Great Recession of 2007-2009

Definition

The Great Recession of 2007-2009 was a severe global economic downturn that originated in the United States due to a combination of factors, including the housing market collapse and risky financial practices. It resulted in widespread unemployment, significant declines in consumer wealth, and major disruptions in financial markets, highlighting the vulnerabilities within the global economy. This period marked a pivotal moment in economic history, reshaping policies and regulatory frameworks worldwide.

5 Must Know Facts For Your Next Test

1. The Great Recession officially began in December 2007 and lasted until June 2009, making it the most severe economic downturn since the Great Depression.
2. The collapse of Lehman Brothers in September 2008 was a critical event that intensified the financial crisis, leading to a loss of confidence in financial institutions.
3. Government intervention included the Federal Reserve lowering interest rates to stimulate borrowing and spending, as well as implementing stimulus packages to boost economic growth.
4. The recession led to a significant increase in unemployment rates, peaking at 10% in October 2009, affecting millions of families across the United States.
5. In response to the recession, new regulations were introduced, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, aimed at preventing future financial crises.

Review Questions

• How did the housing market collapse contribute to the Great Recession of 2007-2009?
  • The housing market collapse was a major trigger for the Great Recession as it revealed the extent of risky lending practices in the mortgage industry. Many banks issued subprime mortgages to borrowers with poor credit histories, leading to a spike in defaults when housing prices plummeted. This created a ripple effect through financial institutions, resulting in significant losses and a lack of confidence that deepened the economic downturn.
• Evaluate the effectiveness of government responses like TARP during the Great Recession. What were its impacts on the economy?
  • The Troubled Asset Relief Program (TARP) aimed to stabilize financial markets by purchasing toxic assets from banks and providing capital injections. While TARP helped restore confidence in the banking system and prevented further collapses, its long-term effectiveness is debated. Critics argue it favored large financial institutions over individuals affected by foreclosures, while supporters claim it played a crucial role in averting a complete financial meltdown.
• Analyze how the Great Recession influenced economic policies and regulatory frameworks post-2009 and its implications for future crises.
  • The Great Recession led to significant shifts in economic policies and regulatory frameworks aimed at preventing future crises. The implementation of Dodd-Frank reforms increased oversight of financial institutions and introduced measures to protect consumers. These changes aimed to enhance transparency and accountability within the banking sector. Additionally, lessons learned from this recession prompted policymakers to consider systemic risks in their regulations, shaping responses to subsequent economic challenges.

Related terms

Subprime Mortgage Crisis: A financial crisis that occurred when high-risk mortgage borrowers began defaulting on their loans, leading to massive losses for financial institutions and triggering the broader economic downturn.

TARP (Troubled Asset Relief Program): A program initiated by the U.S. government to purchase toxic assets and provide financial assistance to banks and other financial institutions to stabilize the economy during the recession.

Unemployment Rate: A measure of the percentage of the labor force that is jobless and actively seeking employment, which surged during the Great Recession as millions lost their jobs.