 2008 stock market crash?
Defaults on aggregated mortgage-backed securities caused the stock market meltdown of 2008. The majority of MBS were made up of subprime mortgages. Banks made these loans available to nearly everyone, including those with bad credit. Many homeowners defaulted on their debts when the housing market crashed.
What is the current state of the economy?
From February 2017 through February 2020, this measure, known as U-6, declined steadily starting in 2011 and was below 8.8%, the rate at the start of the recession. It increased from 8.8% in March 2020 to 22.9 percent in April 2020, but then fell to 7.2 percent in February 2022.
What was the cost of the subprime mortgage crisis?
The immediate source of the crisis was the fall of the housing bubble in the United States, which peaked around 20052006. Borrowers were encouraged to take on risky mortgages in the hopes of soon refinancing at better terms due to an increase in loan incentives such as favorable initial terms and a long-term trend of rising housing prices. Borrowers were unable to refinance once interest rates began to climb and housing values began to moderately drop in 20062007 in several parts of the United States. As cheap initial terms ended, home prices declined, and adjustable-rate mortgage (ARM) interest rates reset higher, the number of defaults and foreclosures surged rapidly.
Global investor interest for mortgage-related securities dwindled as housing values plummeted. This was revealed in July 2007, when investment bank Bear Stearns disclosed the failure of two of its hedge funds. These funds had put their money into securities that were backed by mortgages. Investors asked that these hedge firms furnish greater collateral when the value of these securities fell. This triggered a wave of selling of these securities, significantly lowering their value. This 2007 event, according to economist Mark Zandi, was “arguably the proximate spark” for the financial market disruption that followed.
The growth and fall of home values, as well as associated securities commonly owned by financial firms, is influenced by a number of other factors. The United States received enormous sums of foreign currency from fast-growing Asian economies and oil-producing/exporting countries in the years leading up to the crisis. This influx of capital, combined with historically low interest rates in the United States, contributed to easy lending conditions, which drove both the housing and credit bubbles from 2002 to 2004. Loans of all kinds (mortgage, credit card, and vehicle) were cheap to come by, and consumers took on record amounts of debt.
The number of financial agreements known as mortgage-backed securities (MBS), which draw their value from mortgage payments and home values, grew dramatically during the housing and credit expansions. Institutions and investors from all over the world were able to invest in the US housing market because to such financial innovation. Major worldwide financial institutions that had borrowed and invested extensively in MBS reported large losses as housing prices fell. As the crisis spread from the housing market to other sections of the economy, defaults and losses on other loan types surged considerably. Global losses were anticipated to be in the trillions of dollars.
While the housing and credit bubbles grew, the financial system became increasingly vulnerable due to a number of causes. Financial institutions such as investment banks and hedge funds, commonly known as the shadow banking system, have become increasingly relevant in the eyes of policymakers. These businesses were not governed by the same rules as depository banking. Furthermore, shadow banks used complicated off-balance sheet derivatives and securitizations to hide the amount of their risk-taking from investors and authorities. The components of the crisis in 20072008 have been referred to as a “run” on the shadow banking sector by economist Gary Gorton.
Because of the intricacy of these off-balance sheet arrangements and the securities owned, as well as the connectivity between larger financial institutions, reorganizing them through bankruptcy was almost difficult, necessitating government bailouts. Some experts feel that these shadow institutions have become as important as commercial (depository) banks in terms of supplying credit to the US economy, but they are not regulated in the same way. While providing the loans described above, these organizations, as well as some regulated banks, took on huge debt burdens and lacked the financial cushion to withstand large loan defaults or MBS losses.
Financial institutions’ losses on mortgage-related securities harmed their ability to lend, which slowed economic activity. Interbank lending dried up first, followed by loans to non-financial companies. Concerns over the soundness of major financial institutions prompted central banks to intervene, providing funds to boost lending and restore confidence in the commercial paper markets, which are critical to corporate operations. Governments also bailed out major financial institutions, taking on enormous new financial obligations.
The risks to the broader economy posed by the housing market slump and subsequent financial market crisis were key reasons in various central banks’ and governments’ decisions to slash interest rates and undertake economic stimulus programs around the world. The crisis had a significant impact on worldwide stock markets. Owners of equities in U.S. firms lost nearly $8 trillion between January 1 and October 11, 2008, as their holdings fell in value from $20 trillion to $12 trillion. In other countries, losses averaged around 40%.
Stock market losses and falling home values put even more negative pressure on consumer spending, a vital economic driver. Leaders of the world’s most wealthy and developing countries met between November 2008 and March 2009 to devise solutions for dealing with the crisis. Government officials, central bankers, economists, and corporate executives have all advocated different remedies. To address some of the causes of the crisis, the DoddFrank Wall Street Reform and Consumer Protection Act was signed into law in the United States in July 2010.