Great Recession

Definition

The Great Recession was a severe global economic downturn that occurred in the late 2000s. It was the most significant financial crisis since the Great Depression of the 1930s, characterized by a collapse in asset prices, a credit crisis, and a downturn in economic activity worldwide.

5 Must Know Facts For Your Next Test

1. The Great Recession began in December 2007 in the United States and lasted until June 2009, making it the longest and most severe economic downturn since the Great Depression.
2. The housing bubble and subprime mortgage crisis, fueled by lax lending standards and the securitization of risky loans, were major triggers of the Great Recession.
3. The Great Recession led to a sharp increase in unemployment, with the U.S. unemployment rate peaking at 10% in October 2009.
4. Governments and central banks around the world implemented various stimulus measures, including bailouts, interest rate cuts, and quantitative easing, to try to mitigate the effects of the recession.
5. The Great Recession had a significant impact on global trade and investment, as the downturn in economic activity led to a decline in international trade and foreign direct investment.

Review Questions

• Explain how the subprime mortgage crisis contributed to the onset of the Great Recession.
  • The subprime mortgage crisis was a major trigger of the Great Recession. The collapse of the U.S. housing bubble and the widespread default on risky subprime mortgage loans led to a wave of foreclosures, which in turn caused a credit crisis as financial institutions that had invested in these mortgage-backed securities experienced significant losses. This credit crunch and the resulting decline in consumer spending and business investment were key factors that drove the broader economic downturn.
• Describe the role of globalization in the spread and severity of the Great Recession.
  • Globalization played a significant role in the spread and severity of the Great Recession. As the world's economies had become increasingly interconnected through trade, investment, and financial markets, economic shocks were rapidly transmitted across national borders. The downturn in the U.S. housing market and the credit crisis quickly spread to other countries, leading to a synchronized global recession. The high degree of integration of global financial markets also meant that the collapse of asset prices and the credit crunch were felt worldwide, exacerbating the economic downturn.
• Evaluate the effectiveness of the policy responses implemented by governments and central banks to mitigate the effects of the Great Recession.
  • Governments and central banks around the world implemented a variety of policy responses to try to mitigate the effects of the Great Recession, including bailouts of financial institutions, interest rate cuts, and quantitative easing. While these measures helped to stabilize the financial system and provide some economic stimulus, their overall effectiveness in addressing the depth and duration of the recession has been debated. Critics argue that the policy responses were too slow, too limited, or too focused on protecting the financial sector rather than supporting households and businesses directly. Additionally, the long-term consequences of the unprecedented levels of government debt and central bank intervention are still being evaluated.

Related terms

Subprime Mortgage Crisis: The subprime mortgage crisis was a major contributing factor to the Great Recession, as the collapse of the U.S. housing bubble and risky subprime mortgage lending practices led to a wave of foreclosures and a credit crunch.

Quantitative Easing: Quantitative easing was a monetary policy tool used by central banks, including the Federal Reserve, to stimulate the economy during the Great Recession by purchasing government bonds and other financial assets to increase the money supply and lower interest rates.

Globalization:

The increased interconnectedness of the world's economies, trade, and financial markets played a significant role in the spread and severity of the Great Recession, as economic shocks were rapidly transmitted across national borders.