History Of The 2008 Financial Crisis – The Great Recession began in 2007 and was a sharp decline in economic activity that spread across the world’s economies for several years. This is considered the most significant decline since the Great Depression of the 1930s. The term “Great Recession” refers to the US economic recession that officially lasted from December 2007 to June 2009 and the global recession that occurred in 2009.
U.S. The recession began when the housing market boomed and many mortgage-backed securities (MBS) came down.
History Of The 2008 Financial Crisis
The term “Great Recession” is a term used to refer to the “Great Depression” of the 1930s, when gross domestic product (GDP) fell by more than 10% and unemployment reached 25%.
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Although there are no clear criteria for distinguishing a depression from a severe recession, there is near consensus among economists that the 2007-2009 recession was not a depression. During the US Great Recession, GDP fell by 0.3% in 2008 and 2.8% in 2009, and the unemployment rate was as low as 10%.
According to a 2011 report by the Financial Crisis Inquiry; The Great Depression was avoided. The appointees, who included six Democrats and four Republicans, cited several key reasons for the decline.
First, The report exposed the government’s failure to regulate the financial sector. This regulatory failure includes the Fed’s failure to prevent banks from issuing mortgages.
Also, many financial institutions bring a lot of risk. a shadow banking system consisting of investment firms developed as a competitor to the deposit banking system; But not under the same control or scrutiny. When the shadow banking system failed, the collapse affected the flow of credit to consumers and businesses.
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Other reasons cited in the report include excessive borrowing by consumers and corporations and lawmakers not fully understanding the crumbling financial system. This created asset bubbles, especially in the housing market. They made mortgages at low interest rates to incompetent borrowers who could not repay them at the time. The subsequent sales caused home prices to plummet, leaving many other homeowners stranded. This severely affected the mortgage-backed securities (MBS) market for banks and other institutional investors, allowing lenders to make loans to riskier borrowers.
After the attacks on the World Trade Center on September 11, 2001, the US economy was hit. U.S. The Federal Reserve responded by cutting interest rates to their lowest levels since Bretton Woods, which stimulated the economy. The Fed kept interest rates low until mid-2004.
Low interest rates, combined with federal policies to promote home ownership, have fueled a boom in the real estate and financial markets and a significant increase in overall lending. Financial innovations such as subprime and new adjustable-rate mortgages allowed defaulting borrowers to take out generous home loans based on the expectation that interest rates would fall and home prices would rise.
However, between 2004 and 2006, the central bank raised interest rates to control inflation. As interest rates rise, the flow of new real estate loans through traditional banking systems slows. more profoundly; Rates for existing adjustable-rate loans and exotic loans have evolved to higher rates than many lenders expected (or expected). As monthly loan payments exceed borrowers’ ability to pay (and they are unable to repay as prices rise); Many lenders are starting to sell. The increase in supply was later widely recognized as a real estate bubble.
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U.S. During the housing boom, financial institutions sold mortgage-backed securities and complex derivative products at unprecedented levels. When the real estate market crashed in 2007; The value of these bonds fell. As the credit crisis began to unfold in 2007, the credit markets that financed the housing bubble quickly caused housing prices to fall. Bailouts of over-indebted banks and financial institutions reached a tipping point in March 2008 with the collapse of Bear Stearns.
The events followed the bankruptcy of Lehman Brothers, the nation’s fourth-largest investment bank, in September 2008 later that year. The epidemic quickly spread to other economies around the world, especially in Europe. As a result of the Great Recession, according to the US Bureau of Labor Statistics, the US alone lost 8.7 million jobs and the unemployment rate doubled. In addition, According to the US Treasury Department; American households lost nearly $19 trillion in net worth. The official end date of the Great Recession was June 2009.
The Dodd-Frank Act of 2010 allowed the government to regulate failing financial institutions and establish consumer protections against bad credit.
U.S. The aggressive monetary policy of the Federal Reserve Bank, along with other central banks around the world, is widely credited with protecting the global economy from further damage. But some argue that they prolong recessions and lay the groundwork for recessions.
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For example, The Fed has cut key interest rates to near zero to stimulate liquidity. In an unprecedented move, banks were provided $7.7 trillion in emergency loans as part of a policy known as quantitative easing (QE).
With the influx of liquidity, the US federal government launched a massive $787 billion spending program under the American Recovery and Reinvestment Act to stimulate the economy. This monetary and fiscal policy minimizes the immediate losses of large financial institutions and large corporations.
The government introduced not only stimulus programs but also new financial regulations. In the 1990s, the United States repealed the Glass-Steagall Act, a Depression-era regulation that separated investments from retail banking to reduce systemic risk. Some economists say the move has led to a crisis. The liquidations, some of the largest in the United States, allowed banks to merge and create large corporations, many of which later failed and were bailed out.
In response, President Barack Obama signed the Dodd-Frank Act into law in 2010, after it was passed by the US Congress, which expanded the government’s authority to regulate the financial sector. It also created consumer protection against abusive lending.
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But Dodd-Frank’s critics are aware of financial sector players and institutions that actively profited from practices related to lending during the time the new law was drafted and the agencies charged. its implementation.
According to the Congressional Budget Office; The United States government spent $787 billion to stimulate the economy during the Great Recession under the American Recovery and Reinvestment Act.
After these policies were adopted, the economy gradually recovered. Real GDP bottomed out in the second quarter of 2009 and then rebounded in the second quarter of 2011, three and a half years after the initial start of its official recession in the second quarter of 2011. Financial market recovers due to Wall Street influence.
The Dow Jones Industrial Average (DJIA), which had lost half of its value since its August 2007 peak, recovered in March 2009 and surpassed its 2007 peak in March 2013, four years later.
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The picture is less rosy for workers and households. Unemployment was 5% at the end of 2007, peaked at 10% in October 2009, and did not return to 5% until 2015, nearly 8 years after the recession began. Real median household income only reached pre-recession levels in 2016.
Critics of the political backlash and recovery say the liquidity and deficit wave favors big business at the expense of politically connected financial institutions and ordinary people. A recovery can be delayed by consolidating economic resources and businesses that should not succeed, when those assets and resources could be used by other businesses to expand and create jobs.
According to official data from the Federal Reserve. The Great Recession lasted eighteen months from December 2007 to June 2009.
It’s not official. Although the economy has slumped since the start of the global COVID-19 pandemic in early 2020, Stimulus efforts have been effective in preventing a full U.S. recession. But some economists worry that the recession may be here to stay. The horizon of the end of 2022.
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On October 9, 2007, the Dow Jones Industrial Average closed at a pre-recession high of 14,164.53. On March 5, 2009, the index fell by more than 50% to 6,594.44.
29.9.2008. The Dow Jones fell nearly 778 points in a single day. This was the largest decline in history until the market crashed when the COVID-19 pandemic began in March 2020.
Although the pandemic spread around the world and hit some economies the hardest, the Great Recession lasted from 2007 to 2009 in the US. The root cause is more lending to borrowers who usually don’t qualify for home loans.
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