Great Recession

The Great Recession was a major period of global economic decline. It occurred primarily from late 2007 to mid-2009. In the United States, the National Bureau of Economic Research (NBER) dates the start to December 2007. The recession reached its lowest point in June 2009. This period overlapped with the 2008 financial crisis. The International Monetary Fund (IMF) described it as the most severe meltdown since the Great Depression of the 1930s.

Economists use different ways to define a recession. A general definition refers to a period of reduced economic activity. A technical definition is more specific for use in monetary policy. It requires a contraction in Gross Domestic Product (GDP) for two or more consecutive quarters. GDP measures the total value of goods and services produced. Under this technical rule, the U.S. recession ended in mid-2009. Some observers, like journalist Robert Kuttner, argued the term was a misnomer. He suggested names like "The Great Deflation" because of the stagnant economy.

The crisis was driven by several complex mechanisms. It began with the bursting of a housing bubble in the United States. Between 2005 and 2012, housing prices fluctuated wildly. Many banks held mortgage-backed securities, which are investments tied to home loans. Many of these were subprime mortgages, which are high-risk loans. When housing prices fell, homeowners began to default on these payments. This caused the value of the securities to drop.

A major factor was the growth of the shadow banking system. This system consists of non-depository financial institutions, such as investment banks. It grew to rival the traditional depository banking system. However, it did not have the same regulatory oversight. This made the system vulnerable to a bank run. A bank run happens when many people try to withdraw money at once. In 2007, a run on the shadow banking system began. This disrupted the flow of credit to businesses and consumers.

The crisis reached a breaking point in September 2008. The fall of the investment bank Lehman Brothers caused a massive panic. This panic hit the inter-bank loan market very hard. Many large banks in the U.S. and Europe faced bankruptcy. Governments responded with massive public financial assistance, known as bailouts. In early 2009, bailout money reached approximately $1.9 trillion.

The recession did not affect every part of the world equally. Most developed economies in North America, South America, and Europe suffered deeply. However, some developing economies stayed strong. China, India, and Indonesia saw substantial economic growth during this time. Oceania also experienced minimal impact. This was partly due to its proximity to Asian markets.

The impact on households was significant and lasting. In the United States, median household wealth fell by 35%. It dropped from $106,591 in 2005 to $68,839 in 2011. Income inequality also grew in many U.S. metropolitan areas. The recession led to rising unemployment and lower commodity prices. It also caused a sharp drop in international trade.

Governments used various tools to help economies recover. They used fiscal policy and monetary policy to stimulate growth. One method is called quantitative easing, which involves pumping money into the system. Central banks also held down wholesale lending interest rates. These actions renewed interest in Keynesian economic ideas. Experts say these measures should be withdrawn once sustainable growth is achieved. The crisis showed how interconnected the global financial system has become.