Definition
The Great Recession was a period of general economic decline observed in world markets during the late 2000s and early 2010s. The scale and timing of the recession varied from country to country. In terms of overall impact, the International Monetary Fund concluded that it was the worst global recession since the Great Depression in the 1930s. The causes of the recession largely originated in the United States, particularly the real-estate market, though policies of other nations contributed as well. According to the U.S. National Bureau of Economic Research the recession, as experienced in that country, began in December 2007 and ended in June 2009, thus extending over 19 months. The Great Recession was related to the financial crisis of 2007–08 and U.S. subprime mortgage crisis of 2007–09. The Great Recession resulted in the scarcity of valuable assets in the market economy and the collapse of the financial sector in the world economy.
Great Recession
The Great Recession occurred on December 2007 due to the burst of the 8 trillion dollar housing bubble. The recession would last until June of 2009 and the resulting losses would lead the US and other major world economies into an economic slump in which mortgage backed securities lost significant market value. The bust also led to sharp cutbacks when it came to consumer spending, which together with the chaos after the bursting of the bubble also played a major role in the total collapse of business investment.
As investments in business and consumer spending came to a grinding halt, massive job losses followed. According to statistics, more than 8.4 million people lost their jobs during the two year period. This was considered to be the most dramatic employment contraction since the Great Depression. The affects of the economic slump were so great that even after the wheels began to spin in the summer of 2009, the growth of the job market has not been as strong to create new jobs even under normal population growth.
Breaking Down the Recession in the US
During the housing boom in 2000s in the US, financial institutions began to market mortgage backed securities which were referred to as ‘MBSs’ along with sophisticated derivative products at amazingly high levels. This was also one of the major factors of the Great Recession because when the real estate market collapsed in 2007, these securities also declined in value in a major way, which jeopardized the solvency of over leveraged financial institutions and mainly the banks in both the US and Europe. Even though the global economy was already feeling the heat of the credit crisis which was unfolding since 2007, the bankruptcy of major US investment banks was the final nail on the coffin for the US. And the contagion soon spread to other economies of the world as well.
The major job loss during the Great Recession means that family income has dropped while poverty has risen. This also meant adults and children had lost their health insurance.
Further Reading
- What happened: Financial factors in the great recession – www.aeaweb.org [PDF]
- America’s flawed paradigm: macroeconomic causes of the financial crisis and great recession – link.springer.com [PDF]
- Effects of the financial crisis and great recession on American households – www.nber.org [PDF]
- A monetary Minsky model of the Great Moderation and the Great Recession – www.sciencedirect.com [PDF]
- Financing constraints and unemployment: Evidence from the Great Recession – www.sciencedirect.com [PDF]
- From financial crisis to great recession: The role of globalized banks – www.aeaweb.org [PDF]
- The great recession: Lessons from microeconomic data – pubs.aeaweb.org [PDF]
- The Great Recession: US dynamics and spillovers to the world economy – www.sciencedirect.com [PDF]
- The impact of the Great Recession and the housing crisis on the financing of America’s largest cities – www.sciencedirect.com [PDF]
- Financial variables as leading indicators of GDP growth: Evidence from a MIDAS approach during the Great Recession – www.tandfonline.com [PDF]
