The Great Recession was the sharp decline in economic activity that began in 2007 and profoundly impacted global economies for several years. This significant economic downturn, considered the most severe since the Great Depression of the 1930s, had lasting effects on economies worldwide.
The Crisis Unfolds
The Great Recession is characterized by the period from December 2007 to June 2009, marked by the burst of the U.S. housing bubble and a global financial crisis. Large volumes of mortgage-backed securities (MBS) and derivatives rapidly devalued, precipitating the economic downturn.
Key Takeaways
- The Great Recession refers to the period of economic decline from 2007 to 2009, triggered by the bursting U.S. housing bubble and a global financial crisis.
- The Great Recession is considered the most severe economic downturn in the United States since the Great Depression of the 1930s.
- Federal authorities introduced unprecedented fiscal, monetary, and regulatory policies to combat the recession and stimulate recovery.
Causes: The Perfect Storm
A failure to regulate the financial industry, excessive risk-taking by financial firms, and an overleveraged shadow banking system led to the Great Recession. The Federal Reserve’s inability to prevent banks from issuing risky mortgages initiated the crisis.
Contributing Factors
Several critical factors contributed to the downturn:
- Lack of regulation in the financial industry.
- Excessive risk-taking by financial firms.
- The shadow banking system’s expansion beyond traditional banking regulation.
- Excessive borrowing by consumers and corporations.
- Faulty financial models relied upon by lawmakers and financial experts.
Origins and Implications
The 2001 dotcom bubble collapse and September 11 attacks damaged the U.S. economy. The Federal Reserve’s subsequent cuts to interest rates spurred a housing boom and financial market expansion, particularly through mortgage-backed securities. However, from 2004 onward, rising interest rates and resetting mortgage rates led to increased foreclosure rates and a burst housing bubble.
Subsequent Collapse
When real estate markets collapsed in 2007, the interconnected banking sector, laden with devalued securities, rapidly unraveled. As financial institutions like Bear Stearns and Lehman Brothers crumbled, contagious effects spread globally, severely impacting markets everywhere.
Government Response
Policy Actions and Legislation
Federal authorities reacted with aggressive monetary policies, including the Federal Reserve’s near-zero interest rates and substantial liquidity injections to banks, totaling $7.7 trillion. Fiscal measures include the $787 billion spent under the American Recovery and Reinvestment Act to stimulate the economy.
The Dodd-Frank Act
To curb future risks, the Dodd-Frank Act was enacted in 2010, expanding government control over the failing financial institutions and setting up consumer protections against predatory lending practices.
Recovery Efforts
With robust fiscal and monetary policies, the economy gradually recovered. Real GDP bottomed out in the second quarter of 2009 and fully recovered by 2011. However, employment and household incomes lagged in recovery, with unemployment rates not stabilizing until 2015 and household incomes normalizing by 2016.
Economic and Market Recovery
Despite stock markets rebounding by March 2009, supported by massive inflows of liquidity, the broader labor market took longer to heal. Critics argue that the extended recovery period and extensive bailouts disproportionately benefited financial institutions over ordinary workers.
Summary
The Great Recession lasted from December 2007 to June 2009, but its global economic ripple effects caused prolonged downturns in multiple regions beyond this period. The crisis started with risky lending practices in the housing market and poor regulatory oversight, culminating in widespread financial institution failures. While government intervention stemmed the economic freefall, debate continues about the efficacy and impact of these measures.
FAQ
How long did the Great Recession last?
According to the Federal Reserve, the Great Recession lasted 18 months, from December 2007 to June 2009.
Were there recessions after the Great Recession?
While there have been economic challenges, the COVID-19 pandemic prompted significant market declines but was mitigated by swift and substantial stimulus measures.
How much did the stock market crash during the Great Recession?
The Dow Jones Industrial Average fell from 14,164.53 on October 9, 2007, to 6,594.44 by March 5, 2009, shedding over half its value.
Related Terms: Great Depression, Federal Reserve, monetary policy, quantitative easing, subprime mortgages.
References
- Federal Reserve Economic Data (FRED), Federal Reserve Bank of St. Louis. “Gross Domestic Product (GDP)”.
- GovInfo. “The Financial Crisis Inquiry Report”.
- International Monetary Fund. “Shadow Banks: Out of the Eyes of Regulators”.
- Federal Reserve Economic Data (FRED), Federal Reserve Bank of St. Louis. “Federal Funds Effective Rate (FEDFUNDS)”.
- Congress.gov, U.S. Congress. “H.R.4173—Dodd-Frank Wall Street Reform and Consumer Protection Act: Text”.
- Federal Reserve Bank of St. Louis. “Quantitative Easing: How Well Does This Tool Work?”
- NPR. “Congress Approves $787 Billion Stimulus Plan”.
- Yahoo! Finance. “Dow Jones Industrial Average (^DJI)”.
- Federal Reserve History. “The Great Recession and Its Aftermath”.
- Reuters. “Economic Outlook Has ‘Darkened,’ Business and Government Leaders Warn in Davos”.
