What Was the Great Recession?

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What Was the Great Recession?

Let me tell you directly: the Great Recession was that sharp drop in economic activity starting in 2007. It kicked off when the U.S. housing market flipped from boom to bust, and suddenly all those mortgage-backed securities and derivatives tanked in value. This wasn't just a blip; it spread globally and hit hard.

Understanding the Great Recession

You might have heard the term 'Great Recession' as a nod to the 'Great Depression' of the 1930s, where GDP fell over 10% and unemployment soared to 25%. But economists agree this one wasn't a full depression. During this period, U.S. GDP dropped by 0.3% in 2008 and 2.8% in 2009, with unemployment peaking at 10%. Remember, this applies to the U.S. recession from December 2007 to June 2009, and the global fallout in 2009.

Causes of the Great Recession

According to the 2011 Financial Crisis Inquiry Commission report, which I reference here impartially, the whole mess was avoidable. They pointed to government failures in regulating the financial industry, including the Federal Reserve not stopping banks from issuing risky mortgages to unqualified borrowers. Then there was the excessive risk-taking by financial firms, especially in the unregulated shadow banking system that rivaled traditional banks. When that system collapsed, credit to consumers and businesses dried up. Add in too much borrowing by everyone, and lawmakers who didn't grasp the system's fragility, and you got asset bubbles—particularly in housing. Low-interest mortgages went to people who couldn't repay, leading to falling home prices and underwater homeowners, which hammered the market for those securities held by banks and investors.

Origins and Consequences of the Great Recession

Let's trace this back: after the 2001 dot-com bust and 9/11 attacks, the Fed slashed interest rates to historic lows until mid-2004 to boost the economy. Paired with policies pushing homeownership, this sparked a real estate boom and massive mortgage debt. New subprime and adjustable mortgages let unqualified borrowers in, assuming rates would stay low and prices would rise forever. But from 2004 to 2006, the Fed hiked rates to fight inflation, slowing credit and resetting adjustable mortgages to unaffordable levels. Borrowers couldn't pay or refinance, so they sold, bursting the housing bubble. Financial institutions had sold tons of mortgage-backed securities and derivatives, which crashed in value in 2007, sparking a credit crisis. It peaked with Bear Stearns' collapse in March 2008 and Lehman Brothers' bankruptcy in September, spreading contagion worldwide. In the U.S., over 8.7 million jobs vanished, unemployment doubled, households lost $19 trillion in net worth, and the recession officially ended in June 2009. On the response side, the 2010 Dodd-Frank Act gave the government tools to handle failing institutions and protect against predatory lending.

Response to the Great Recession

The Fed and other central banks went aggressive with monetary policies, which many say prevented worse damage, though critics argue it prolonged the recession and set up future ones. They dropped key interest rates to near zero and pumped $7.7 trillion in emergency loans via quantitative easing. The government also launched the $787 billion American Recovery and Reinvestment Act, later upped to $831 billion, to stimulate spending. This helped major institutions and corporations avoid bigger losses. Separately, after repealing the Glass-Steagall Act in the 1990s—which had separated investment and retail banking—some say that contributed to the crisis by allowing banks to merge and take risks. In response, the 2010 Dodd-Frank Act expanded government oversight of the financial sector, including control over failing institutions and consumer protections against bad lending. Critics point out that the same players who caused the bubble helped draft and implement this law.

Recovery From the Great Recession

The economy clawed back slowly after these policies. Real GDP hit bottom in Q2 2009 and returned to pre-recession levels by Q2 2011, about 3.5 years later. Financial markets bounced back with all that liquidity; the Dow, which lost over half its value from its 2007 peak, started recovering in March 2009 and broke its old high by March 2013. But for everyday workers and households, it was tougher: unemployment was 5% at the end of 2007, peaked at 10% in October 2009, and didn't drop back to 5% until 2015—eight years in. Real median household income didn't recover until 2016. Some critics say the bailouts favored big banks and businesses over ordinary people, delaying recovery by propping up failing industries instead of letting resources shift to better ones.

Key Facts and Figures

To wrap this up technically, the Great Recession lasted 18 months from December 2007 to June 2009, per Federal Reserve data. Yes, there have been recessions since, like the short one from February to April 2020. The stock market crashed hard: the Dow fell from 14,164.53 on October 9, 2007, to 6,594.44 by March 5, 2009—over 50% down. On September 29, 2008, it dropped nearly 778 points in a day, the biggest until 2020.

The Bottom Line

In essence, the Great Recession hit from 2007 to 2009 in the U.S., spreading globally and lingering in some places. It stemmed from reckless mortgage lending to unqualified borrowers, with lenders packaging and selling the risk away. Low rates and lax oversight after Glass-Steagall's repeal made credit cheap and banks bolder. When it all blew up, the government bailed out with the ARRA at $831 billion, saving the financial sector but drawing criticism for not redirecting funds to more viable areas.

What Was the Great Recession?

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