Great Recession

This article is about the global economic downturn during the early 21st century. For background on financial market events dating from 2007, see financial crisis of 2007–08.

World map showing real GDP growth rates for 2009. (Countries in brown were in recession.)

The Great Recession (also referred to as the Lesser Depression, the Long Recession, or the global recession of 2009) is a marked global economic decline that began in December 2007 and took a particularly sharp downward turn in September 2008. The initial phase of the ongoing crisis, which manifested as a liquidity crisis, can be dated from August 7, 2007, when BNP Paribas, citing a "complete evaporation of liquidity," terminated withdrawals from three hedge funds. The bursting of the U.S. housing bubble, which peaked in 2006, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally.

The global recession has affected the entire world economy, with greater detriment to some countries than others. It is a major global recession characterised by various systemic imbalances and was sparked by the outbreak of the U.S. subprime mortgage crisis and financial crisis of 2007–08. The economic side effects of the European sovereign debt crisis, austerity, high levels of household debt, trade imbalances, high unemployment, and limited prospects for global growth in 2013 and 2014 continue to provide obstacles to full recovery from the Great Recession.

Overview

According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the recession began in the United States in December 2007 and became international in September 2008 and is still ongoing. US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world. A more broad based credit boom fed a global speculative bubble in real estate and equities, which served to reinforce the risky lending practices.

The bad financial situation was made more difficult by a sharp increase in oil and food prices. The emergence of sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market. As share and housing prices declined, many large and well established investment and commercial banks in the United States and Europe suffered huge losses and even faced bankruptcy, resulting in massive public financial assistance.

A global recession has resulted in a sharp drop in international trade, rising unemployment and slumping commodity prices. In December 2008, the National Bureau of Economic Research (NBER) declared that the United States had been in recession since December 2007. Several economists predicted that recovery might not appear until 2011 and that the recession would be the worst since the Great Depression of the 1930s. Paul Krugman, who won the Nobel Memorial Prize in Economics, once commented on this as seemingly the beginning of "a second Great Depression." The conditions leading up to the crisis, characterised by an exorbitant rise in asset prices and associated boom in economic demand, are considered a result of the extended period of easily available credit and inadequate regulation and oversight.

The recession has renewed interest in Keynesian economic ideas on how to combat recessionary conditions. Fiscal and monetary policies have been significantly eased to stem the recession and financial risks. Economists advise that the stimulus should be withdrawn as soon as the economies recover enough to "chart a path to sustainable growth".

Causes

Main article: Causes of the Great Recession

The great asset bubble: * Central banks' gold reserves – $0.845 tn. * M0 (paper money) – – $3.9 tn. * traditional (fractional reserve) banking assets – $39 tn. * shadow banking assets – $62 tn. * other assets – $290 tn. * Bail-out money (early 2009) – $1.9 tn.

Further information: Financial crisis of 2007–08

Overview

The immediate or proximate cause of the crisis in 2008 was the failure or risk of failure at major financial institutions globally, starting with the rescue of investment bank Bear Stearns in March 2008 and the failure of Lehman Brothers in September 2008. Many of these institutions had invested heavily in risky securities that lost much or all of their value when U.S. and European housing bubbles began to deflate during the 2007-2009 period. Further, many institutions had become dependent on short-term (overnight) funding markets subject to disruption.

The origin of these housing bubbles involved two major factors: 1) low interest rates in the U.S. and Europe following the 2000-2001 U.S. recession; and 2) significant growth in savings available from developing nations due to ongoing trade imbalances. These factors drove a large increase in demand for high-yield investments. Large investment banks connected the housing markets to this large supply of savings via innovative new securities, fueling housing bubbles in the U.S. and Europe.

Many institutions lowered credit standards to continue feeding the global demand for mortgage securities, generating huge profits while passing the risk to investors. However, while the bubbles developed, household debt levels rose sharply after the year 2000 globally. Households became dependent on being able to refinance their mortgages. Further, U.S. households often had adjustable rate mortgages, which had lower initial interest rates and payments that later rose. When global credit markets essentially stopped funding mortgage-related investments in the 2007-2008 period, U.S. homeowners were no longer able to refinance and defaulted in record numbers, leading to the collapse of securities backed by these mortgages that now pervaded the system.

The failure rates of subprime mortgages were the first symptom of a credit boom turned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The latter had become fragile as a result of several factors that are unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting. To these novel factors, one must add the now standard failure of regulators and supervisors in spotting and correcting the emerging weaknesses.

Panel reports

The majority report of the U.S. Financial Crisis Inquiry Commission (supported by 6 Democrat appointees without Republican participation) 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.“

In its "Declaration of the Summit on Financial Markets and the World Economy," dated 15 November 2008, leaders of the Group of 20 cited the following causes:

During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.

Trade imbalances and debt bubbles

The Economist wrote in July 2012 that the inflow of investment dollars required to fund the U.S. trade deficit was a major cause of the housing bubble and financial crisis: "The trade deficit, less than 1% of GDP in the early 1990s, hit 6% in 2006. That deficit was financed by inflows of foreign savings, in particular from East Asia and the Middle East. Much of that money went into dodgy mortgages to buy overvalued houses, and the financial crisis was the result."

In May 2008, NPR explained in their Peabody Award winning program "The Giant Pool of Money" that a vast inflow of savings from developing nations flowed into the mortgage market, driving the U.S. housing bubble. This pool of fixed income savings increased from around $35 trillion in 2000 to about $70 trillion by 2008. NPR explained this money came from various sources, "[b]ut the main headline is that all sorts of poor countries became kind of rich, making things like TVs and selling us oil. China, India, Abu Dhabi, Saudi Arabia made a lot of money and banked it."

Describing the crisis in Europe, Paul Krugman wrote in February 2012 that: "What we’re basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe."

Monetary policy

Another narrative about the origin has been focused on the respective parts played by the public monetary policy (in the US notably) and by the practices of private financial institutions. In the U.S., mortgage funding was unusually decentralised, opaque, and competitive, and it is believed that competition between lenders for revenue and market share contributed to declining underwriting standards and risky lending.

While Greenspan's role as Chairman of the Federal Reserve has been widely discussed (the main point of controversy remains the lowering of the Federal funds rate to 1% for more than a year which, according to Austrian theorists, allowed huge amounts of "easy" credit-based money to be injected into the financial system and thus create an unsustainable economic boom), there is also the argument that Greenspan's actions in the years 2002–2004 were actually motivated by the need to take the U.S. economy out of the early 2000s recession caused by the bursting of the dot-com bubble—although by doing so he did not help avert the crisis, but only postpone it.

High private debt levels

US Household debt relative to disposable income and GDP.

Another narrative focuses on high levels of private debt in the US economy. USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990. Faced with increasing mortgage payments as their adjustable rate mortgage payments increased, households began to default in record numbers, rendering mortgage-backed securities worthless. High private debt levels also impact growth by making recessions deeper and the following recovery weaker. Robert Reich claims the amount of debt in the US economy can be traced to economic inequality, assuming that middle-class wages remained stagnant while wealth concentrated at the top, and households "pull equity from their homes and overload on debt to maintain living standards."

The International Monetary Fund (IMF) reported in April 2012: "Household debt soared in the years leading up to the Great Recession. In advanced economies, during the five years preceding 2007, the ratio of household debt to income rose by an average of 39 percentage points, to 138 percent. In Denmark, Iceland, Ireland, the Netherlands, and Norway, debt peaked at more than 200 percent of household income. A surge in household debt to historic highs also occurred in emerging economies such as Estonia, Hungary, Latvia, and Lithuania. The concurrent boom in both house prices and the stock market meant that household debt relative to assets held broadly stable, which masked households’ growing exposure to a sharp fall in asset prices. When house prices declined, ushering in the global financial crisis, many households saw their wealth shrink relative to their debt, and, with less income and more unemployment, found it harder to meet mortgage payments. By the end of 2011, real house prices had fallen from their peak by about 41% in Ireland, 29% in Iceland, 23% in Spain and the United States, and 21% in Denmark. Household defaults, underwater mortgages (where the loan balance exceeds the house value), foreclosures, and fire sales are now endemic to a number of economies. Household deleveraging by paying off debts or defaulting on them has begun in some countries. It has been most pronounced in the United States, where about two-thirds of the debt reduction reflects defaults."

Pre-recession economic imbalances

The onset of the economic crisis took most people by surprise. A 2009 paper identifies twelve economists and commentators who, between 2000 and 2006, predicted a recession based on the collapse of the then-booming housing market in the United States: Dean Baker, Wynne Godley, Fred Harrison, Michael Hudson, Eric Janszen, Steve Keen, Jakob Brøchner Madsen, Jens Kjaer Sørensen, Kurt Richebächer, Nouriel Roubini, Peter Schiff, and Robert Shiller.

Housing bubbles

Housing price appreciation in selected countries, 2002-2008

Further information: Real estate bubble

By 2007, real estate bubbles were still under way in many parts of the world, especially in the United States, France, United Kingdom, Italy, Spain, The Netherlands, Australia, United Arab Emirates, New Zealand, Ireland, Poland, South Africa, Israel, Greece, Bulgaria, Croatia, Norway, Singapore, South Korea, Sweden, Finland, Argentina, Baltic states, India, Romania, Ukraine, and China. U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' [in the U.S. housing market]...it's hard not to see that there are a lot of local bubbles".

The Economist magazine, writing at the same time, went further, saying "the worldwide rise in house prices is the biggest bubble in history". Real estate bubbles are (by definition of the word "bubble") followed by a price decrease (also known as a housing price crash) that can result in many owners holding negative equity (a mortgage debt higher than the current value of the property).

Increases in Uncertainty

Increases in uncertainty can depress hiring, investment, or consumption. The 2007-09 recession represents the most striking episode of heightened uncertainty since 1960.,

Ineffective or inappropriate regulation

Regulations encouraging lax lending standards

Several analysts, such as Peter Wallison and Edward Pinto of the American Enterprise Institute, have asserted that private lenders were encouraged to relax lending standards by government affordable housing policies. They cite The Housing and Community Development Act of 1992, which initially required that 30 percent or more of Fannie’s and Freddie’s loan purchases be related to affordable housing. The legislation gave HUD the power to set future requirements, and eventually (under the Bush Administration) a 56 percent minimum was established. To fulfil the requirements, Fannie Mae and Freddie Mac established programs to purchase $5 trillion in affordable housing loans, and encouraged lenders to relax underwriting standards to produce those loans.

These critics also cite, as inappropriate regulation, “The National Homeownership Strategy: Partners in the American Dream (“Strategy”), which was compiled in 1995 by Henry Cisneros, President Clinton’s HUD Secretary. In 2001, the independent research company, Graham Fisher & Company, stated: “While the underlying initiatives of the [Strategy] were broad in content, the main theme ... was the relaxation of credit standards.”

The Community Reinvestment Act (CRA) is also identified as one of the causes of the recession, by some critics. They contend that lenders relaxed lending standards in an effort to meet CRA commitments, and they note that publicly announced CRA loan commitments were massive, totaling $4.5 trillion in the years between 1994 and 2007.

However, the Financial Crisis Inquiry Commission (FCIC) concluded that Fannie & Freddie "were not a primary cause" of the crisis and that CRA was not a factor in the crisis. Further, since housing bubbles appeared in multiple countries in Europe as well, the FCIC Republican minority dissenting report also concluded that U.S. housing policies were not a robust explanation for a wider global housing bubble.

Derivatives

Author Michael Lewis wrote that a type of derivative called a credit default swap (CDS) enabled speculators to stack bets on the same mortgage securities. This is analogous to allowing many persons to buy insurance on the same house. Speculators that bought CDS protection were betting that significant mortgage security defaults would occur, while the sellers (such as AIG) bet they would not. An unlimited amount could be wagered on the same housing-related securities, provided buyers and sellers of the CDS could be found. When massive defaults occurred on underlying mortgage securities, companies like AIG that were selling CDS were unable to perform their side of the obligation and defaulted; U.S. taxpayers paid over $100 billion to global financial institutions to honor AIG obligations, generating considerable outrage.

Derivatives such as CDS were unregulated or barely regulated. Several sources have noted the failure of the US government to supervise or even require transparency of the financial instruments known as derivatives. A 2008 investigative article in the Washington Post found that leading government officials at the time (Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and SEC Chairman Arthur Levitt) vehemently opposed any regulation of derivatives. In 1998 Brooksley E. Born, head of the Commodity Futures Trading Commission, put forth a policy paper asking for feedback from regulators, lobbyists, legislators on the question of whether derivatives should be reported, sold through a central facility, or whether capital requirements should be required of their buyers. Greenspan, Rubin, and Levitt pressured her to withdraw the paper and Greenspan persuaded Congress to pass a resolution preventing CFTC from regulating derivatives for another six months — when Born's term of office would expire. Ultimately, it was the collapse of a specific kind of derivative, the mortgage-backed security, that triggered the economic crisis of 2008.

Shadow banking system

Securitisation markets were impaired during the crisis.

Paul Krugman wrote in 2009 that the run on the shadow banking system as the "core of what happened" to cause the crisis. "As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realised that they were re-creating the kind of financial vulnerability that made the Great Depression possible – and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank." He referred to this lack of controls as "malign neglect."

During 2008, three of the largest U.S. investment banks either went bankrupt (Lehman Brothers) or were sold at fire sale prices to other banks (Bear Stearns and Merrill Lynch). The investment banks were not subject to the more stringent regulations applied to depository banks. These failures augmented the instability in the global financial system. The remaining two investment banks, Morgan Stanley and Goldman Sachs, potentially facing failure, opted to become commercial banks, thereby subjecting themselves to more stringent regulation but receiving access to credit via the Federal Reserve. Further, American International Group (AIG) had insured mortgage-backed and other securities but was not required to maintain sufficient reserves to pay its obligations when debtors defaulted on these securities. AIG was contractually required to post additional collateral with many creditors and counter-parties, touching off controversy when over $100 billion of U.S. taxpayer money was paid out to major global financial institutions on behalf of AIG. While this money was legally owed to the banks by AIG (under agreements made via credit default swaps purchased from AIG by the institutions), a number of Congressmen and media members expressed outrage that taxpayer money was used to bailout banks.

Economist Gary Gorton wrote in May 2009: "Unlike the historical banking panics of the 19th and early 20th centuries, the current banking panic is a wholesale panic, not a retail panic. In the earlier episodes, depositors ran to their banks and demanded cash in exchange for their checking accounts. Unable to meet those demands, the banking system became insolvent. The current panic involved financial firms “running” on other financial firms by not renewing sale and repurchase agreements (repo) or increasing the repo margin (“haircut”), forcing massive deleveraging, and resulting in the banking system being insolvent."

The Financial Crisis Inquiry Commission reported in January 2011: "In the early part of the 20th century, we erected a series of protections – the Federal Reserve as a lender of last resort, federal deposit insurance, ample regulations – to provide a bulwark against the panics that had regularly plagued America’s banking system in the 20th century. Yet, over the past 30-plus years, we permitted the growth of a shadow banking system – opaque and laden with short term debt – that rivaled the size of the traditional banking system. Key components of the market – for example, the multitrillion-dollar repo lending market, off-balance-sheet entities, and the use of over-the-counter derivatives – were hidden from view, without the protections we had constructed to prevent financial meltdowns. We had a 21st-century financial system with 19th-century safeguards."

Effects

Main article: Effects of the Great Recession

Terminology

There are two senses of the word "recession": a less precise sense, referring broadly to "a period of reduced economic activity", and the academic sense used most often in economics, which is defined operationally, referring specifically to the contraction phase of a business cycle, with two or more consecutive quarters of negative GDP growth. If one analyses the event using the economics-academic definition of the word, the recession ended in the United States in June or July 2009. However, in the broader, lay sense of the word, many people use the term to refer to the ongoing hardship (in the same way that the term "Great Depression" is also popularly used).

Effect on the U.S.

Further information: Unemployment in the United States and National debt of the United States

Sectoral financial balances in U.S. economy 1990–2012. By definition, the three balances must net to zero. Since 2009, the U.S. capital surplus and private sector surplus have driven a government budget deficit.

U.S. Changes in Employment for Selected Time Periods

In the U.S., persistent high unemployment remains as of December 2012, along with low consumer confidence, the continuing decline in home values and increase in foreclosures and personal bankruptcies, an increasing federal debt, inflation, and rising petroleum and food prices. In fact, a 2011 poll found that more than half of all Americans think the U.S. is still in recession or even depression, although economic data show a historically modest recovery. This could be due to the fact that both private and public levels of debt are at historic highs in the U.S. and in many other countries, and a number of economists believe that excessive debt plays a role in causing bank crises and sovereign default.

• Real gross domestic product (GDP) began contracting in the third quarter of 2008 and did not return to growth until Q1 2010. CBO estimated in February 2013 that real U.S. GDP remained 5.5% below its potential level, or about $850 billion. CBO projected that GDP would not return to its potential level until 2017.
• The unemployment rate rose from 5% in 2008 pre-crisis to 10% by late 2009, then steadily declined to 7.6% by March 2013. The number of unemployed rose from approximately 7 million in 2008 pre-crisis to 15 million by 2009, then declined to 12 million by early 2013.
• Residential private investment (mainly housing) fell from its 2006 pre-crisis peak of $800 billion, to $400 billion by mid-2009 and has remained depressed at that level. Non-residential investment (mainly business purchases of capital equipment) peaked at $1,700 billion in 2008 pre-crisis and fell to $1,300 billion in 2010, but by early 2013 had nearly recovered to this peak.
• Housing prices fell approximately 30% on average from their mid-2006 peak to mid-2009 and remained at approximately that level as of March 2013.
• Stock market prices, as measured by the S&P 500 index, fell 57% from their October 2007 peak of 1,565 to a trough of 676 in March 2009. Stock prices began a steady climb thereafter and returned to record levels by April 2013.
• The net worth of U.S. households and non-profit organisations fell from from a peak of approximately $67 trillion in 2007 to a trough of $52 trillion in 2009, a decline of $15 trillion or 22%. It began to recover thereafter and was $66 trillion by Q3 2012.
• U.S. total national debt rose from 66% GDP in 2008 pre-crisis to over 103% by the end of 2012. Martin Wolf and Paul Krugman argued that the rise in private savings and decline in investment fueled a large private sector surplus, which drove sizeable budget deficits.
• For the majority, income levels have dropped substantially with the median male worker making $32,137 in 2010, and an inflation-adjusted income of $32,844 in 1968. The recession of 2007–2009 is considered to be the worst economic downturn since the Great Depression. and the subsequent economic recovery one of the weakest. The weak economic performance since 2000 has seen the percentage of working age adults actually employed drop from 64% to 58% (a number last seen in 1984), with most of that drop occurring since 2007.
• Approximately 5.4 million people have been added to federal disability rolls as discouraged workers give up looking for work and take advantage of the federal program.
• The United States has seen an increasing concentration of wealth to the detriment of the middle class and the poor with the younger generations being especially affected. The middle class dropped from 61% of the population in 1971 to 51% in 2011 as the upper class increased its take of the national income from 29% in 1970 to 46% in 2010. The share for the middle class dropped to 45%, down from 62% while total income for the poor dropped to 9% from 10%. Since the number of poor increased during this period the smaller piece of the pie (down to 9% from 10%) is spread over a greater portion of the population. The portion of national wealth owned by the middle class and poor has also dropped as their portion of the national income has dropped, making it more difficult to accumulate wealth. The younger generation, which would be just starting their wealth accumulation, has been the most hard hit. Those under 35 are 68% less wealthy than they were in 1984, while those over 55 are 10% wealthier. Much of this concentration has happened since the start of the Great Recession. In 2009, the wealthiest 20% of households controlled 87.2% of all wealth, up from 85.0% in 2007. The top 1% controlled 35.6% of all wealth, up from 34.6% in 2007. The share of the bottom 80% fell from 15% to 12.8%, dropping 15%.
• Inflation-adjusted median household income in the United States peaked in 1999 at $53,252 (at the peak of the Internet stock bubble), dropped to $51,174 in 2004, went up to 52,823 in 2007 (at the peak of the housing bubble), and has since trended downward to $49,445 in 2010. The last time median household income was at this level was in 1996 at $49,112, indicating that the recession of the early 2000s and the 2008–2012 global recession wiped out all middle class income gains for the last 15 years. This income drop has caused a dramatic rise in people living under the poverty level and has hit suburbia particularly hard. Between 2000 and 2010, the number of suburban households below the poverty line increased by 53 percent, compared to a 23 percent increase in poor households in urban areas.

Effects on Europe

Further information: European sovereign-debt crisis and Austerity

Public Debt to GDP Ratio for Selected European Countries - 2008 to 2011. Source Data: Eurostat

Relationship between fiscal tightening (austerity) in Eurozone countries with their GDP growth rate, 2008–2012

The crisis in Europe generally progressed from banking system crises to sovereign debt crises, as many countries elected to bailout their banking systems using taxpayer money. Greece was different in that it concealed large public debts in addition to issues within its banking system. Several countries received bailout packages from the "troika" (European Commission, European Central Bank, International Monetary Fund), which also implemented a series of emergency measures.

Many European countries which embarked on austerity programs, reducing their budget deficits relative to GDP from 2010 to 2011. For example, according to the CIA World Factbook Greece improved its budget deficit from 10.4% GDP in 2010 to 9.6% in 2011. Iceland, Italy, Ireland, Portugal, France, and Spain also improved their budget deficits from 2010 to 2011 relative to GDP.

However, with the exception of Germany, each of these countries had public-debt-to-GDP ratios that increased (i.e., worsened) from 2010 to 2011, as indicated in the chart at right. Greece's public-debt-to-GDP ratio increased from 143% in 2010 to 165% in 2011. This indicates that despite improving budget deficits, GDP growth was not sufficient to support a decline (improvement) in the debt-to-GDP ratio for these countries during this period. Eurostat reported that the debt to GDP ratio for the 17 Euro area countries together was 70.1% in 2008, 79.9% in 2009, 85.3% in 2010, and 87.2% in 2011.

According to the CIA World Factbook, from 2010 to 2011, the unemployment rates in Spain, Greece, Ireland, Portugal, and the UK increased. France and Italy had no significant changes, while in Germany and Iceland the unemployment rate declined. Eurostat reported that Eurozone unemployment reached record levels in September 2012 at 11.6%, up from 10.3% the prior year. Unemployment varied significantly by country.

Economist Martin Wolf analysed the relationship between cumulative GDP growth from 2008-2012 and total reduction in budget deficits due to austerity policies (see chart at right) in several European countries during April 2012. He concluded that: "In all, there is no evidence here that large fiscal contractions [budget deficit reductions] bring benefits to confidence and growth that offset the direct effects of the contractions. They bring exactly what one would expect: small contractions bring recessions and big contractions bring depressions." Changes in budget balances (deficits or surpluses) explained approximately 53% of the change in GDP, according to the equation derived from the IMF data used in his analysis.

Economist Paul Krugman analysed the relationship between GDP and reduction in budget deficits for several European countries in April 2012 and concluded that austerity was slowing growth, similar to Martin Wolf. He also wrote: "... this also implies that 1 euro of austerity yields only about 0.4 euros of reduced deficit, even in the short run. No wonder, then, that the whole austerity enterprise is spiraling into disaster."

Countries that avoided recession

Poland is the only member of the European Union to have avoided a decline in GDP, meaning that in 2009 Poland has created the most GDP growth in the EU. As of December 2009 the Polish economy had not entered recession nor even contracted, while its IMF 2010 GDP growth forecast of 1.9 per cent is expected to be upgraded.

Analysts have identified several causes: Extremely low levels of bank lending and a relatively very small mortgage market; the relatively recent dismantling of EU trade barriers and the resulting surge in demand for Polish goods since 2004; the receipt of direct EU funding since 2004; lack of over-dependence on a single export sector; a tradition of government fiscal responsibility; a relatively large internal market; the free-floating Polish zloty; low labour costs attracting continued foreign direct investment; economic difficulties at the start of the decade which prompted austerity measures in advance of the world crisis.

While China, India, and Iran have experienced slowing growth, they have not entered recession.

South Korea narrowly avoided technical recession in the first quarter of 2009. The International Energy Agency stated in mid September that South Korea could be the only large OECD country to avoid recession for the whole of 2009. It was the only developed economy to expand in the first half of 2009.

Australia avoided a technical recession after experiencing only one quarter of negative growth in the fourth quarter of 2008, with GDP returning to positive in the first quarter of 2009.

The financial crisis did not affect developing countries to a great extent. Experts see several reasons: Africa was not affected because it is not integrated in the world market. Latin America and Asia seemed better prepared, since they experienced crisis before. In Latin America for example banking laws and regulations are very stringent. Bruno Wenn of the German DEG even suggests that Western countries could learn from these countries when it comes to regulations of financial markets.

Timeline of effects

Main article: Timeline of the Great Recession

Many countries experienced recession in 2008.

Denmark went into recession in the first quarter of 2008, but came out again in the second quarter. Iceland fell into an economic depression in 2008 following the collapse of its banking system. (see 2008–2011 Icelandic financial crisis) By mid-2012 Iceland is regarded as one of Europe's recovery success stories largely as a result of a currency devaluation that has effectively reduced wages by 50%--making exports more competitive.

The following countries went into recession in the second quarter of 2008: Greece, Estonia, Latvia, Ireland and New Zealand.

The following countries/territories went into recession in the third quarter of 2008: Japan, Sweden, Hong Kong, Singapore, Italy, Turkey and Germany. As a whole the fifteen nations in the European Union that use the Euro went into recession in the third quarter, and the United Kingdom. In addition, the European Union, the G7, and the OECD all experienced negative growth in the third quarter.

The following countries/territories went into technical recession in the fourth quarter of 2008: United States, Switzerland, Spain, and Taiwan.

South Korea "miraculously" avoided recession with GDP returning positive at a 0.1% expansion in the first quarter of 2009.

Of the seven largest economies in the world by GDP, only China and France avoided a recession in 2008. France experienced a 0.3% contraction in Q2 and 0.1% growth in Q3 of 2008. In the year to the third quarter of 2008 China grew by 9%. Until recently Chinese officials considered 8% GDP growth to be required simply to create enough jobs for rural people moving to urban centres. This figure may more accurately be considered to be 5–7% now that the main growth in working population is receding. Ukraine went into technical depression in January 2009 with a nominal annualised GDP growth of −20%.

Japan was in recovery in the middle of the decade 2000s but slipped back into recession and deflation in 2008. The recession in Japan intensified in the fourth quarter of 2008 with a nominal annualized GDP growth of −12.7%, and deepened further in the first quarter of 2009 with a nominal annualised GDP growth of −15.2%.

Political instability related to the economic crisis

On February 26, 2009, an Economic Intelligence Briefing was added to the daily intelligence briefings prepared for the President of the United States. This addition reflects the assessment of U.S. intelligence agencies that the global financial crisis presents a serious threat to international stability.

Business Week stated in March 2009 that global political instability is rising fast due to the global financial crisis and is creating new challenges that need managing. The Associated Press reported in March 2009 that: United States "Director of National Intelligence Dennis Blair has said the economic weakness could lead to political instability in many developing nations." Even some developed countries are seeing political instability. NPR reports that David Gordon, a former intelligence officer who now leads research at the Eurasia Group, said: "Many, if not most, of the big countries out there have room to accommodate economic downturns without having large-scale political instability if we're in a recession of normal length. If you're in a much longer-run downturn, then all bets are off."

Globally, mass protest movements have arisen in many countries as a response to the economic crisis. Additionally, in some countries, riots and even open revolts have occurred in relation to the economic crisis.

In January 2009 the government leaders of Iceland were forced to call elections two years early after the people of Iceland staged mass protests and clashed with the police due to the government's handling of the economy. Hundreds of thousands protested in France against President Sarkozy's economic policies. Prompted by the financial crisis in Latvia, the opposition and trade unions there organised a rally against the cabinet of premier Ivars Godmanis. The rally gathered some 10–20 thousand people. In the evening the rally turned into a Riot. The crowd moved to the building of the parliament and attempted to force their way into it, but were repelled by the state's police. In late February many Greeks took part in a massive general strike because of the economic situation and they shut down schools, airports, and many other services in Greece.

Police and protesters clashed in Lithuania where people protesting the economic conditions were shot with rubber bullets. In addition to various levels of unrest in Europe, Asian countries have also seen various degrees of protest. Communists and others rallied in Moscow to protest the Russian government's economic plans. Protests have also occurred in China as demands from the west for exports have been dramatically reduced and unemployment has increased. Beyond these initial protests, the protest movement has grown and continued in 2011. In late 2011, the Occupy Wall Street protest took place in the United States, spawning several offshoots that came to be known as the Occupy movement.

In 2012 the economic difficulties in Spain have caused support for secession movements to increase. In Catalonia support for the secession movement exceeded 50%, up from 25% in 2010. On September 11, a pro-independence march, which in the past has never drawn more than 50,000 people, pulled in a crowd estimated by city police at 1.5 million.

Policy responses

Main article: National fiscal policy response to the Great Recession

See also: 2008–09 Keynesian resurgence

The financial phase of the crisis led to emergency interventions in many national financial systems. As the crisis developed into genuine recession in many major economies, economic stimulus meant to revive economic growth became the most common policy tool. After having implemented rescue plans for the banking system, major developed and emerging countries announced plans to relieve their economies. In particular, economic stimulus plans were announced in China, the United States, and the European Union. Bailouts of failing or threatened businesses were carried out or discussed in the USA, the EU, and India. In the final quarter of 2008, the financial crisis saw the G-20 group of major economies assume a new significance as a focus of economic and financial crisis management.

United States policy responses

Main article: United States policy responses to the Great Recession

Federal Reserve Holdings of Treasury and Mortgage-Backed Securities

The Federal Reserve, Treasury, and Securities and Exchange Commission took several steps on September 19 to intervene in the crisis. To stop the potential run on money market mutual funds, the Treasury also announced on September 19 a new $50 billion program to insure the investments, similar to the Federal Deposit Insurance Corporation (FDIC) program. Part of the announcements included temporary exceptions to section 23A and 23B (Regulation W), allowing financial groups to more easily share funds within their group. The exceptions would expire on January 30, 2009, unless extended by the Federal Reserve Board. The Securities and Exchange Commission announced termination of short-selling of 799 financial stocks, as well as action against naked short selling, as part of its reaction to the mortgage crisis. In May 2013 as the stock market was hitting record highs and the housing and employment markets were improving slightly the prospect of the Federal Reserve beginning to decrease its economic stimulus activities began to enter the projections of investment analysts and affected global markets.

Asia-Pacific policy responses

On September 15, 2008, China cut its interest rate for the first time since 2002. Indonesia reduced its overnight repo rate, at which commercial banks can borrow overnight funds from the central bank, by two percentage points to 10.25 percent. The Reserve Bank of Australia injected nearly $1.5 billion into the banking system, nearly three times as much as the market's estimated requirement. The Reserve Bank of India added almost $1.32 billion, through a refinance operation, its biggest in at least a month.

On November 9, 2008, the Chinese economic stimulus program is a RMB¥ 4 trillion ($586 billion) stimulus package announced by the central government of the People's Republic of China in its biggest move to stop the global financial crisis from hitting the world's second largest economy. A statement on the government's website said the State Council had approved a plan to invest 4 trillion yuan ($586 billion) in infrastructure and social welfare by the end of 2010. The stimulus package will be invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income-building, tax cuts, and finance.

China's export driven economy is starting to feel the impact of the economic slowdown in the United States and Europe, and the government has already cut key interest rates three times in less than two months in a bid to spur economic expansion. On November 28, 2008, the Ministry of Finance of the People's Republic of China and the State Administration of Taxation jointly announced a rise in export tax rebate rates on some labour-intensive goods. These additional tax rebates will take place on December 1, 2008.

The stimulus package was welcomed by world leaders and analysts as larger than expected and a sign that by boosting its own economy, China is helping to stabilise the global economy. News of the announcement of the stimulus package sent markets up across the world. However, Marc Faber claimed that he thought China was still in recession on January 16.

In Taiwan, the central bank on September 16, 2008, said it would cut its required reserve ratios for the first time in eight years. The central bank added $3.59 billion into the foreign-currency interbank market the same day. Bank of Japan pumped $29.3 billion into the financial system on September 17, 2008, and the Reserve Bank of Australia added $3.45 billion the same day.

In developing and emerging economies, responses to the global crisis mainly consisted in low-rates monetary policy (Asia and the Middle East mainly) coupled with the depreciation of the currency against the dollar. There were also stimulus plans in some Asian countries, in the Middle East and in Argentina. In Asia, plans generally amounted to 1 to 3% of GDP, with the notable exception of China, which announced a plan accounting for 16% of GDP (6% of GDP per year).

European policy responses

Until September 2008, European policy measures were limited to a small number of countries (Spain and Italy). In both countries, the measures were dedicated to households (tax rebates) reform of the taxation system to support specific sectors such as housing. The European Commission proposed a €200 billion stimulus plan to be implemented at the European level by the countries. At the beginning of 2009, the UK and Spain completed their initial plans, while Germany announced a new plan.

On September 29, 2008, the Belgian, Luxembourg and Dutch authorities partially nationalised Fortis. The German government bailed out Hypo Real Estate.

On 8 October 2008 the British Government announced a bank rescue package of around £500 billion ($850 billion at the time). The plan comprises three parts. The first £200 billion would be made in regard to the banks in liquidity stack. The second part will consist of the state government increasing the capital market within the banks. Along with this, £50 billion will be made available if the banks needed it, finally the government will write away any eligible lending between the British banks with a limit to £250 billion.

In early December German Finance Minister Peer Steinbrück indicated a lack of belief in a "Great Rescue Plan" and reluctance to spend more money addressing the crisis. In March 2009, The European Union Presidency confirmed that the EU was at the time strongly resisting the US pressure to increase European budget deficits.

Global responses

Responses by the UK and United States in proportion to their GDPs.

Most political responses to the economic and financial crisis has been taken, as seen above, by individual nations. Some coordination took place at the European level, but the need to cooperate at the global level has led leaders to activate the G-20 major economies entity. A first summit dedicated to the crisis took place, at the Heads of state level in November 2008 (2008 G-20 Washington summit).

The G-20 countries met in a summit held on November 2008 in Washington to address the economic crisis. Apart from proposals on international financial regulation, they pledged to take measures to support their economy and to coordinate them, and refused any resort to protectionism.

Another G-20 summit was held in London on April 2009. Finance ministers and central banks leaders of the G-20 met in Horsham, England, on March to prepare the summit, and pledged to restore global growth as soon as possible. They decided to coordinate their actions and to stimulate demand and employment. They also pledged to fight against all forms of protectionism and to maintain trade and foreign investments.

They also committed to maintain the supply of credit by providing more liquidity and recapitalising the banking system, and to implement rapidly the stimulus plans. As for central bankers, they pledged to maintain low-rates policies as long as necessary. Finally, the leaders decided to help emerging and developing countries, through a strengthening of the IMF.

Policy recommendations

IMF recommendation

The IMF stated in September 2010 that the financial crisis would not end without a major decrease in unemployment as hundreds of millions of people were unemployed worldwide. The IMF urged governments to expand social safety nets and to generate job creation even as they are under pressure to cut spending. Governments should also invest in skills training for the unemployed and even governments of countries like Greece with major debt risk should first focus on long-term economic recovery by creating jobs.

Raising interest rates

The Bank of Israel was the first to raise interest rates after the global recession began. It increased rates in August 2009.

On October 6, 2009, Australia became the first G20 country to raise its main interest rate, with the Reserve Bank of Australia moving rates up from 3.00% to 3.25%.

The Norges Bank of Norway and the Reserve Bank of India raised interest rates in March 2010.

Comparisons with the Great Depression

Main article: Comparisons between the Great Recession and the Great Depression

On April 17, 2009, the then head of the IMF Dominique Strauss-Kahn said that there was a chance that certain countries may not implement the proper policies to avoid feedback mechanisms that could eventually turn the recession into a depression. "The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today." The IMF pointed out that unlike the Great Depression, this recession was synchronised by global integration of markets. Such synchronized recessions were explained to last longer than typical economic downturns and have slower recoveries.

Olivier Blanchard, IMF Chief Economist, stated that the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time. "Long-term unemployment is alarmingly high: in the United States, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression." The IMF also stated that a link between rising inequality within Western economies and deflating demand may exist. The last time that the wealth gap reached such skewed extremes was in 1928–1929.

Concerning unemployment, during the 1980–1982 recession, unemployment peaked at nearly 11% (10.8%) in November 1982 and remained above 10% from September 1982 through June 1983. Unemployment remained over 8% through January 1984 before dipping lower. By contrast, unemployment peaked at 10% in October 2009 for one month, before declining to below 10% after that, although remaining high at above 8% through April 2012. Unemployment numbers at the beginning of both recessions were at similar levels, around 6% in early-1980 and around 5% in early 2008.

In regards to inflation, the 1980–1982 recession inflation rate peaked at 14.76% in March 1980 and remained over 10% through October 1981, before dropping in early to mid-1982. By comparison, inflation during the 2008–2009 recession was practically non-existent, with a peak of nearly 5.6% inflation in July 2008 before dropping to .09% by December 2008. Deflation occurred in 2009, specifically between March–October, “troughing” at negative (-) 2.10% in July 2009 before going positive to 2.72% in December 2009. Inflation remains low, standing at 2.65% as of March 2012.

In a related debilitating category, the Prime Lending Rate (PLR) stood at 20% in early-1980 in order to combat high inflation. The PLR fluctuated somewhat but hit 20% again in late-1980, again in early-1981, and yet again in late-1981, remaining at around 15% through mid-1982 before dropping below 10% by the end of 1982. By contrast, during the 2008–2009 recession the PLR has remained flat at around 1% since late in 2008, practically speaking during the entire period.

Although the banking industry and housing sector were hit hard in the 1980–1982 recession, the housing sector was hit harder in the 2008–2009 recession due to the housing bubble bursting in 2006–2007. This is the only category that is clearly worse in the 2008–2009 recession from a U.S. perspective.

Risks

Risk of relapse into recession

As recovery stalled and stagnation set in, several observers warned of the possibility of a second recession. United States observers often cite the recession of 1937–1938 as a model.

In his article “On the Possibilities to Forecast the Current Crisis and its Second Wave” (with Askar Akaev and Andrey Korotayev) in the Russian academic journal “Ekonomicheskaya politika” (December 2010. Issue 6. pp. 39–46 ) the Rector of the Moscow State University Viktor Sadovnichiy published "a forecast of the second wave of the crisis, which suggested that it might start in July — August, 2011". A September 14, 2011 Reuters Poll indicated that economists thought the probability of another recession was at 31%, up from 25% the month before. Since the US economy has not fully recovered from the last recession, any resumption would be considerably more painful.

In the United States, jobs paying between $14 and $21 per hour made up about 60% those lost during the recession, but such mid-wage jobs have comprised only about 27% of jobs gained during the recovery through mid-2012. In contrast, lower-paying jobs constituted about 58% of the jobs regained.

See also

• Collateralized debt obligation
• List of minimum wages by country
• Savings and loan crisis

Further reading

• JC Coffee, ‘What went wrong? An initial inquiry into the causes of the 2008 financial crisis’ (2009) 9(1) Journal of Corporate Law Studies 1
• Cohan, William D., The Last Tycoons. The Secret History of Lazard Frères & Co.. New York, Broadway Books (Doubleday), 2007. ISBN 9780385521772
• Cohan, William D., House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, [a novel]. New York, Doubleday, 2009. ISBN 9780385528269
• Fengbo Zhang: 1.Perspective on the United States Sub-prime Mortgage Crisis , 2.Accurately Forecasting Trends of the Financial Crisis , 3.Stop Arguing about Socialism versus Capitalism .
• Fried, Joseph, Who Really Drove the Economy into the Ditch? (New York, NY: Algora Publishing, 2012) ISBN 978-0-87586-942-1.
• Funnell, Warwick N. In government we trust: market failure and the delusions of privatisation / Warwick Funnell, Robert Jupe and Jane Andrew. Sydney: University of New South Wales Press, 2009. ISBN 9780868409665 (pbk.)
• Harman, Chris Zombie Capitalism: Global Crisis and the Relevance of Marx / London: Bookmarks Publications 2009. ISBN 9781905192533
• Paulson, Hank, On the Brink. London, Headline, 2010. ISBN 9780755360543
• Read, Colin. Global financial meltdown: how we can avoid the next economic crisis / Colin Read. New York: Palgrave Macmillan, c2009. ISBN 9780230222182
• Wallison, Peter, Bad History, Worse Policy (Washington, D.C.: AEI Press, 2013) ISBN 978-0-8447-7238-7.
• Woods, Thomas E. Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse / Washington DC: Regnery Publishing 2009. ISBN 1596985879
• Ivo Pezzuto Miraculous Financial Engineering or Toxic Finance? The Genesis of the U.S. Subprime Mortgage Loans Crisis and its Consequences on the Global Financial Markets and Real Economy" (2008) ISSN 1662-761X. Journal of Governance and Regulation / Volume 1, Issue 3, 2012 of Virtus Interpress

External links

• Tracking the Global Recession accurate and useful information from the Federal Reserve Bank of St. Louis
• Federal Reserve Bank of St. Louis, "What Caused the Crisis", collection of papers
• Global Outlook, Uri Dadush, "International Economics Bulletin", June 2009.
• Global Recession ongoing coverage from BBC News
• Global Recession ongoing coverage from The Guardian
• ILO Job Crisis Observatory
• Financial Transmission of the Crisis: What’s the Lesson? Shimelse Ali, Uri Dadush, Lauren Falcao, "International Economics Bulletin, June 2009.
• A Spectral Analysis of World GDP Dynamics: Kondratieff Waves, Kuznets Swings, Juglar and Kitchin Cycles in Global Economic Development, and the 2008–2009 Economic Crisis.
• The Second Wave of the Global Crisis? On mathematical analyses of some dynamic series