The Great Recession that started in December 2007 and ended June 2009 was the worst economic recession since the Great Depression of 1929. The economy endured economic contraction as the financial and housing markets nearly collapsed. The scope of this recession went beyond the United States, since the global economy was impacted as well. All Americans suffered because the housing market fell by 31.8%, a figure that represents a higher depreciation in home value than during the Great Depression (Amadeo, 2017). Many American workers lost their jobs and the bad state of the economy led to a reduction in consumption that lowered sales. More than 8.2 million jobs were lost during the recession (Nasiripour, 2010). The federal government created a bailout package to save the banking industry. On October 3, 2008 the U.S. Senate passed the Emergency Economic Stabilization Act of 2008. This bill provided a bailout package of $700 billion to the U.S. financial system.
The Great Recession impacted the lives of my family and friends. In my household my parents went from a two income family to a one income. My mom lost her job at the beginning of the recession and never found a job until it ended. Since the recession lasted more than a year our family found creative ways to make extra money. We had four garage sales in the span of a year and my mother sold a portion of her collectibles and antiques through EBay and other live auctions. My parents bought a house in 2004 with a $40,000 down payment. By the end of recession the housing market had drop so much that the mortgage had negative equity. The credit scores of my parents were negatively impacted since on many occasions they had to pay their debt payments late. I have an uncle that has a business. The recession was very hard on him. He told us that sales went down by 40% and as a consequence the profitability of the company declined. His business lost money for two straight years. The cash reserves of the business were depleted and my uncle had to lower costs by firing 15% of the staff. He was also forced to lower prices to ignite demand and increase long term debt.
The root causes for the recession of 2008 were a combination of the downfall of the housing market and the irresponsible actions of the banking industry. Banks made too many housing loans to customers with questionable credit. They lend money for new mortgages and 2nd mortgages based on housing values that later collapsed. The unemployment problem caused by the recession led to thousands of defaults on mortgages. The problem was increased when banks began to sell mortgage backed securities in the form of derivatives. Many financial institutions and corporations owned mortgage back securities through mutual funds, derivatives, and pension funds, thus when the price of the homes that backed these mortgages reduced drastically it caused panic in the market. Many investors wanted to take money out of their money market accounts. There were many consequences and some opportunities that resulted from this recession.
The massive lost of jobs was one of the reasons the recession lasted so long. The lack of money in the economy created contraction due to lower spending. Customer and investor confidence lowered drastically, thus the prices of companies in the stock market reduced. A lot of wealth was lost since house prices and the stock market went down in value. Many corporations had pension funds tied to the stock market. The funds in these pensions were depleted. An opportunity associated with the governmental intervention in the recession was the cash for junkers program. The cash for junkers program was a bill that was created to get old cars out of the road, while at the same time igniting cars sales. The customer would receive a large rebate for an old car that would be used as a down payment in the purchase of a new and efficient automobile. The Big Three Automakers also benefited from the $700 bailout package, since $80.7 billion of the bailout fund was diverted to this industry. The money General Motors received saved the company from running out of business.
As a result of the Great Recession new regulations were created to prevent a similar recession from reoccurring. One of those regulations is the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law was approved by the Obama administration in 2010. This act established a number of new government agencies tasked with overseeing and monitoring various components and aspects of the financial system (“Dodd-Frank”, 2017). The Financial Stability Oversight Council created by the act has the power to break up banks that become too large. When banks become too big they pose a systematic risk. Predatory mortgage lending is being closely monitored by the Consumer Financial Protection Bureau.
Today the U.S. economy is more prepared than in the past to prevent another Great Recession from occurring. Regulations such as the Dodd-Frank increased the governance of banks to ensure another Mannie Mae and Freddie Mac does not monopolize the mortgage market. It is impossible for governments to complete eliminate the risk of a recession, but actions were taken to ensure a recession does not become a long term phenomenon like what occurred during the Great Recession. The globalization of the economy requires greater cooperation from both the private sector and governments around the world.
- Amadeo, K. (2017). 2008 Financial Crisis: Causes, Costs, and Could it Reoccur? Thebalance. Retrieved from https://www.thebalance.com/2008-financial-crisis-3305679
- Dodd-Frank Wall Street Reform and Consumer Protection Act. (2017). Investopedia. Retrieved from http://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp
- Nasiripour, S. (2011). Which Industries Lost/Gained Jobs in the Great Recession (Charts). Huffingtonpost. Retrieved from http://www.huffingtonpost.com/2010/04/05/which-industries-lostgain_n_525504.html