Great Recession of 2007-2009

Definition

The Great Recession of 2007-2009 was a severe global economic downturn that began in the United States, marked by a decline in economic activity, rising unemployment, and significant drops in consumer wealth. It was triggered by the collapse of the housing market and financial institutions due to risky mortgage lending practices and the proliferation of complex financial instruments, which led to widespread bank failures and a credit crisis.

5 Must Know Facts For Your Next Test

1. The Great Recession officially lasted from December 2007 to June 2009, but its effects continued for years, impacting millions of households and businesses.
2. Unemployment rates peaked at around 10% in October 2009, significantly affecting job markets across various industries.
3. The housing market collapse was primarily fueled by risky lending practices and a surge in subprime mortgages that borrowers could not repay.
4. The federal government responded with various stimulus measures, including the American Recovery and Reinvestment Act of 2009, aimed at jump-starting the economy.
5. Global repercussions included recession in many countries, as trade volumes plummeted and international markets experienced significant downturns.

Review Questions

• How did risky lending practices contribute to the onset of the Great Recession?
  • Risky lending practices, particularly in the subprime mortgage market, played a crucial role in triggering the Great Recession. Banks issued mortgages to borrowers with poor credit histories without adequate assessments of their ability to repay. When housing prices began to fall, many borrowers defaulted on their loans, leading to massive losses for financial institutions and creating a domino effect throughout the economy that ultimately contributed to the recession.
• What measures did the federal government take to mitigate the effects of the Great Recession, and how effective were these measures?
  • In response to the Great Recession, the federal government implemented several key measures, including TARP (Troubled Asset Relief Program), which aimed to stabilize financial institutions by purchasing toxic assets. Additionally, the American Recovery and Reinvestment Act was passed to stimulate economic growth through government spending on infrastructure and social programs. While these measures helped restore some confidence in the economy and prevented a complete collapse, critics argue that they did not adequately address underlying issues or provide sufficient relief to struggling households.
• Evaluate the long-term impacts of the Great Recession on economic policies and consumer behavior in the United States.
  • The Great Recession had profound long-term impacts on both economic policies and consumer behavior in the United States. In terms of policy, there was a shift toward stricter regulations on financial institutions, exemplified by the Dodd-Frank Act aimed at preventing future crises. Consumers became more cautious about debt accumulation and spending habits shifted as many prioritized savings over consumption. The recession fundamentally altered perceptions of risk and stability within both individual households and broader economic systems.

Related terms

Subprime Mortgage: A type of mortgage offered to borrowers with poor credit histories, often resulting in higher interest rates and a greater risk of default.

Financial Crisis: A situation in which the value of financial institutions or assets drops rapidly, leading to a widespread loss of confidence and significant economic downturns.

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