Great Recession

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Great Recession: What it was and what caused it

The Great Recession was a severe global economic downturn centered in the United States that began in 2007 and officially lasted through June 2009. Triggered by the collapse of the U.S. housing market, it morphed into a widespread financial crisis as mortgage-related securities and complex derivatives plunged in value.

Core causes

  • Housing bubble and subprime lending: Widespread extension of mortgages to high-risk borrowers and the rapid expansion of subprime and exotic adjustable-rate mortgages created a fragile credit structure tied to rising home prices.
  • Securitization and derivatives: Banks packaged mortgages into mortgage-backed securities (MBS) and sold risk to investors worldwide, spreading exposure throughout the financial system.
  • Low interest rates and credit growth: Prolonged low rates after the 2001 recession and 9/11 encouraged heavy borrowing and fueled the real estate boom.
  • Regulatory and oversight failures: Gaps in regulation, including limited oversight of the shadow banking system (investment firms and non-depository lenders), allowed excessive leverage and risky practices to grow unchecked.
  • Financial institution risk-taking: Large financial firms amassed leverage and complex exposures. When housing prices stopped rising and mortgage payments reset higher, defaults rose and asset values collapsed.

Timeline and key events

  • Early 2000s: Low interest rates and policies encouraging homeownership helped spark a housing boom.
  • 2004–2006: The Federal Reserve raised interest rates, and many adjustable-rate mortgages began resetting at higher payments.
  • 2007: Housing prices fell and mortgage defaults increased. The credit markets seized as MBS values declined.
  • March 2008: Collapse of Bear Stearns underscored the fragility of leveraged investment firms.
  • September 2008: Bankruptcy of Lehman Brothers intensified the crisis and triggered global financial contagion.

Economic consequences

  • Job loss and income: The U.S. lost more than 8.7 million jobs; unemployment peaked near 10%. Unemployment did not return to 5% until 2015, and real median household income did not recover to pre-recession levels until about 2016.
  • Wealth destruction: U.S. households lost trillions in net worth as stock and housing values fell.
  • Market collapse: The Dow Jones Industrial Average fell from a pre-recession high of about 14,164 (October 2007) to roughly 6,594 (March 2009), a decline of more than 50%. Major one-day drops occurred in September 2008 as panic spread.
  • Global contagion: The crisis spread to other economies, notably in Europe, through financial linkages and reduced credit availability.

Policy response

Monetary and fiscal authorities undertook unprecedented actions to stabilize the financial system and stimulate the economy:

  • Monetary policy and liquidity:
  • The Federal Reserve cut its policy rate to near zero and launched large-scale asset purchases (quantitative easing) to restore liquidity.
  • Emergency lending programs and support for key institutions provided trillions in temporary liquidity to markets.
  • Fiscal stimulus:
  • The U.S. enacted a major fiscal stimulus package (the American Recovery and Reinvestment Act), initially $787 billion and later reported as $831 billion, aimed at supporting demand, jobs, and public investment.
  • Regulatory reform:
  • In 2010, the Dodd–Frank Act introduced new oversight powers, systemic-risk monitoring, and consumer protections intended to reduce the chances of a repeat crisis.

Recovery and critiques

  • Recovery timeline:
  • Real GDP bottomed in the second quarter of 2009 and regained its pre-recession peak by mid-2011.
  • Financial markets recovered sooner than labor markets; the Dow surpassed its 2007 high in 2013.
  • Distributional outcomes:
  • The policy mix prevented a deeper economic collapse but critics argue that rescue efforts disproportionately favored large financial institutions and delayed necessary restructuring. Some contend resources were tied up supporting failing firms rather than reallocating capital to productive uses.
  • Legacy:
  • The crisis prompted substantial changes in banking regulation and crisis-management tools, but debates continue about the adequacy and fairness of the responses.

How long was the Great Recession?

  • The official U.S. recession lasted 18 months, from December 2007 to June 2009. Many of its economic effects—particularly on employment and household wealth—persisted for years afterward.

Key takeaways

  • The Great Recession was centered on a housing market collapse amplified by securitization, excessive leverage, and regulatory gaps.
  • Its fallout included massive job losses, steep declines in household wealth, and deep disruptions in credit markets globally.
  • Aggressive monetary policy, fiscal stimulus, and later regulatory reform limited what could have been a more catastrophic collapse, but recovery was uneven and long-lasting for many households.