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The Great Recession in the United States was a severe financial crisis combined with a deep recession. While the recession officially lasted from December 2007 to June 2009, it took many years for the economy to recover to pre-crisis levels of employment and output. This slow recovery was due in part to households and financial institutions paying off debts accumulated in the years preceding the crisis[1] along with restrained government spending following initial stimulus efforts.[2] It followed the bursting of the housing bubble, the housing market correction and subprime mortgage crisis.

The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels."[3]

According to the Department of Labor, roughly 8.7 million jobs (about 7%) were shed from February 2008 to February 2010, and real GDP contracted by 4.2% between Q4 2007 and Q2 2009, making the Great Recession the worst economic downturn since the Great Depression. The GDP bottom, or trough, was reached in the second quarter of 2009 (marking the technical end of the recession, defined as at least two consecutive quarters of declining GDP).[4] Real (inflation-adjusted) GDP did not regain its pre-crisis (Q4 2007) peak level until Q3 2011.[5] Unemployment rose from 4.7% in November 2007 to peak at 10% in October 2009, before returning steadily to 4.7% in May 2016.[6] The total number of jobs did not return to November 2007 levels until May 2014.[7]

Households and non-profit organizations added approximately $8 trillion in debt during the 2000-2008 period (roughly doubling it and fueling the housing bubble), then reduced their debt level from the peak in Q3 2008 until Q3 2012, the only period this debt declined since at least the 1950s.[8] However, the debt held by the public rose from 35% GDP in 2007 to 77% GDP by 2016, as the government spent more while the private sector (e.g., households and businesses, particularly the banking sector) reduced the debt burdens accumulated during the pre-recession decade.[9][10] President Obama declared the bailout measures started under the Bush Administration and continued during his Administration as completed and mostly profitable as of December 2014.[11]

Background

After the Great Depression of the 1930s, the American economy experienced robust growth, with periodic lesser recessions, for the rest of the 20th century. The federal government enforced the Securities Exchange Act (1934)[12] and The Chandler Act (1938),[13] which tightly regulated the financial markets. The Securities Exchange Act of 1934 regulated the trading of the secondary securities market and The Chandler Act regulated the transactions in the banking sector.

There were a few investment banks, small by current standards, that expanded during the late 1970s, such as JP Morgan. The Reagan Administration in the early 1980s began a thirty-year period of financial deregulation.[14] The financial sector sharply expanded, in part because investment banks were going public, bringing them vast sums of stockholder capital. From 1978 to 2008, the average salary for workers outside of investment banking in the U.S. increased from $40k to $50k[14] – a 25 percent salary increase - while the average salary in investment banking increased from $40k to $100k – a 150 percent salary increase. Deregulation also precipitated financial fraud - often tied to real estate investments - sometimes on a grand scale, such as the savings and loan crisis. By the end of the 1980s, many workers in the financial sector were being jailed for fraud, but many Americans were losing their life savings. Large investment banks began merging and developing financial conglomerates; this led to the formation of the giant investment banks like Goldman Sachs.

Early suggestions

Subprime mortgage lending jumped dramatically during the 2004–2006 period preceding the crisis (source: Financial Crisis Inquiry Commission Report, p. 70 Figure 5.2).
Number of U.S. household properties subject to foreclosure actions by quarter

In the early months of 2008, many observers believed that a U.S. recession had begun.[15][16][17] The collapse of Bear Stearns and the resulting financial market turbulence signaled that the crisis would not be mild and brief.

Alan Greenspan, ex-Chairman of the Federal Reserve, stated in March 2008 that the 2008 financial crisis in the United States "is likely to be judged in retrospect as the most wrenching since the end of World War II".[18] A chief economist at Standard & Poor's said in March 2008 he had projected a worst-case-scenario in which the country would endure a double-dip recession, in which the economy would briefly recover in the summer 2008, before plunging again.[citation needed] Under this scenario, the economy's total output, as measured by the gross domestic product (GDP), would drop by 2.2 percentage points, making it among the worst recessions in the post World War II period.[citation needed]

The former head of the National Bureau of Economic Research said in March 2008 that he believed the country was then in a recession, and it could be a severe one.[citation needed] A number of private economists generally predicted a mild recession ending in the summer of 2008 when the economic stimulus checks going to 130 million households started being spent. A chief economist at Moody's predicted in March 2008 that policymakers would act in a concerted and aggressive way to stabilize the financial markets, and that the economy would suffer, but not enter a prolonged and severe recession.[citation needed] It takes many months before the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end, would make its own ruling.[19]

According to numbers published by the Bureau of Economic Analysis in May 2008, the GDP growth of the previous two quarters was positive. As one common definition of a recession is negative economic growth for at least two consecutive fiscal quarters, some analysts suggested this indicates that the U.S. economy was not in a recession at the time.[20] However, this estimate has been disputed by analysts who argue that if inflation is taken into account, the GDP growth was negative for those two quarters, making it a technical recession.[21] In a May 9, 2008 report, the chief North American economist for investment bank Merrill Lynch wrote that despite the GDP growth reported for the first quarter of 2008, "it is still reasonable to believe that the recession started some time between September and January", on the grounds that the National Bureau of Economic Research's four recession indicators all peaked during that period.[22]

New York's budget director concluded the state of New York was officially in a recession by the summer of 2008. Governor David Paterson called an emergency economic session of the state legislature for August 19 to push a budget cut of $600 million on top of a hiring freeze and a 7 percent reduction in spending at state agencies that had already been implemented by the Governor.[23] An August 1 report, issued by economists with Wachovia Bank, said Florida was officially in a recession.[24]

White House budget director Jim Nussle maintained at that time that the U.S. had avoided a recession, following revised GDP numbers from the Commerce Department showing a 0.2 percent contraction in the fourth quarter of 2007 down from a 0.6 percent increase, and a downward revision to 0.9 percent from 1 percent in the first quarter of 2008. The GDP for the second quarter was placed at a 1.9 percent expansion, below an expected 2 percent.[25] On the other hand, Martin Feldstein, who headed the National Bureau of Economic Research and served on the group's recession-dating panel, said he believed the U.S. was in a very long recession and that there was nothing the Federal Reserve could do to change it.[26]

In a CNBC interview at the end of July 2008, Alan Greenspan said he believed the U.S. was not yet in a recession, but that it could enter one due to a global economic slowdown.[27]

A study released by Moody's found two-thirds of the 381 largest metropolitan areas in the United States were in a recession. The study also said 28 states were in recession, with 16 at risk. The findings were based on unemployment figures and industrial production data.[28]

In March 2008, financier Warren Buffett stated in a CNBC interview that by a "common sense definition", the U.S. economy was already in a recession. Buffett has also stated that the definition of recession is flawed and that it should be three consecutive quarters of GDP growth that is less than population growth. However, the U.S. only experienced two consecutive quarters of GDP growth less than population growth.[29][30]

Causes

Federal Reserve Chair Ben Bernanke testified in September 2010 regarding the causes of the crisis. He wrote that there were shocks or triggers (i.e., particular events that touched off the crisis) and vulnerabilities (i.e., structural weaknesses in the financial system, regulation and supervision) that amplified the shocks. Examples of triggers included: losses on subprime mortgage securities that began in 2007 and a run on the shadow banking system that began in mid-2007, which adversely affected the functioning of money markets. Examples of vulnerabilities in the private sector included: financial institution dependence on unstable sources of short-term funding such as repurchase agreements or Repos; deficiencies in corporate risk management; excessive use of leverage (borrowing to invest); and inappropriate usage of derivatives as a tool for taking excessive risks. Examples of vulnerabilities in the public sector included: statutory gaps and conflicts between regulators; ineffective use of regulatory authority; and ineffective crisis management capabilities. Bernanke also discussed "Too big to fail" institutions, monetary policy, and trade deficits.[31]

The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels."[32]

Among the important catalysts of the subprime crisis were the influx of money from the private sector, the banks entering into the mortgage bond market, government policies aimed at expanding homeownership, speculation by many home buyers, and the predatory lending practices of the mortgage lenders, specifically the adjustable-rate mortgage, 2–28 loan, that mortgage lenders sold directly or indirectly via mortgage brokers.[33] On Wall Street and in the financial industry, moral hazard lay at the core of many of the causes.[34]

Government policies

A federal inquiry found that some federal government policies (or lack of them) were responsible to a large extent for the recession in the United States and the resultant vast unemployment.[35] Factors include: