Before , the U. Here is a look at every recession that's hit the U. The global economy has not yet entered a recession, but economists are predicting that the effects of the coronavirus pandemic -- including businesses being shut down and millions of workers staying at home -- will cause U.
GDP to decline for at least the first two quarters of At that point, after a prolonged period of GDP decline, then the economy would have technically entered into a recession. If that is the case, the impending recession will come after a record expansion for the economy that lasted over a decade months, as of December. Goldman Sachs is projecting that U. The country's GDP fell 4. It occurred on the tail end of a subprime mortgage crisis where the U. That also spurred on a banking crisis, as numerous financial institutions that had taken on high-risk mortgage-backed securities saw those portfolios wiped out as borrowers defaulted on their loans.
Huge financial institutions such as Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers all collapsed as a result in , leading to a stock market crash that saw the major indexes lose more than half of their value over the course of the crisis.
Those losses left the stock market in a vulnerable place that got worse in the fall of , when the devastation of the September 11, terrorist attacks and a series of major accounting scandals at corporations like Enron and Swissair spurred a stock market crash.
The resulting recession was relatively short, at just eight months, and also shallow, as GDP dipped only 0. A mild recession kicked off in , as the Federal Reserve had been slowly raising interest rates for over two years to keep inflation in check. Those moves slowed down the economy, which then took a hit when Iraq invaded Kuwait in the summer of followed by U. While it may be many years before the causes and consequences of these events are fully understood, the effort to untangle them is an important opportunity for the Federal Reserve and other agencies to learn lessons that can inform future policy.
Bank for International Settlements. Ennis, Huberto, and Alexander Wolman. Ben S. Bernanke Chairman. Timothy F. Geithner President. Current Fed leaders. Classroom resources About this site Our authors Related resources.
The Great Recession and Its Aftermath — The economic crisis was deep and protracted enough to become known as "the Great Recession" and was followed by what was, by some measures, a long but unusually slow recovery. Bibliography Bank for International Settlements.
Written as of November 22, See disclaimer. Related People Ben S. Bernanke Chairman Board of Governors — Geithner President New York Fed — And as housing prices continued to rise in North America and Western Europe, other financial institutions acquired thousands of these risky mortgages in bulk typically in the form of mortgage-backed securities as an investment, in hopes of a quick profit.
Although the U. A couple of months earlier, in February, the Federal Home Loan Mortgage Corporation Freddie Mac announced that it would no longer purchase risky subprime mortgages or mortgage-related securities. With no market for the mortgages it owned, and therefore no way to sell them to recoup their initial investment, New Century Financial collapsed. Interestingly, on October 9, , the U. Over the next 18 months, the Dow would lose more than half its value, falling to 6, points.
As a result, hundreds of thousands of Americans who had significant portions of their life saving invested in the stock market suffered catastrophic financial losses. With the American economy teetering, the U. Interest rates were at 5. By the end of , the Fed had reduced the target interest rate to zero percent for the first time in history in hopes of once again encouraging borrowing and, by extension, capital investment.
In February , President George W. Bush signed the so-called Economic Stimulus Act into law. This last element was designed to, hopefully, generate new home sales and provide a boost to the economy. In March , investment banking giant Bear Stearns collapsed after attributing its financial troubles to investments in subprime mortgages, and its assets were acquired by JP Morgan Chase at a cut-rate price.
A few months later, financial behemoth Lehman Brothers declared bankruptcy for similar reasons, creating the largest bankruptcy filing in U. TARP essentially provided the U. The deals would enable the government to sell these assets at a later date, hopefully at a profit. January also brought with it a new administration in the White House , that of President Barack Obama. However, many of the old financial problems remained for the new president to tackle.
While just one contributing factor to the Great Recession, the changes to the Glass-Steagall Act brought a period of national expansion for corporations and the gobbling up of small, independent institutions, which created entities that were "too big to fail" — or so everyone thought. In the decade leading up to , real estate and property values had been rising steadily, encouraging people to invest in property and buy homes.
By early to mids, the residential housing market was booming. To capitalize on the boom, mortgage lenders rushed to approve as many home loans as they could, including to borrowers with less-than-deal credit. These risky loans, called subprime mortgages, would later become one of the main causes of the Great Recession.
A subprime mortgage is a type of loan issued to borrowers with low credit ratings. A prospective subprime borrower might have multiple dings on their credit history or dubious streams of income. In fact, the loan verification process was so lax at the time that it drew its own nickname: NINJA loans, which stands for "no income, no job, and no assets. Because subprime mortgages were granted to people who previously couldn't qualify for conventional mortgages , it opened the market to a flood of new homebuyers.
Easy housing credit resulted in the higher demand for homes. This contributed to the run-up in housing prices, which led to the rapid formation and eventual bursting of the s housing bubble.
While interest rates at the time were low , subprime mortgages were adjustable-rate mortgages, which charged low, affordable payments initially, followed by higher payments in the years thereafter. The result? Borrowers who were already on shaky financial footing stood a good chance of not being able to make payments when the interest rate rose in the years following.
In the rush to take advantage of a hot market and low interest rates, many homebuyers took on loans without knowing the risks involved. But the common wisdom held that subprime loans were safe since real estate prices were sure to keep rising. Along with issuing mortgages, lenders found another way to make money off of the real estate industry: By packaging subprime mortgage loans and reselling them in a process called securitization.
Through securitization, subprime lenders bundled loans together and sold them to investment banks, which, in turn, sold them to investors around the world as mortgage-backed securities MBS. Eventually, investment banks started repackaging and selling mortgage-backed securities on the secondary market as collateralized debt obligations CDOs.
These financial instruments combined multiple loans of varying quality into one product, divided into segments, or tranches, each with its own risk levels suitable for different types of investors.
The theory, backed by elaborate Wall Street mathematical models, was that the variety of different mortgages reduced the CDOs' risk. The reality, however, was that a lot of the tranches contained mortgages of poor quality, which would drag down returns of the entire portfolio.
Investment banks and institutional investors around the world borrowed significant sums at low short-term rates to buy CDOs. And because the financial markets seemed stable on the whole, investors felt secure about taking on more debt. To make matters even more complicated, banks used credit default swaps CDS , another financial derivative, to insure against defaults on CDOs.
Banks and hedge funds started buying and selling swaps on CDOs in unregulated transactions. Also, because CDS transactions didn't show up on institutions' balance sheets, investors couldn't assess the actual risks these enterprises had assumed.
Like corporate bonds and other forms of debt, MBS and CDOs required the blessing of credit rating agencies in order to be marketed. These agencies placed AAA ratings — usually reserved for the safest investments — on many securities, even though they contained a healthy share of risky mortgages.
It's worth noting that credit rating agencies are supposed to be independent.
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