During the late 2000s, the Great Recession was characterized by a dramatic drop in economic activity. It is often regarded as the worst downturn since the Great Depression. The term “Great Recession” refers to both the United States’ recession, which lasted from December 2007 to June 2009, and the worldwide recession that followed in 2009. When the housing market in the United States transitioned from boom to bust, large sums of mortgage-backed securities (MBS) and derivatives lost significant value, the economic depression began.
What triggered the Great Recession of 2009?
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.
How long did it take to recover from the financial crisis 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.
When was the worst of the 2008 recession?
- The Great Recession was a period of economic slump that lasted from 2007 to 2009, following the bursting of the housing bubble in the United States and the worldwide financial crisis.
- The Great Recession was the worst economic downturn in the United States since the 1930s’ Great Depression.
- Federal authorities unleashed unprecedented fiscal, monetary, and regulatory policy in reaction to the Great Recession, which some, but not all, credit with the ensuing recovery.
What caused the recession of 2001?
(March 2001November 2001) The 9/11 Recession Causes and reasons: The dotcom bubble burst, the 9/11 attacks, and a series of accounting scandals at major U.S. firms all contributed to the economy’s relatively slight downturn. Within a few months, GDP had rebounded to its previous level.
Is there going to be a recession in 2021?
Unfortunately, a worldwide economic recession in 2021 appears to be a foregone conclusion. The coronavirus has already wreaked havoc on businesses and economies around the world, and experts predict that the devastation will only get worse. Fortunately, there are methods to prepare for a downturn in the economy: live within your means.
What happened during the Great Recession of 2008?
In 2008, the stock market plummeted. The Dow had one of the most significant point declines in history. 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.
Is a recession in 2020 likely?
Domestic demand and supply, commerce, and finance are all expected to be significantly disrupted in advanced economies by 2020, resulting in a 7% drop in economic activity. This year, emerging market and developing economies (EMDEs) are predicted to fall by 2.5 percent, the first time in at least sixty years. Per capita incomes are predicted to fall by 3.6 percent this year, plunging millions more people into poverty.
The damage is being felt most acutely in nations where the pandemic has been the most severe and where global trade, tourism, commodity exports, and external financing are heavily reliant. While the severity of the disruption will differ by location, all EMDEs have vulnerabilities that are exacerbated by external shocks. Furthermore, disruptions in education and primary healthcare are likely to have long-term consequences for human capital development.
Global growth is forecast to rebound to 4.2 percent in 2021, with advanced economies growing 3.9 percent and EMDEs growing 4.6 percent, according to the baseline forecast, which assumes that the pandemic recedes sufficiently to allow the lifting of domestic mitigation measures by mid-year in advanced economies and a bit later in EMDEs, that adverse global spillovers ease during the second half of the year, and that financial market dislocations are not long-lasting. However, the future is bleak, and negative risks abound, including the likelihood of a longer-lasting epidemic, financial turmoil, and a pullback from global commerce and supply chains. In a worst-case scenario, the world economy might fall by as much as 8% this year, followed by a sluggish recovery of just over 1% in 2021, with output in EMDEs contracting by about 5% this year.
The GDP of the United States is expected to fall by 6.1 percent this year, owing to the interruptions caused by pandemic-control measures. As a result of widespread outbreaks, output in the Euro Area is expected to fall 9.1 percent in 2020. The Japanese economy is expected to contract by 6.1 percent as a result of preventative measures that have hampered economic activity.
Key aspects of this historic economic shock are addressed in analytical sections in this edition of Global Economic Prospects:
- What will the depth of the COVID-19 recession be? A study of 183 economies from 1870 through 2021 provides a historical perspective on global recessions.
- Scenarios of potential growth outcomes: Near-term growth estimates are unusually uncertain; various scenarios are investigated.
- How does the pandemic’s impact be exacerbated by informality? The pandemic’s health and economic implications are anticipated to be severe in countries where informality is widespread.
- The situation in low-income countries: The pandemic is wreaking havoc on the poorest countries’ people and economies.
- Regional macroeconomic implications: Each region is vulnerable to the epidemic and the ensuing downturn in its own way.
- Impact on global value chains: Global value chain disruptions can magnify the pandemic’s shocks to trade, production, and financial markets.
- Deep recessions are likely to harm investment in the long run, destroy human capital through unemployment, and promote a retreat from global trade and supply links. (June 2nd edition)
- The Consequences of Low-Cost Oil: Low oil prices, resulting from a historic decline in demand, are unlikely to mitigate the pandemic’s consequences, but they may provide some support during the recovery. (June 2nd edition)
The pandemic emphasizes the urgent need for health and economic policy action, particularly global cooperation, to mitigate its effects, protect vulnerable populations, and build countries’ capacities to prevent and respond to future crises. Strengthening public health systems, addressing difficulties posed by informality and weak safety nets, and enacting reforms to promote robust and sustainable growth are vital for rising market and developing countries, which are particularly vulnerable.
If the pandemic’s effects persist, emerging market and developing economies with fiscal space and reasonable financing circumstances may seek extra stimulus. This should be supported by actions that help restore medium-term fiscal sustainability in a credible manner, such as strengthening fiscal frameworks, increasing domestic revenue mobilization and expenditure efficiency, and improving fiscal and debt transparency. Transparency of all government financial commitments, debt-like instruments, and investments is a critical step toward fostering a favorable investment climate, and it may be achieved this year.
East Asia and the Pacific: The region’s growth is expected to slow to 0.5 percent in 2020, the lowest pace since 1967, due to the pandemic’s interruptions. See the regional overview for further information.
Europe and Central Asia: The regional economy is expected to fall by 4.7 percent, with practically all nations experiencing recessions. See the regional overview for further information.
Latin America and the Caribbean: Pandemic-related shocks will produce a 7.2 percent drop in regional economic activity in 2020.
See the regional overview for further information.
Middle East and North Africa: As a result of the pandemic and oil market changes, economic activity in the Middle East and North Africa is expected to fall by 4.2 percent. See the regional overview for further information.
South Asia: The region’s economy is expected to fall by 2.7 percent in 2020 as pandemic preparedness measures stifle consumption and services, and uncertainty about the virus’s trajectory chills private investment. See the regional overview for further information.
Sub-Saharan Africa’s economy is expected to decline by 2.8 percent in 2020, the steepest contraction on record. See the regional overview for further information.
How many recessions has the United States experienced?
A recession is defined as a two-quarters or longer decline in economic growth as measured by the gross domestic product (GDP). Since World War II and up until the COVID-19 epidemic, the US economy has endured 12 different recessions, beginning with an eight-month depression in 1945 and ending with the longest run of economic expansion on record.
Recessions in the United States have lasted an average of 10 months, while expansions have averaged 57 months.
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.
Depression or recession: which is worse?
A recession is a negative trend in the business cycle marked by a reduction in production and employment. As a result of this downward trend in household income and spending, many businesses and people are deferring big investments or purchases.
A depression is a strong downswing in the business cycle (much more severe than a downward trend) marked by severely reduced industrial production, widespread unemployment, a considerable decline or suspension of construction growth, and significant cutbacks in international commerce and capital movements. Aside from the severity and impacts of each, another distinction between a recession and a depression is that recessions can be geographically confined (limited to a single country), but depressions (such as the Great Depression of the 1930s) can occur throughout numerous countries.
Now that the differences between a recession and a depression have been established, we can all return to our old habits of cracking awful jokes and blaming them on individuals who most likely never said them.