Great Recession

Definition

The Great Recession was a severe global economic downturn that began in late 2007 and lasted until mid-2009, characterized by significant declines in consumer wealth, widespread unemployment, and a decrease in economic activity. This period was marked by the collapse of housing markets and financial institutions, leading to a profound impact on economies worldwide and prompting significant changes in regulatory policies.

5 Must Know Facts For Your Next Test

1. The Great Recession is considered the most severe economic crisis since the Great Depression of the 1930s, impacting millions globally.
2. Unemployment rates soared during the Great Recession, reaching a peak of around 10% in the United States by October 2009.
3. The housing bubble burst during this period, leading to a significant drop in home values and an increase in foreclosures.
4. Governments worldwide implemented stimulus packages and bailouts to stabilize their economies and prevent further collapse during the Great Recession.
5. The financial sector saw major failures, including that of Lehman Brothers, which highlighted the interconnectedness of global finance and the need for regulatory reforms.

Review Questions

• How did the subprime mortgage crisis contribute to the onset of the Great Recession?
  • The subprime mortgage crisis was a major trigger for the Great Recession, as it involved a large number of high-risk loans being issued to borrowers with poor credit histories. When these borrowers began to default on their loans, it caused a ripple effect throughout financial institutions that had invested heavily in mortgage-backed securities. This led to a loss of confidence in financial markets, resulting in significant declines in stock prices and an overall contraction in economic activity.
• Evaluate the effectiveness of the Dodd-Frank Act in addressing issues that arose during the Great Recession.
  • The Dodd-Frank Act was designed to prevent a recurrence of the financial instability that contributed to the Great Recession by implementing stricter regulations on banks and increasing transparency in financial markets. It established new oversight mechanisms like the Consumer Financial Protection Bureau (CFPB) to protect consumers from risky lending practices. While it has succeeded in increasing regulatory scrutiny and stabilizing the financial system, critics argue that it may have also imposed excessive burdens on smaller financial institutions, potentially limiting their ability to lend.
• Analyze the long-term economic implications of the Great Recession on deregulation policies and financial practices.
  • The Great Recession prompted a reevaluation of deregulation policies that had been prevalent before its onset. In response to the crisis, there was a push for increased regulation and oversight in the financial sector. However, as economic recovery began, there were debates over returning to more lenient policies. The long-term implications include a more cautious approach towards deregulation among policymakers and a recognition of the need for balance between promoting economic growth and ensuring financial stability. This ongoing dialogue shapes current financial practices and regulations.

Related terms

Subprime Mortgage Crisis: A financial crisis that occurred when a large number of borrowers with poor credit histories defaulted on their mortgage loans, contributing significantly to the Great Recession.

Dodd-Frank Act: A comprehensive piece of legislation enacted in 2010 aimed at reducing risks in the financial system by implementing stricter regulations on banks and financial institutions in response to the failures that led to the Great Recession.

Economic Stimulus: Government measures, usually involving increased public spending and tax cuts, aimed at encouraging economic growth during periods of economic downturn, as seen during and after the Great Recession.