The Canadian economy entered a recession in 200809, partly as a result of issues in the US housing market. When interest rates began to rise, a housing boom fueled by cheap financing and financial deregulation in that country collapsed, forcing several significant financial institutions in the United States to fail. As a result of these corporate failures, there was a loss of confidence in the global financial industry, which had an influence on the economies of Canada and other countries. Consumer spending and business investment in Canada plummeted, and it took some time for the government to restore market stability and confidence by lowering interest rates and expanding the money supply.
Because of a steep drop of 16 percent in exports, GDP fell by 3.3 percent across three quarters (nine months) during this recession. Following that, business investment in new buildings and machinery plummeted by 22%. Government spending, consumer spending, and a looser monetary policy (lower interest rates and a larger money supply) all contributed to the recovery. (See Canada’s Recession of 200809 for further information.)
What was the primary cause of the Great Recession of 2008?
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.
Was Canada affected by the Great Recession of 2008?
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.
Who was to blame for the financial crisis of 2008?
Richard Fuld, CEO of Lehman Brothers Richard “Dick” Fuld’s name was synonymous with the financial crisis as the last CEO of Lehman Brothers. He guided Lehman into subprime mortgages, establishing the investment bank as a leader in the packaging of debt into bonds that could be sold to investors.
What was the impact of the 2008 recession?
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.
Why was Canada unaffected by the global financial crisis of 2008?
Insolvent businesses were not bailed out by the government (just a couple of lend- ing programs to address market volatility relating to problems in the United States). Canada was the only G-7 country to avoid a financial crisis, and the recession it experienced was milder than those in the 1980s and early 1990s.
Have banks failed in 2008?
Many banks in the United States failed as a result of the financial crisis of 20072008. Between 2008 and 2012, the Federal Deposit Insurance Corporation (FDIC) shuttered 465 bankrupt banks. Only ten banks collapsed in the five years leading up to 2008.
A bank failure occurs when a federal or state banking regulatory agency closes a bank. When a bank’s capital levels are too low or it can’t satisfy obligations the next day, the FDIC is named Receiver for its assets. After a bank’s assets are placed in receivership, the FDIC serves two purposes: first, it insures depositors for assets that are not sold to another bank, up to the deposit insurance maximum. Second, as the failing bank’s receiver, it is responsible for selling and collecting the bankrupt bank’s assets as well as satisfying its debts, including claims for deposits in excess of the insured limit. As a result of the Emergency Economic Stabilization Act of 2008, which increased the ceiling from $100,000 to $250,000 per depositor, per insured bank, the FDIC now insures up to $250,000 per depositor, per insured bank.
On September 26, 2008, federal authorities placed Washington Mutual Bank into receivership, making it the greatest bank collapse in US history. Regulators also facilitated the sale of the majority of WaMu’s assets to JPMorgan Chase, which expected to write down the value of the company’s loans by at least $31 billion.
How many recessions has Canada experienced?
A “double dip recession” occurs when the economy enters a downturn, recovers for a quarter, and then enters another downturn. A double dip recession mimics the shape of a W when plotted on a graph.
Regional Recessions in Canada
Because each province is exposed to distinct industries that are affected by different variables, recessions can develop regionally in Canada. If the oil and gas markets drop in Alberta, for example, a recession may develop there, but not in Ontario, if manufacturing and services stay stable, or vice versa. A recession in Canada occurs when all of the country’s regions and provinces are in decline.
How Businesses Respond to Recession
Recessions can have some positive benefits. They can motivate businesses to focus on efficiency and product quality in order to compete more effectively. They can also motivate businesses to seek out new markets in order to remain profitable. Small entrepreneurial enterprises that can compete with lower costs and innovations can thrive during recessions. They have the potential to compel larger corporations to reconsider the scope of their operations and how they are handled. During a recession, certain defensive enterprises that remain steady during economic cycle fluctuations perform better than others. Food manufacturers and discount retailers are examples of companies with consistent demand for their products. Nonetheless, recessions are difficult for most people due to overall losses in productivity and wages, as well as more unemployment.
Economic Stimulus Government Response to Recession
The government strives to maintain economic confidence by limiting the frequency and duration of recessions. To do so, the government uses interest rates, the money supply, and spending to try to actively influence business cycles. If the economy appears to be heading for a downturn, the government can lower interest rates and expand the money supply in the hopes that individuals and businesses will borrow, invest, and spend more. In addition, the government can spend more in order to boost total economic activity and employment through creating jobs and company activity in the economy. New investments in infrastructure, research, and education could result from the government’s response.
Determining a Recession
The government is in charge of determining whether or not the economy is in or out of recession. Since the Bank of Canada and the Minister of Finance prepare the country’s economic reports using Statistics Canada data, this is disseminated through them. Since 2015, the Federal Balanced Budget Act has defined what constitutes a recession and set some limits on how much the federal government can increase its operating budgets in response.
Economists and the government are attempting to identify indicators of economic activity that can anticipate whether or not a recession is imminent. Leading indicators are what they’re called. A combination of sharp stock market dips, declines in retail sales or the volume of inventories held by businesses, and a sharp drop in housing values are examples. Similarly, there are indicators of economic activity called as trailing indicators that prove the occurrence of a recession. Real GDP, wages, and incomes are all declining, as is international trade, and unemployment rates are rising.
The C.D. Howe Institute’s Business Cycle Council, a group of Canadian economists that defines business cycle dates in Canada, is another source of information regarding recessions.
History of Recessions in Canada
Recessions are uncommon because the economy is normally in expansion mode. Since 1970, Canada has endured five recessions and twelve since 1929. Recessions normally span three to nine months; the most recent one, from 2008 to 2009, lasted seven months. Since 1970, every recession in Canada has coincided with a recession in the United States, demonstrating that the two economies are well linked (see Canada-US Economic Relations). However, the severity of a recession in Canada is determined by a variety of factors, including which sectors of the economy are experiencing a downturn. The Canadian economy, for example, is highly dependent on natural resource activity such as oil and gas, mining, and lumber.
In 2008, why did the government buy toxic assets?
TARP allowed the US Treasury to buy or insure up to $700 billion in “troubled assets,” defined as “(A) residential or commercial obligations, or other instruments based on or related to such mortgages, that were originated or issued on or before March 14, 2008, and the purchase of which the Secretary determines promotes financial market stability; and (B) any other financial instrument that the Secretary, in his discretion, determines promotes financial market stability; and (C) any other financial instrument that the Secretary, in
In a nutshell, this allows the Treasury to buy illiquid, hard-to-value assets from banks and other financial institutions. The targeted assets might be collateralized debt obligations (CDOs), which were sold in a flourishing market until 2007, when the underlying loans were widely foreclosed on. The goal of TARP was to increase the liquidity of these assets by purchasing them on the secondary market, allowing participating banks to stabilize their balance sheets and avoid further losses.
TARP does not allow banks to recuperate losses on troublesome assets already incurred, but authorities anticipate that once trading begins on these assets, their prices will stabilize and eventually increase in value, resulting in gains for both participating banks and the Treasury. The concept of future benefits from distressed assets is based on the financial industry’s belief that these assets are oversold because only a tiny fraction of all mortgages are in default, while the price drop reflects losses from a far higher default rate.
The Emergency Economic Stabilization Act of 2008 (EESA) mandates that financial institutions selling assets to TARP issue equity warrants (a type of security that entitles the holder to purchase shares in the company issuing the security for a set price) or equity or senior debt securities (for non-publicly traded companies) to the Treasury. The Treasury will only receive warrants for non-voting shares or will agree not to vote the stock in the case of warrants. The purpose of this policy was to protect the government by allowing the Treasury to profit from its new ownership shares in these organizations. In an ideal world, if financial institutions benefit from government aid and regain their former strength, the government will benefit as well.
Another significant purpose of TARP was to encourage banks to resume lending to each other, as well as to consumers and businesses, at levels seen prior to the crisis. If the TARP program is successful in stabilizing bank capital ratios, banks should be able to boost lending rather than hoard cash to protect against future unforeseen losses from bad assets. Increased lending equates to “loosening” of credit, which the government hopes would bring financial markets back into shape and increase investor confidence in financial institutions and markets. As banks acquire more confidence in lending, interbank lending interest rates (the rates at which banks lend to one another on a short-term basis) should fall, making lending even easier.
The TARP program will function as a “revolving buying facility.” The Treasury will have a defined spending limit, which will be $250 billion at the start of the program, with which it will buy assets, sell them, or keep them and collect the coupons. The proceeds from sales and coupons will be reinvested in the pool, allowing for the purchase of further assets. If the president certifies to Congress that an increase is warranted, the initial $250 billion might be boosted to $350 billion. The remaining $350 billion might be delivered to the Treasury after the Treasury submits a written report to Congress outlining its plans for the money. Before the money was automatically disbursed, Congress had 15 days to vote to disapprove the increase. Other incentives, such as a five-year loan modification, would be available to privately held mortgages.
The authority of the United States Department of Treasury to establish and manage the Troubled Asset Relief Program (TARP) under a newly created Office of Financial Stability became law on October 3, 2008, as a result of an initial proposal that was eventually passed by Congress as H.R. 1424, enacting the Emergency Economic Stabilization Act of 2008 and several other acts.
On October 8, the British announced a financial rescue package that included money, debt guarantees, and preferred stock infusions into banks. The rest of Europe, as well as the US government, have closely followed this strategy, with the latter announcing a $250 billion (143 billion) Capital Purchase Program on October 14 to buy holdings in a range of banks in a bid to restore trust in the sector. The $700 billion came from the Troubled Asset Relief Program.
How did we recover from the financial crisis of 2008?
Congress passed the Struggling Asset Relief Scheme (TARP) to empower the US Treasury to implement a major rescue program for troubled banks. The goal was to avoid a national and global economic meltdown. To end the recession, ARRA and the Economic Stimulus Plan were passed in 2009.
How long did the financial crisis of 2008 last?
From an intraday high of 11,483 on October 19, 2008 to an intraday low of 7,882 on October 10, 2008. The following is a rundown of the significant events in the United States throughout the course of this momentous three-week period.