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In the United States, the Great Recession 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 and output. This slow recovery was due in part to households and financial institutions paying off debts accumulated in the years preceding the crisis^[1] along with restrained government spending following initial stimulus efforts.^[2] It followed the bursting of the housing bubble, the housing market correction and subprime mortgage crisis.

According to the Department of Labor, 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 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").^[3] Real (inflation-adjusted) GDP did not regain its pre-crisis (Q4 2007) peak level until Q3 2011.^[4] Unemployment rose from 4.7% in November 2007 to peak at 10% in October 2009, before returning steadily to 4.7% in May 2016.^[5] The total number of jobs did not return to November 2007 levels until May 2014.^[6] Some areas, such as jobs in public health, have not recovered as of 2023.^[7]

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.^[8] 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.^[9][10] President Barack Obama declared the bailout measures started under the Bush Administration and continued during his Administration as completed and mostly profitable as of December 2014.^[11]

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)^[12] and The Chandler Act (1938),^[13] 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.^[14] 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^[14] – 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

Subprime mortgage lending jumped dramatically during the 2004–2006 period preceding the crisis (source: Financial Crisis Inquiry Commission Report, p. 70 Figure 5.2).

Number of U.S. household properties subject to foreclosure actions by quarter

In the early months of 2008, many observers believed that a U.S. recession had begun.^[15][16][17] The collapse of Bear Stearns and the resulting financial market turbulence signaled that the crisis would not be mild and brief.

Alan Greenspan, 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".^[18] A chief economist at Standard & Poor's said in March 2008 he had projected a worst-case-scenario in which the country would endure a double-dip recession, 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.^[19]

According to numbers published by the Bureau of Economic Analysis 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.^[20] 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.^[21] In a May 9, 2008 report, the chief North American economist for investment bank Merrill Lynch 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.^[22]

New York's budget director concluded the state of New York was officially in a recession by the summer of 2008. Governor David Paterson 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.^[23] An August 1 report, issued by economists with Wachovia Bank, said Florida was officially in a recession.^[24]

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.^[25] On the other hand, Martin Feldstein, 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.^[26]

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.^[27]

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.^[28]

In March 2008, financier Warren Buffett 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.^[29][30]

Causes

Cost of housing by State

Federal Reserve Chair Ben Bernanke 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 on the shadow banking system 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 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.^[31]

The U.S. Financial Crisis Inquiry Commission 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."^[32]

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.^[33] On Wall Street and in the financial industry, moral hazard lay at the core of many of the causes.^[34]

Recession declared by economists

U.S. Real GDP in Billions of Current USD. Courtesy of www.bea.gov

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.^[45][46] The Dow Jones Industrial Average lost 679 points that same day.^[47] On January 4, 2009, Nobel Memorial Prize–winning economist Paul Krugman wrote, "This looks an awful lot like the beginning of a second Great Depression."^[48]

Bailout of U.S. financial system

U.S. median family net worth peaked in 2007, declined due to the Great Recession until 2013, and only partially recovered by 2016. Homeowners did not receive bailout support on the scale of financial institutions.^[63]

Main article: Emergency Economic Stabilization Act of 2008

On September 17, 2008, Federal Reserve chairman Ben Bernanke advised Secretary of the Treasury Henry Paulson that a large amount of public money would be needed to stabilize the financial system.^[64] Short selling on 799 financial stocks was banned on September 19. Companies were also forced to disclose large short positions.^[65] The Treasury Secretary also indicated that money funds would create an insurance pool to cover themselves against losses and that the government would buy mortgage-backed securities from banks and investment houses.^[65] 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^[66] to $1 trillion U.S. dollars.^[67] President George W. Bush asked Congress on September 20, 2008 for the authority to spend as much as $700 billion (~$939 billion in 2022) to purchase troubled mortgage assets and contain the financial crisis.^[68][64] The crisis continued when the United States House of Representatives rejected the bill and the Dow Jones took a 777-point plunge.^[69] A revised version of the bill was later passed by Congress, but the stock market continued to fall nevertheless.^[70][71] 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.^[72]

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.^[73]

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.^[74]

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 (FDIC) program.^[75] 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.^[76] The Securities and Exchange Commission announced the termination of short-selling of 799 financial stocks, as well as action against naked short selling, as part of its reaction to the mortgage crisis.^[77]

Recovery

U.S. changes in household debt as a percentage of GDP for 1989-2016. Recoveries from financial crises tend to be protracted, as debt levels must be reduced before typical borrow-and-spend patterns are resumed. In this case, homeowners paid down debt from 2009-2012.^[78]

U.S. federal government spending was held relatively level around $3.5 trillion from 2009-2014, which created a headwind to recovery, reducing real GDP growth by approximately 0.5% per quarter (annualized) on average between Q3 2010 and Q2 2014.^[2]

Several major U.S. economic variables had recovered from the 2007-2009 Subprime mortgage crisis and Great Recession by the 2013-2014 time period.

The recession officially ended in the second quarter of 2009,^[3] but the nation's economy continued to be described as in an "economic malaise" during the second quarter of 2011.^[79] Some economists described the post-recession years as the weakest recovery since the Great Depression and World War II.^[80][81] 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.^[82] Additionally as of September 2012, the long-term unemployment is the highest it had been since World War II,^[83] 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%).^[84][85] 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.^[86] Economist Carmen Reinhart stated in August 2011: "Debt de-leveraging [reduction] 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."^[87]

Then-Fed Chair Ben Bernanke 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.^[2]

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.^[88] Both households and government practicing austerity at the same time was a recipe for a slow recovery.^[2]

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.^{[89][90][91][92]} 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.^[93] 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.^[94] 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.^[63]

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.^[95]

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.^[11] 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.^[96]

Severity

The vast majority of economic historians believe the Great Recession was the second worst contraction in US history, after the Great Depression. Some economists, including Ben Bernanke, 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.^[97]

See also

• Timeline of the Great Recession
• Causes of the Great Recession
• New Deal
• Financial crisis of 2007–2008
• 2008–2011 bank failures in the United States
• 2008–09 Keynesian resurgence
• 2010 United States foreclosure crisis
• United States debt-ceiling crisis of 2011
• List of economic crises
• The Big Short

References

Further reading

• Bernanke, Ben S. (2015). The Courage to Act: A Memoir of a Crisis and Its Aftermath. New York: W. W. Norton & Company. ISBN 978-0393247213.
• Greenspan, Alan (2008) [2007]. The Age of Turbulence: Adventures in a New World. New York: Penguin Books. pp. 507–532. ISBN 978-0143114161.
• Greenspan, Alan; Wooldridge, Adrian (2018). Capitalism in America: A History. New York: Penguin Press. pp. 368–388. ISBN 978-0735222441.
• Meltzer, Allan H. (2009). A History of the Federal Reserve – Volume 2, Book 2: 1970–1986. Chicago: University of Chicago Press. pp. 1243–1256. ISBN 978-0226213514.
• Sumner, Scott B. (2021). The Money Illusion: Market Monetarism, the Great Recession, and the Future of Monetary Policy. Chicago: University of Chicago Press. ISBN 978-0226773681.