Tuning into today’s news, it can be easy to feel like everything about the world is going downhill. Being regularly surrounded by this news can push to the back of our minds even the biggest bad news in the past, such as the Great Recession. So, here is something to refresh our collective memory.
What is the Great Recession?
The Great Recession was a period of economic decline experienced by financial markets around the world. It saw the 2008 financial crisis, and some of the worst unemployment rates, GDP and economic downturns since the Second World War.
Although it affected much of the world, the U.S. felt it immensely. From its peak in the fourth quarter of 2007 to its trough in the second quarter of 2009, the real gross domestic product (GDP) dropped at around 4.3%, which is the deepest plunge in the postwar era. The unemployment rate was at 5% in December 2007, and has doubled by October 2009.
The subprime mortgage crisis
The Great Recession is closely linked with the subprime mortgage crisis, a consequence of the U.S. housing boom during the early 2000s. In the early to mid-2000s, mortgage lenders who sought to capitalize on the soaring home prices approved loans even for high-risk borrowers. As housing prices continued to rise, other financial institutions who were hoping for a quick profit amassed bulks of these risky mortgages as investment.
In February 2007, however, the Federal Home Loan Mortgage Corporation (Freddie Mac) stated that they would no longer buy high-risk subprime mortgages or mortgage-related securities. It meant that some subprime mortgage lenders will not have a market for their mortgages and no way of selling them to regain their initial investments. Because of this, the major subprime mortgage lender, New Century Financial, declared bankruptcy in April 2007, followed by the American Mortgage Investment Corporation in August.
All around the country, housing prices started falling as the subprime crisis continued. With a surplus of new houses on the market, millions of homeowners and their mortgage lenders were put “underwater” because their homes had less value than their total loan amounts.
The Fed and the U.S. government take action
The rise and fall of U.S. mortgage rates are usually guided by the federal funds rate. In 2006, around the time of the housing boom, the U.S. Federal Reserve (commonly known as the “Fed”) raised rates to 5.25% from 1% in 2004 and nudged the mortgage rates up, as well. The federal funds rate remained the same until 2007, as the subprime crisis began. But, for the first time in history, the Fed reduced target interest rates to 0% in 2008, hoping to encourage borrowing and capital investment once again.
President George W. Bush signed the Economic Stimulus Act into law in February 2008. The legislation is meant to provide taxpayers with rebates ranging from $600 to $1200, that they were encouraged to spend. It also reduced taxes, increased federal home loan limits, and provided businesses with incentives for capital investment. In October 2008, President Bush also approved the Troubled Asset Relief Program (TARP), which enabled the government to purchase the assets of struggling companies and keep them in business.
The crisis was not over when President Barack Obama took over in January 2009. In his first few weeks, President Obama signed into law a second “Stimulus Package”. It designated $787 billion for tax cuts, and funded infrastructure, healthcare, education, and green energy.
Based on critical economic indicators (such as the stock market and unemployment rates), the National Bureau of Economic Research (NBER) determined that the economic downturn in the country has officially ended in June 2009.
Ten turbulent years have passed since then, and we may still be experiencing its consequences to this day. And even though the Great Recession is over, the things we learned from it as a society should be remembered even for years to come.
