Great Recession

Definition

The Great Recession was a severe worldwide economic downturn that began in late 2007 and lasted until mid-2009, marked by significant declines in consumer wealth, widespread unemployment, and a global financial crisis. It was primarily triggered by the collapse of the housing bubble in the United States, leading to a cascade of financial failures and a crisis in the banking sector.

5 Must Know Facts For Your Next Test

1. The Great Recession was the most severe economic downturn since the Great Depression of the 1930s, affecting economies worldwide.
2. In the United States, unemployment rates soared to around 10% at the peak of the recession, leaving millions without jobs.
3. The financial crisis was largely caused by the burst of the housing bubble, which led to a wave of mortgage defaults and foreclosures.
4. Major financial institutions faced bankruptcy or severe distress, prompting unprecedented government intervention to stabilize the economy.
5. The aftermath of the Great Recession saw increased regulations on financial institutions, including reforms like the Dodd-Frank Act aimed at preventing future crises.

Review Questions

• How did the collapse of the housing market contribute to the onset of the Great Recession?
  • The collapse of the housing market was pivotal to the Great Recession as it triggered a wave of defaults on subprime mortgages, which were given to high-risk borrowers. As home values plummeted, many homeowners found themselves with mortgages exceeding their home's worth, leading to widespread foreclosures. This situation caused significant losses for banks and financial institutions heavily invested in mortgage-backed securities, setting off a chain reaction that led to a broader financial crisis.
• Discuss the impact of government intervention during the Great Recession and its long-term implications for financial regulation.
  • Government intervention during the Great Recession included measures like TARP, which aimed to stabilize banks by purchasing toxic assets. This unprecedented action helped prevent a complete collapse of the financial system but also raised debates about moral hazard and government overreach. In response to the crisis, long-term reforms such as the Dodd-Frank Act were implemented to increase transparency and reduce risks in financial markets, shaping future regulatory frameworks.
• Evaluate how global interconnectedness influenced the spread and severity of the Great Recession across different countries.
  • The Great Recession demonstrated how interconnected global economies can amplify economic downturns. As U.S. financial institutions failed, international banks that had invested heavily in American mortgage-backed securities also faced significant losses. The resulting credit crunch affected global trade and investment flows, leading to recessions in various countries. This situation highlighted vulnerabilities in global economic structures and led to discussions on better coordination among international regulatory bodies to manage future crises.

Related terms

Subprime Mortgage: A type of mortgage that is offered to borrowers with low credit ratings, often associated with higher risk and higher interest rates.

Financial Derivatives: Complex financial instruments whose value is derived from the performance of underlying assets, which played a significant role in the financial crisis.

TARP (Troubled Asset Relief Program): A program enacted by the U.S. government in 2008 to purchase toxic assets and stabilize financial institutions during the Great Recession.