The Great Recession in the United States was a severe
financial crisis combined with a deep recession. While the recession officially lasted from December 2007 to June 2009, it took many years for the economy to recover to pre-crisis levels of
employment
Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...
and
output
Output may refer to:
* The information produced by a computer, see Input/output
* An output state of a system, see state (computer science)
* Output (economics), the amount of goods and services produced
** Gross output in economics, the value of ...
. This slow recovery was due in part to households and financial institutions paying off debts accumulated in the years preceding the crisis along with restrained government spending following initial stimulus efforts.
It followed the bursting of the
housing bubble, the
housing market correction and
subprime mortgage crisis
The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the Financial crisis of 2007–2008, 2007–2008 global financial crisis. It was triggered by a large decline ...
.
According to the
Department of Labor
The Ministry of Labour ('' UK''), or Labor ('' US''), also known as the Department of Labour, or Labor, is a government department responsible for setting labour standards, labour dispute mechanisms, employment, workforce participation, training, a ...
, roughly 8.7 million jobs (about 7%) were shed from February 2008 to February 2010, and real GDP contracted by 4.2% between Q4 2007 and Q2 2009, making the Great Recession the worst economic downturn since the
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
. The GDP bottom, or trough, was reached in the second quarter of 2009 (marking the technical end of the recession that is defined by a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales).
Real (inflation-adjusted) GDP did not regain its pre-crisis (Q4 2007) peak level until Q3 2011. Unemployment rose from 4.7% in November 2007 to peak at 10% in October 2009, before returning steadily to 4.7% in May 2016. The total number of jobs did not return to November 2007 levels until May 2014.
Households and non-profit organizations added approximately $8 trillion in debt during the 2000-2008 period (roughly doubling it and fueling the housing bubble), then reduced their debt level from the peak in Q3 2008 until Q3 2012, the only period this debt declined since at least the 1950s. However, the
debt held by the public rose from 35% GDP in 2007 to 77% GDP by 2016, as the government spent more while the private sector (e.g., households and businesses, particularly the banking sector) reduced the debt burdens accumulated during the pre-recession decade. President
Barack Obama
Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the U ...
declared the bailout measures started under the Bush Administration and continued during his Administration as completed and mostly profitable as of December 2014.
[New York Times-U.S. Declares Bank and Auto Bailouts Over, and Profitable-December 19, 2014](_blank)
/ref>
Background
After the Great Depression of the 1930s, the American economy experienced robust growth, with periodic lesser recessions, for the rest of the 20th century. The federal government enforced the Securities Exchange Act (1934) and The Chandler Act (1938), which tightly regulated the financial markets. The Securities Exchange Act of 1934 regulated the trading of the secondary securities market and The Chandler Act regulated the transactions in the banking sector.
There were a few investment banks, small by current standards, that expanded during the late 1970s, such as JP Morgan. The Reagan Administration in the early 1980s began a thirty-year period of financial deregulation. The financial sector sharply expanded, in part because investment banks were going public, bringing them vast sums of stockholder capital. From 1978 to 2008, the average salary for workers outside of investment banking in the U.S. increased from $40k to $50k – a 25 percent salary increase - while the average salary in investment banking increased from $40k to $100k – a 150 percent salary increase. Deregulation also precipitated financial fraud - often tied to real estate investments - sometimes on a grand scale, such as the savings and loan crisis. By the end of the 1980s, many workers in the financial sector were being jailed for fraud, but many Americans were losing their life savings. Large investment banks began merging and developing financial conglomerates; this led to the formation of the giant investment banks like Goldman Sachs.
Early suggestions
In the early months of 2008, many observers believed that a U.S. recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
had begun. The collapse of Bear Stearns
The Bear Stearns Companies, Inc. was a New York-based global investment bank, securities trading and brokerage firm that failed in 2008 as part of the global financial crisis and recession, and was subsequently sold to JPMorgan Chase. The compa ...
and the resulting financial market turbulence signaled that the crisis would not be mild and brief.
Alan Greenspan
Alan Greenspan (born March 6, 1926) is an American economist who served as the 13th chairman of the Federal Reserve from 1987 to 2006. He works as a private adviser and provides consulting for firms through his company, Greenspan Associates LLC. ...
, ex- Chairman of the Federal Reserve, stated in March 2008 that the 2008 financial crisis in the United States "is likely to be judged in retrospect as the most wrenching since the end of World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
". A chief economist at Standard & Poor's
S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is con ...
said in March 2008 he had projected a worst-case-scenario in which the country would endure a double-dip recession
Recession shapes or recovery shapes are used by economists to describe different types of recessions and their subsequent recoveries. There is no specific academic theory or classification system for recession shapes; rather the terminology is us ...
, in which the economy would briefly recover in the summer 2008, before plunging again. Under this scenario, the economy's total output, as measured by the gross domestic product (GDP), would drop by 2.2 percentage points, making it among the worst recessions in the post World War II period.
The former head of the National Bureau of Economic Research said in March 2008 that he believed the country was then in a recession, and it could be a severe one. A number of private economists generally predicted a mild recession ending in the summer of 2008 when the economic stimulus checks going to 130 million households started being spent. A chief economist at Moody's predicted in March 2008 that policymakers would act in a concerted and aggressive way to stabilize the financial markets, and that the economy would suffer, but not enter a prolonged and severe recession. It takes many months before the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end, would make its own ruling.
According to numbers published by the Bureau of Economic Analysis
The Bureau of Economic Analysis (BEA) of the United States Department of Commerce is a U.S. government agency that provides official economy of the United States, macroeconomic and industry statistics, most notably reports about the gross domestic ...
in May 2008, the GDP growth of the previous two quarters was positive. As one common definition of a recession is negative economic growth for at least two consecutive fiscal quarters, some analysts suggested this indicates that the U.S. economy was not in a recession at the time. However, this estimate has been disputed by analysts who argue that if inflation is taken into account, the GDP growth was negative for those two quarters, making it a technical recession. In a May 9, 2008 report, the chief North American economist for investment bank Merrill Lynch
Merrill (officially Merrill Lynch, Pierce, Fenner & Smith Incorporated), previously branded Merrill Lynch, is an American investment management and wealth management division of Bank of America. Along with BofA Securities, the investment bank ...
wrote that despite the GDP growth reported for the first quarter of 2008, "it is still reasonable to believe that the recession started some time between September and January", on the grounds that the National Bureau of Economic Research's four recession indicators all peaked during that period.
New York's budget director concluded the state of New York was officially in a recession by the summer of 2008. Governor David Paterson
David Alexander Paterson (born May 20, 1954) is an American politician and attorney who served as the 55th governor of New York, succeeding Eliot Spitzer and serving out nearly three years of Spitzer's term from March 2008 to December 2010. A ...
called an emergency economic session of the state legislature for August 19 to push a budget cut of $600 million on top of a hiring freeze and a 7 percent reduction in spending at state agencies that had already been implemented by the Governor. An August 1 report, issued by economists with Wachovia Bank, said Florida was officially in a recession.
White House budget director Jim Nussle maintained at that time that the U.S. had avoided a recession, following revised GDP numbers from the Commerce Department showing a 0.2 percent contraction in the fourth quarter of 2007 down from a 0.6 percent increase, and a downward revision to 0.9 percent from 1 percent in the first quarter of 2008. The GDP for the second quarter was placed at a 1.9 percent expansion, below an expected 2 percent. On the other hand, Martin Feldstein
Martin Stuart Feldstein ( ; November 25, 1939 – June 11, 2019) was an American economist. He was the George F. Baker Professor of Economics at Harvard University and the president emeritus of the National Bureau of Economic Research (NBER ...
, who headed the National Bureau of Economic Research and served on the group's recession-dating panel, said he believed the U.S. was in a very long recession and that there was nothing the Federal Reserve could do to change it.
In a CNBC interview at the end of July 2008, Alan Greenspan said he believed the U.S. was not yet in a recession, but that it could enter one due to a global economic slowdown.
A study released by Moody's found two-thirds of the 381 largest metropolitan areas in the United States were in a recession. The study also said 28 states were in recession, with 16 at risk. The findings were based on unemployment figures and industrial production data.
In March 2008, financier Warren Buffett
Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is one of the most successful investors in the world and has a net w ...
stated in a CNBC interview that by a "common sense definition", the U.S. economy was already in a recession. Buffett has also stated that the definition of recession is flawed and that it should be three consecutive quarters of GDP growth that is less than population growth. However, the U.S. only experienced two consecutive quarters of GDP growth less than population growth.
Causes
Federal Reserve Chair Ben Bernanke
Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Durin ...
testified in September 2010 regarding the causes of the crisis. He wrote that there were shocks or triggers (i.e., particular events that touched off the crisis) and vulnerabilities (i.e., structural weaknesses in the financial system, regulation and supervision) that amplified the shocks. Examples of triggers included: losses on subprime mortgage securities that began in 2007 and a run
Run(s) or RUN may refer to:
Places
* Run (island), one of the Banda Islands in Indonesia
* Run (stream), a stream in the Dutch province of North Brabant
People
* Run (rapper), Joseph Simmons, now known as "Reverend Run", from the hip-hop group ...
on the shadow banking system
The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that provide services similar to traditional commercial banks but outside normal banking regulations. Examples of NBFIs include hedge funds, ins ...
that began in mid-2007, which adversely affected the functioning of money markets. Examples of vulnerabilities in the ''private'' sector included: financial institution dependence on unstable sources of short-term funding such as repurchase agreements
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities. The dealer sells the underlying security to investors and, by agreement between the two par ...
or Repos; deficiencies in corporate risk management; excessive use of leverage (borrowing to invest); and inappropriate usage of derivatives as a tool for taking excessive risks. Examples of vulnerabilities in the ''public'' sector included: statutory gaps and conflicts between regulators; ineffective use of regulatory authority; and ineffective crisis management capabilities. Bernanke also discussed " Too big to fail" institutions, monetary policy, and trade deficits.
The U.S. Financial Crisis Inquiry Commission
The Financial Crisis Inquiry Commission (FCIC) was a ten-member commission appointed by the leaders of the United States Congress with the goal of investigating the causes of the financial crisis of 2007–2008. The Commission has been nicknamed t ...
reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels."
Among the important catalysts of the subprime crisis were the influx of money from the private sector, the banks entering into the mortgage bond market, government policies aimed at expanding homeownership, speculation by many home buyers, and the predatory lending practices of the mortgage lenders, specifically the adjustable-rate mortgage, 2–28 loan, that mortgage lenders sold directly or indirectly via mortgage brokers. On Wall Street and in the financial industry, moral hazard lay at the core of many of the causes.
Government policies
A federal inquiry found that some federal government policies (or lack of them) were responsible to a large extent for the recession in the United States and the resultant vast unemployment. Factors include:
* The non-depository banking system was not subject to the same risk-taking regulations as the depository banks. The top 5 investment banks at the core of the crisis (Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley) had accumulated approximately $4 trillion in debt by 2007 with a high leverage ratio (25:1 or higher) meaning a 4% decline in the value of their assets would render them insolvent. Many housing securities in their portfolios became worthless during the crisis. They were also vulnerable to disruptions in their short-term financing (often overnight in Repo markets). They had been encouraged to add to their debt by the SEC in a 2004 meeting.
* Giving Fannie Mae & Freddie Mac GSE status allowed Fannie Mae and Freddie Mac to borrow money in the bond market at lower rates (yields) than other financial institutions. With their funding advantage, they purchased and invested in huge numbers of mortgages and mortgage-backed securities, and they did so with lower capital requirements than other regulated financial institutions and banks. Fannie Mae and Freddie Mac began to experience large losses on their retained portfolios, especially on their Alt-A An Alt-A mortgage, short for Alternative A-paper, is a type of U.S. mortgage that, for various reasons, is considered riskier than A-paper, or "prime", and less risky than "subprime," the riskiest category. For these reasons, as well as in some ca ...
and subprime
In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subpri ...
investments. In 2008, the sheer size of their retained portfolios and mortgage guarantees led the Federal Housing Finance Agency to conclude that they would soon be insolvent. Under, GSE status Fannie Mae and Freddie Mac's debt and credit guarantees grew so large, that 90 percent of all residential mortgages are financed through Fannie and Freddie or the Federal Housing Administration.
Role of Alan Greenspan
Alan Greenspan
Alan Greenspan (born March 6, 1926) is an American economist who served as the 13th chairman of the Federal Reserve from 1987 to 2006. He works as a private adviser and provides consulting for firms through his company, Greenspan Associates LLC. ...
was the Chairman of the Federal Reserve of the United States from 1987 to 2006. He was appointed by President Ronald Reagan
Ronald Wilson Reagan ( ; February 6, 1911June 5, 2004) was an American politician, actor, and union leader who served as the 40th president of the United States from 1981 to 1989. He also served as the 33rd governor of California from 1967 ...
in August 1987 and was reappointed by President Bill Clinton
William Jefferson Clinton ( né Blythe III; born August 19, 1946) is an American politician who served as the 42nd president of the United States from 1993 to 2001. He previously served as governor of Arkansas from 1979 to 1981 and agai ...
in 1996. He was widely blamed, perhaps fairly or unfairly, as the individual most singly responsible for the housing bubble in the U.S.. Furthermore, he himself understood the full extent of the problem only until it was too late, saying that "I really didn't get it until very late in 2005 and 2006." Greenspan stated that the housing bubble was "fundamentally engendered by the decline in real long-term interest rates", though he also claims that long-term interest rates are beyond the control of central banks because "the market value of global long-term securities is approaching $100 trillion" and thus these and other asset markets are large enough that they "now swamp the resources of central banks".
Greenspan admitted to a congressional committee that he had been "partially wrong" in his hands-off approach towards the banking industry - "I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms," said Greenspan. That being said, the Federal Reserve did not have the power to wade into the banking sector at the time.
Recession declared by economists
On December 1, 2008, the National Bureau of Economic Research (NBER) declared that the United States entered a recession in December 2007, citing employment and production figures as well as the third quarter decline in GDP. The Dow Jones Industrial Average lost 679 points that same day. On January 4, 2009, Nobel Memorial Prize
The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...
–winning economist Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was th ...
wrote, "This looks an awful lot like the beginning of a second Great Depression."
Rise in unemployment
The Great Recession cost millions of jobs initially and high unemployment lingered for years after the official end of the recession in June 2009. One of the frightening aspects how deep the recession would go, which is one reason Congress passed and President Obama signed the American Recovery and Reinvestment Act (ARRA) in January 2009. Known as "The Stimulus", ARRA was a roughly $800 billion mix of tax cuts (about one-third) and spending programs (about two-thirds) with the primary impact spread over three years.[FRED-Total Non-Farm Payrolls-Retrieved March 24, 2018](_blank)
/ref> Many economists argued the stimulus was too small, while conservatives such as the Tea Party
A tea party is a social gathering event held in the afternoon. For centuries, many societies have cherished drinking tea with a company at noon. Tea parties are considered for formal business meetings, social celebrations or just as an afternoon ...
argued that deficit reduction was the priority.
The number of jobs ("total non-farm payrolls" which includes both private sector and government jobs) reached a peak of 138.4 million in January 2008, then fell to a trough (bottom) of 129.7 million in February 2010, a decline of nearly 8.8 million jobs or 6.8%. The number of jobs did not regain the January 2008 level until May 2014. For comparison, the severe 1981-82 recession had a jobs decline of 3.2%. Full-time employment did not regain its pre-crisis level until August 2015.
The unemployment rate ("U-3") rose from the pre-recession level of 4.7% in November 2008 to a peak of 10.0% in October 2009, before steadily falling back to the pre-recession level by May 2016. One factor to consider is that the job count was artificially high and the unemployment rate was artificially low prior to the recession due to an unsustainable housing bubble, which had increased construction and other employment substantially. In 2003, prior to the significant expansion of subprime lending of 2004-2006, the unemployment rate was close to 6%. The wider measure of unemployment ("U-6") which includes those employed part-time for economic reasons or marginally attached to the labor force rose from 8.4% pre-crisis to a peak of 17.1% in October 2009. It did not regain the pre-crisis level until May 2017.
Bloomberg maintains a "dashboard" of several labor-market variables that illustrates the state of recovery of the labor market.
Liquidity crisis
The major investment banks at the core of the crisis obtained significant funding in overnight repo
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities. The dealer sells the underlying security to investors and, by agreement between the two par ...
markets, which were disrupted during the crisis. In effect, there was a run
Run(s) or RUN may refer to:
Places
* Run (island), one of the Banda Islands in Indonesia
* Run (stream), a stream in the Dutch province of North Brabant
People
* Run (rapper), Joseph Simmons, now known as "Reverend Run", from the hip-hop group ...
on the essentially unregulated shadow banking
The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that provide services similar to traditional commercial banks but outside normal banking regulations. Examples of NBFIs include hedge funds, ins ...
(non-depository) banking system, which had grown larger than the regulated depository system. Unable to obtain financing, they merged (in the case of Bear Stearns and Merrill Lynch), declared bankruptcy (Lehman Brothers) or obtained federal depository bank charters and private loans (Goldman Sachs and Morgan Stanley). Insurer AIG, which had guaranteed many of the liabilities of these and other banks around the globe through derivatives called credit default swaps
A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default (by the debtor) or other credit event. That is, the seller of the CDS insures the buyer against som ...
, also was bailed out and taken over by the government at an initial cost exceeding $100 billion. The bailout of AIG was essentially a conduit for the U.S. government to bail out banks around the world, as the money was used by AIG to make good on its obligations.
A timeline of some of the significant events in the crisis from 2007 to 2008 includes:
* From late 2007 through September 2008, before the official October 3 bailout, there was a series of smaller bank rescues that occurred which totaled almost $800 billion.
* In summer 2007, Countrywide Financial drew down an $11 billion line of credit and then secured an additional $12 billion bailout in September. This may be considered the start of the crisis.
* In mid-December 2007, Washington Mutual bank cut more than 3,000 jobs and closed its sub-prime mortgage business.
* In mid-March 2008, Bear Stearns was bailed out by a gift of $29 billion non-recourse treasury bill debt assets.
* In early July 2008, depositors at the Los Angeles offices of IndyMac
IndyMac, a contraction of Independent National Mortgage Corporation, was an American bank based in California that failed in 2008 and was seized by the United States Federal Deposit Insurance Corporation (FDIC).
Before its failure, IndyMac Ban ...
Bank frantically lined up in the street to withdraw their money. On July 11, IndyMac, a spinoff of Countrywide, was seized by federal regulators—and called for a $32 billion bailout—as the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac. The two were placed into conservatorship on September 7, 2008.
* During the weekend of September 13–14, 2008, Lehman Brothers
Lehman Brothers Holdings Inc. ( ) was an American global financial services firm founded in 1847. Before Bankruptcy of Lehman Brothers, filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Gol ...
declared bankruptcy
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...
after failing to find a buyer; Bank of America
The Bank of America Corporation (often abbreviated BofA or BoA) is an American multinational investment bank and financial services holding company headquartered at the Bank of America Corporate Center in Charlotte, North Carolina. The bank w ...
agreed to purchase investment bank Merrill Lynch; the insurance giant AIG sought a bridge loan from the Federal Reserve; and a consortium of 10 banks created an emergency fund of at least $70 billion to deal with the effects of Lehman's closure, similar to the consortium put forth by J.P. Morgan during the stock market panic of 1907
The Panic of 1907, also known as the 1907 Bankers' Panic or Knickerbocker Crisis, was a financial crisis that took place in the United States over a three-week period starting in mid-October, when the New York Stock Exchange fell almost 50% from ...
and the crash of 1929. Stocks on Wall Street
Wall Street is an eight-block-long street in the Financial District of Lower Manhattan in New York City. It runs between Broadway in the west to South Street and the East River in the east. The term "Wall Street" has become a metonym for t ...
tumbled on Monday, September 15.
* On September 16, 2008, news emerged that the Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
might give AIG an $85 billion rescue package; on September 17, 2008, this was confirmed. The terms of the package were that the Federal Reserve would receive an 80% public stake in the firm. The biggest bank failure in history occurred on September 25 when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual.
The year 2008, as of September 17, had seen 81 public corporations file for bankruptcy in the United States, already higher than the 78 for all of 2007. The largest corporate bankruptcy in U.S. history also made 2008 a record year in terms of assets, with Lehman's size—$691 billion in assets—alone surpassing all past annual totals. The year also saw the ninth-biggest bankruptcy, with the failure of IndyMac Bank.
''The Wall Street Journal'' stated that venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which ha ...
funding slowed down, which in the past had led to unemployment and slowed new job creation. The Federal Reserve took steps to feed economic expansion by lowering the prime rate
A prime rate or prime lending rate is an interest rate used by banks, usually the interest rate at which banks lend to customers with good credit. Some variable interest rates may be expressed as a percentage above or below prime rate.
Use in dif ...
repeatedly during 2008.
Bailout of U.S. financial system
On September 17, 2008, Federal Reserve chairman Ben Bernanke
Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Durin ...
advised Secretary of the Treasury Henry Paulson
Henry Merritt Paulson Jr. (born March 28, 1946) is an American banker and financier who served as the 74th United States Secretary of the Treasury from 2006 to 2009. Prior to his role in the Department of the Treasury, Paulson was the Chairman a ...
that a large amount of public money would be needed to stabilize the financial system. Short selling on 799 financial stocks was banned on September 19. Companies were also forced to disclose large short positions. The Treasury Secretary also indicated that money fund
A money market fund (also called a money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a hi ...
s would create an insurance pool to cover themselves against losses and that the government would buy mortgage-backed securities from banks and investment houses. Initial estimates of the cost of the Treasury bailout proposed by the Bush Administration's draft legislation (as of September 19, 2008) were in the range of $700 billion to $1 trillion U.S. dollars
The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
. President George W. Bush
George Walker Bush (born July 6, 1946) is an American politician who served as the 43rd president of the United States from 2001 to 2009. A member of the Republican Party, Bush family, and son of the 41st president George H. W. Bush, he ...
asked Congress
A congress is a formal meeting of the representatives of different countries, constituent states, organizations, trade unions, political parties, or other groups. The term originated in Late Middle English to denote an encounter (meeting of a ...
on September 20, 2008 for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis. The crisis continued when the United States House of Representatives rejected the bill and the Dow Jones Dow Jones is a combination of the names of business partners Charles Dow and Edward Jones.
Dow Jones & Company
Dow, Jones and Charles Bergstresser founded Dow Jones & Company in 1882. That company eventually became a subsidiary of News Corp, and ...
took a 777-point plunge. A revised version of the bill was later passed by Congress, but the stock market continued to fall nevertheless. The first half of the bailout money was primarily used to buy preferred stock in banks, instead of troubled mortgage assets. This flew in the face of some economists' argument that buying preferred stock would be far less effective than buying common stock.
As of mid-November 2008, it was estimated that the new loans, purchases, and liabilities of the Federal Reserve, the Treasury, and FDIC, brought on by the financial crisis, totalled over $5 trillion: $1 trillion in loans by the Fed to broker-dealers through the emergency discount window, $1.8 trillion in loans by the Fed through the Term Auction Facility, $700 billion to be raised by the Treasury for the Troubled Assets Relief Program, $200 billion insurance for the GSEs by the Treasury, and $1.5 trillion insurance for unsecured bank debt by FDIC.
ProPublica maintains a "bailout tracker" that indicated about $626 billion was "spent, invested or loaned" in bailouts of the financial system due to the crisis as of March 2018, while $713 billion had been repaid to the government ($390 billion in principal repayments and $323 billion in interest) indicating the bailouts generated $87 billion in profit.
United States policy responses
The Federal Reserve, Treasury, and Securities and Exchange Commission took several steps on September 19 to intervene in the crisis. To stop the potential run on money market mutual funds, the Treasury also announced on September 19 a new $50,000,000,000 ($50 billion) program to ensure the investments, similar to the Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cred ...
(FDIC) program. Part of the announcements included temporary exceptions to section 23A and 23B (Regulation W), allowing financial groups to more easily share funds within their group. The exceptions would expire on January 30, 2009, unless extended by the Federal Reserve Board
The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the mon ...
. The Securities and Exchange Commission announced the termination of short-selling of 799 financial stocks, as well as action against naked short selling
Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the asset from someone else or ensuring that it can be borrowed. When the seller does not obtain the asset and deliv ...
, as part of its reaction to the mortgage crisis.
Recovery
The recession officially ended in the second quarter of 2009, but the nation's economy continued to be described as in an "economic malaise
Economic stagnation is a prolonged period of slow economic growth (traditionally measured in terms of the GDP growth), usually accompanied by high unemployment. Under some definitions, "slow" means significantly slower than potential growth as es ...
" during the second quarter of 2011. Some economists described the post-recession years as the weakest recovery
Recovery or Recover may refer to:
Arts and entertainment Books
* Recovery (novel), ''Recovery'' (novel), a Star Wars e-book
* Recovery Version, a translation of the Bible with footnotes published by Living Stream Ministry
Film and television
* R ...
since the Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
and World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
. The weak recovery led one commentator to call it a "Zombie Economy", so-called because it was neither dead nor alive. Household incomes, as of August 2012 continued falling after the end of the recession, eventually declining 7.2% below the December 2007 level. Additionally as of September 2012, the long-term unemployment
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the referenc ...
is the highest it had been since World War II, and the unemployment rate peaked several months after the end of the recession (10.1% in October 2009) and was above 8% until September 2012 (7.8%). The Federal Reserve kept interest rates at a historically low 0.25% from December 2008 until December 2015, when it began to raise them again.
However, the Great Recession was different in kind from all the recessions since the Great Depression, as it also involved a banking crisis and the de-leveraging (debt reduction) of highly indebted households. Research indicates recovery from financial crises can be protracted, with lengthy periods of high unemployment and substandard economic growth. Economist Carmen Reinhart stated in August 2011: "Debt de-leveraging eduction
Eduction or variants may refer to:
* Eduction (geology), a process in which the Earth's crust spreads sideways, exposing deep-seated rocks
* Eductor-jet pump, a form of injector pump
* A conclusion educed (induced or deduced) through a process of ...
takes about seven years ... And in the decade following severe financial crises, you tend to grow by 1 to 1.5 percentage points less than in the decade before, because the decade before was fueled by a boom in private borrowing, and not all of that growth was real. The unemployment figures in advanced economies after falls are also very dark. Unemployment remains anchored about five percentage points above what it was in the decade before."
Then-Fed Chair Ben Bernanke
Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Durin ...
explained during November 2012 several of the economic headwinds that slowed the recovery:
* The housing sector did not rebound, as was the case in prior recession recoveries, as the sector was severely damaged during the crisis. Millions of foreclosures had created a large surplus of properties and consumers were paying down their debts rather than purchasing homes.
* Credit for borrowing and spending by individuals (or investing by corporations) was not readily available as banks paid down their debts.
* Restrained government spending following initial stimulus efforts (i.e., austerity) was not sufficient to offset private sector weaknesses.[Federal Reserve-Ben Bernanke-The Economic Recovery and Economic Policy-November 20, 2012](_blank)
/ref>
For example, U.S. federal spending rose from 19.1% GDP in fiscal year (FY) 2007 to 24.4% GDP in FY2009 (the last year budgeted by President Bush) before falling towards to 20.4% GDP in 2014, closer to the historical average. In dollar terms, federal spending was actually higher in 2009 than in 2014, despite a historical trend of a roughly 5% annual increase. This reduced real GDP growth by approximately 0.5% per quarter on average between Q3 2010 and Q2 2014. Both households and government practicing austerity at the same time was a recipe for a slow recovery.
Several key economic variables (e.g., Job level, real GDP per capita, stock market, and household net worth) hit their low point (trough) in 2009 or 2010, after which they began to turn upward, recovering to pre-recession (2007) levels between late 2012 and May 2014 (close to Reinhart's prediction), which marked the recovery of all jobs lost during the recession. Real median household income fell to a trough of $53,331 in 2012, but recovered to an all-time high of $59,039 by 2016. However, the gains during the recovery were very unevenly distributed. Economist Emmanuel Saez wrote in June 2016 that the top 1% of families captured 52% of the total real income (GDP) growth per family from 2009-2015. The gains were more evenly distributed after the tax increases in 2013 on higher-income earners. According to the Federal Reserve, median family net worth had peaked at about $140,000 in 2007, fell to a low point of $84,000 in 2013, and only partially recovered to $97,000 by 2016. Middle-class families had much of their wealth in housing, driving much of the decline when the housing bubble burst.
Healthcare costs in the United States slowed in the period after the Great Recession (2008–2012). A decrease in inflation and in the number of hospital stays per population drove a reduction in the rate of growth in aggregate hospital costs at this time. Growth slowed most for surgical stays and least for maternal and neonatal stays.
President Obama declared the bailout measures started under the Bush Administration and continued during his Administration as completed and mostly profitable as of December 2014. As of January 2018, bailout funds had been fully recovered by the government, when interest on loans is taken into consideration. A total of $626B was invested, loaned, or granted due to various bailout measures, while $390B had been returned to the Treasury. The Treasury had earned another $323B in interest on bailout loans, resulting in an $87B profit.
Severity
The vast majority of economic historians believe the Great Recession was the second worst contraction
Contraction may refer to:
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** Syncope (phonology), omission of sounds in a word
* Synalepha, merged ...
in US history, after the Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
. Some economists, including Ben Bernanke
Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Durin ...
, have argued that the financial crisis precipitating the Great Recession was arguably more severe than the financial crisis that preceded the Great Depression, and that a depression was only avoided due to decisive policy actions taken by the Federal Reserve and federal government.
See also
* Timeline of the Great Recession
This article gives the timeline of the Great Recession, which hit many developed economies in the wake of the financial crisis of 2007-2008.
Note: The date indicated is that of the official announcement by the department or the public agency i ...
* Causes of the Great Recession
Many factors directly and indirectly serve as the causes of the Great Recession that started in 2008 with the US subprime mortgage crisis. The major causes of the initial subprime mortgage crisis and the following recession include lax lending s ...
* New Deal
The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States between 1933 and 1939. Major federal programs agencies included the Civilian Cons ...
* Financial crisis of 2007–2008
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
* 2008–2011 bank failures in the United States
* 2008–09 Keynesian resurgence
* 2010 United States foreclosure crisis
The 2010 United States foreclosure crisis, sometimes referred to as Foreclosure-gate or Foreclosuregate, refers to a widespread epidemic of improper foreclosures initiated by large banks and other lenders. The foreclosure crisis was extensivel ...
* United States debt-ceiling crisis of 2011
The 2011 United States debt-ceiling crisis was a stage in the ongoing political debate in the United States Congress about the appropriate level of government spending and its effect on the national debt and deficit. The debate centered on the ...
* List of economic crises
* ''The Big Short
''The Big Short: Inside the Doomsday Machine'' is a nonfiction book by Michael Lewis about the build-up of the United States housing bubble during the 2000s. It was released on March 15, 2010, by W. W. Norton & Company. It spent 28 weeks on '' ...
''
Further reading
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References
{{Federal Reserve System
2000s economic history
2010s economic history
Economic collapses
2007 in the United States
2008 in the United States
2009 in the United States