The Great Recession was a period of contraction in economies around the world (particularly in the western world and associated countries) that occurred from late 2007 to mid-2009,"US Business Cycle Expansions and Contractions", United States NBER, or National Bureau of Economic Research, updated March 14, 2023. This government agency dates the Great Recession as starting in December 2007 and bottoming-out in June 2009. overlapping with the closely related 2008 financial crisis. The scale and timing of the recession varied from country to country (see map). At the time, the International Monetary Fund (IMF) concluded that it was the most severe economic and financial meltdown since the Great Depression of the 1930s.
The Great Recession was caused by many weaknesses that slowly developed in the global financial system, along with a series of concurrent and triggering events that began with the bursting of the United States housing bubble, which had formed in 2005 and lasted until 2012. When housing prices fell and homeowners began to abandon their mortgages, the value of mortgage-backed securities held by investment banks declined sharply in 2007–2008, causing several banks to collapse or be bailed out in September 2008. This 2007–2008 phase became known as the subprime mortgage crisis, referring to borrowers of lesser payment capacity as subprime debtors.
The combination of banks being unable to provide funds to businesses (also known as the credit crunch) and homeowners forsaking or paying down their debts (rather than borrowing and spending) resulted in the Great Recession. In the U.S., the recession officially began in December 2007 and lasted until June 2009, thus extending over 19 months.US Business Cycle Expansions and Contractions , NBER, accessed August 9, 2012. As with most other recessions, it appears that no known formal theoretical or empirical model succeeded in accurately predicting the onset of this recession, except for minor signals in the sudden rise of forecast probabilities, which were still well under 50%.
The recession was not felt equally around the world. Whereas most of the world's developed economies, particularly in North America and Europe, fell into a severe, sustained recession (with international trade and financial contagion spreading into developing countries in Latin America and Africa), far less impact occurred in many more-recently developing economies, particularly in China, India and Indonesia, whose economies grew substantially during this period. Similarly, Oceania suffered minimal impact, in part due to its proximity to Asian markets.
Terminology Two definitions of the term "economic recession" exist: one sense referring generally to "a period of reduced economic activity" and ongoing hardship; and a technical definition used in economics, which is defined operationally, specifically the contraction phase of a business cycle with two or more consecutive quarters of GDP contraction (negative GDP growth rate). The latter is typically used to influence abrupt changes in monetary policy.
Under the technical definition, the recession ended in the United States in June or July 2009.V.I. Keilis-Borok et al., Pattern of Macroeconomic Indicators Preceding the End of an American Economic Recession. Journal of Pattern Recognition Research, JPRR Vol. 3 (1) 2008.
Journalist Robert Kuttner has argued that 'The Great Recession' is a misnomer. According to Kuttner, "recessions are mild dips in the business cycle that are either self-correcting or soon cured by modest fiscal or monetary stimulus. Because of the continuing deflationary trap, it would be more accurate to call this decade's stagnant economy The Lesser Depression or The Great Deflation."Kuttner, Robert. Debtors’ Prison: The Politics of Austerity Versus Possibility. New York: Vintage Books, 2013, 40.
Overview The Great Recession met the IMF criteria for being a global recession only in the single calendar year 2009. That IMF definition requires a decline in annual real world GDP per capita. Despite the fact that quarterly data are being used as recession definition criteria by all G20 members, representing 85% of the world GDP, the International Monetary Fund (IMF) has decidedin the absence of a complete data setnot to declare/measure global recessions according to quarterly GDP data. The seasonally adjusted PPPweighted real GDP for the G20zone, however, is a good indicator for the world GDP, and it was measured to have suffered a direct quarter on quarter decline during the three quarters from Q32008 until Q12009, which more accurately mark when the recession took place at the global level.
According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions), the recession began in December 2007 and ended in June 2009, and thus extended over eighteen months.
The years leading up to the crisis were characterized by an exorbitant rise in asset prices and associated boom in economic demand. Further, the U.S. shadow banking system (i.e., non-depository financial institutions such as investment banks) had grown to rival the depository system yet was not subject to the same regulatory oversight, making it vulnerable to a bank run.
U.S. mortgage-backed securities, which had risks that were hard to assess, were marketed around the world, as they offered higher yields than U.S. government bonds. Many of these securities were backed by subprime mortgages, which collapsed in value when the U.S. housing bubble burst during 2006 and homeowners began to default on their mortgage payments in large numbers starting in 2007.
The emergence of subprime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market. There was the equivalent of a bank run on the shadow banking system, resulting in many large and well established investment banks and commercial banks in the United States and Europe suffering huge losses and even facing bankruptcy, resulting in massive public financial assistance (government bailouts).
The global recession that followed resulted in a sharp drop in international trade, rising unemployment and slumping commodity prices. Several economists predicted that recovery might not appear until 2011 and that the recession would be the worst since the Great Depression of the 1930s.David Lightman. Congressional Budget Office compares downturn to Great Depression . McClatchy Washington Bureau. January 27, 2009. Economist Paul Krugman once commented on this as seemingly the beginning of "a second Great Depression".
Governments and central banks responded with fiscal policy and monetary policy initiatives to stimulate national economies and reduce financial system risks. The recession renewed interest in Keynesian economic ideas on how to combat recessionary conditions. Economists advise that the stimulus measures such as quantitative easing (pumping money into the system) and holding down central bank wholesale lending interest rates should be withdrawn as soon as economies recover enough to "chart a path to sustainable growth".
The distribution of household incomes in the United States became more unequal during the post-2008 economic recovery. Income inequality in the United States grew from 2005 to 2012 in more than two thirds of metropolitan areas. Median household wealth fell 35% in the U.S., from $106,591 to $68,839 between 2005 and 2011.
Causes
Panel reports
The U.S. Financial Crisis Inquiry Commission, composed of six Democratic and four Republican appointees, reported its majority 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."
There were two Republican dissenting FCIC reports. One of them, signed by three Republican appointees, concluded that there were multiple causes. In his separate dissent to the majority and minority opinions of the FCIC, Commissioner Peter J. Wallison of the American Enterprise Institute (AEI) primarily blamed U.S. housing policy, including the actions of Fannie and Freddie, for the crisis. He wrote: "When the bubble began to deflate in mid-2007, the low quality and high risk loans engendered by government policies failed in unprecedented numbers."
In its "Declaration of the Summit on Financial Markets and the World Economy," dated November 15, 2008, leaders of the Group of 20 cited the following causes:
Federal Reserve Chair Ben Bernanke testified in September 2010 before the FCIC 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 the middle of 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.
Narratives
There are several "narratives" attempting to place the causes of the recession into context, with overlapping elements. Five such narratives include:
There was the equivalent of a bank run on the shadow banking system, which includes investment banks and other non-depository financial entities. This system had grown to rival the depository system in scale yet was not subject to the same regulatory safeguards. Its failure disrupted the flow of credit to consumers and corporations. The U.S. economy was being driven by a housing bubble. When it burst, private residential investment (i.e., housing construction) fell by over four percent of GDP.FRED-Private Residential Investment – Retrieved March 3, 2019 Consumption enabled by bubble-generated housing wealth also slowed. This created a gap in annual demand (GDP) of nearly $1 trillion. The U.S. government was unwilling to make up for this private sector shortfall. Record levels of household debt accumulated in the decades preceding the crisis resulted in a balance sheet recession (similar to debt deflation) once housing prices began falling in 2006. Consumers began paying off debt, which reduces their consumption, slowing down the economy for an extended period while debt levels are reduced. U.S. government policies encouraged home ownership even for those who could not afford it, contributing to lax lending standards, unsustainable housing price increases, and indebtedness.