The 2008-2009 global financial crises were the second in rank among the devastating economic downturns in history since the Great Depression in the 1930s. The Great Recession was felt throughout the globe, as the stock market plummeted, so did peoples net worth. The stock market turned bearish, while many people also lost their homes. Furthermore, the Great Recession had a far-reaching long-term effect on the national and global economy than the short-term economic impact of the Great Depression. A decade after the end of the Global Recession, unemployment levels in most countries have not yet returned to post-recession levels. This paper explores the causes and ramifications of the 2007-2009 Great Recession. The subprime mortgage crisis mainly caused the long-term effects of the Great Recession and its globally devastating impact on global financial markets, real estate and banking industries, mortgage foreclosures, and loss of billions of savings.
Overview
International Monetary Fund (IMF) defines a global recession as a period of unprecedented fall in the per-capita global gross domestic product (GDP) as proof by similar macroeconomic indicators including trade, unemployment, industrial production and oil consumption. Based on the IMF definition, Arestis and Karakitsos (2013) notes that the Great Recession, therefore, began in December 2007, whereby GDP fell by 4.3%, and the unemployment rate hit 10%.
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Economists associate the Great Recession by the end of 2007 with the subprime mortgage crisis that began in April 2007 with the declaration of bankruptcy by the Federal Home Loan Mortgage Corporation. An earlier real estate bubble in the mortgage industry had led to over-investment in the sector, which led to the subprime mortgage crash. Most of the mortgage multinationals followed Freddie Mac bankruptcy path, including the New Century Financial firm, and American Mortgage Investment Cooperatives. Subsequently, the Standard and Poor’s and Moody credit rating firms declared their decisions to cut the ratings on over a hundred bonds insured through second-lien subprime mortgages, which banished over 600 residential mortgages under subprime category on the credit watch list (Arestis & Karakitsos, 2013) . Furthermore, mortgage prices plummeted as the subprime crash bite, throwing millions of homeowners under the bus by undervaluing their mortgage below their overall loan value.
Causes of the 2008 Great Recession
Regulatory interventions by the federal government escalated the Great Recession. Unlike the Franklin Roosevelt administration, the Bush and Obama administration responded with ineffective economic policies that escalated the crisis to a more extended period than witnessed during the Great Depression. Federal government failures included Bush administration reluctance to bail out financial investors filing for bankruptcy, which led to the collapse of multinational financial banks such as Bear Stearns and Lehman Brothers. Several other factors triggered and escalated the Great Recession. Among them include regulatory failures, especially Federal Reserve’s indifference to toxic mortgages wave in the early 2000s. Recklessness and risky investment behaviour triggered by an unprecedented breakdown in corporate governance also contributed to the unravelling of the Great Recession. Excessive credit and risk by homeowners and Wall Street investors also increased the vulnerability of the financial system to the unravelling crisis. Breaches in ethics and accountability among policymakers also contributed to the escalation of the crisis.
Numerous factors caused the great recession to occur within the United States. These factors acted in conjunction, and they helped to escalate the financial crisis across the globe, which had far-reaching outcomes. Arguments suggest that monetary policies, especially in the United States that were formulated by financial institutions, had an impact on palpitating the great recession. According to Ramiro and Gomez (2017) , mortgage funding was competitive and decentralized; thus, this competition between lenders for revenue and the market share led to the increased risk of lending money. This sparked an unsustainable economic burst that many authors attribute to have resulted to the recession.
The collapse of the housing bubble also played a significant role in instigating the financial crisis. Deregulation of banks by the government occurred through the Depository Institutions Deregulation and Monetary Control Act, the Gramm-Leach-Bliley Act and the Garn-St. Germain Depository Act, all of which were enforced within the timeframe of the recession ( Del Negro, Giannoni & Schorfheide, 2015 ). Similar banks were merged under the Monetary Control Act, which made the banks set their interest rates. Homeowners would then be allowed to file for adjustable-rate mortgages under the Depository Institutions Act, and finally, the Gramm-Leach-Bliley Act was enforced to allow for the commercial and investments bank to merge into one facility. Housing, therefore, was immensely affected as the firms had more emphasis on investing money in the form of mortgage purchases, with which the local banks had used to offer loans to individuals and homeowners in many countries. This meant that banks would have increasingly risky terms inclusive of down payments, no need for proof of income and other aspects, all of which made more people eligible for these funds. As a result, more people had defaulted on loans that they were unable to pay, thus leading to the collapse of the investment in the income, hence the financial crisis.
The low interest on housing developed the belief that the housing industry and their purchase was a good asset for the consumers, primarily due to the reduced rates that had been set by the banks. The low-interest rates invigorated the market, thereby giving rise to more purchases of houses as the overpriced homes now seemed to be more affordable. According to Ramiro and Gomez (2017) , the consumers would have expectations that were not correct about the impending future housing and its investment, which made them acquire houses that they would otherwise not afford hence raising the risk of high mortgages. The American economy, for instance, collapsed to this issue as companies that had securities backed by the mortgages collapsed and thus losing billions in unforeseen financial crises. Statistics indicate that about 12.5 million people failed to repay their loans on time, which led to their loss of the homes they were purchasing on the mortgage ( Mueller, Rothstein & Von Wachter, 2016 ). Furthermore, unemployment rates rose to about 8.1%, which further intensified the financial crisis in the globe.
Effects and impacts of the 2008 Great Recession
The Great Recession had far-reaching ramifications on the global and national economy. The impacts included loans defaults by several European states as the crisis bite including Greece, Cyprus, Ireland and Portugal. The resultant austerity measures such as social benefit cuts and tax increases triggered a political backlash in default states, which led to mass protests and regime changes in several European states (Kumkar, 2018) . Stock owners also lost billions of dollars as stock price plummeted to a historic low. Furthermore, Arestis and Karakitsos (2013) explains that mortgage prices fell by 20% to a historic low of $55 trillion, marking a $14 trillion loss between the fall of 2007 and the spring of 2009.
In the United States, the great recession had various impact on the political and economic aspects of the nation. Even after the recession had been mitigated, many economic variables, however, did not return to their normal state in the country. For instance, the United States overall GDP had fallen by about 4.3%, which totalled to about $650 billion and they did not recover until late 2011 ( Del Negro, Giannoni & Schorfheide, 2015 ). The value of both housing and stock markets plummeted by about 17.3%, which did not recover until the end of the year 2012 in the United States. Unemployment rates that were observed during the recession period would not be relieved until late in May of 2016 when it dropped from the staggering 10% to about 4.7%. Due to the defaulters having nor paid their mortgages, the effect was that the majority of the people became homeless and had to pay their debts rather than purchasing new houses. Banks had to limit credit to its users as they also paid their debts, and hence, individuals within the country lacked money freely. Both President Washington Bush and his predecessor Obama had to formulate measures to curb the issue.
In Europe, on the other hand, the banking and debt crisis progressed such that the overall budget was reduced to reflect upon the country’s GDP and the deficit that was being measured. In nations such as Ireland, Greece, Portugal, the UK and Italy, among others, unemployment rates increased except Germany, Iceland and France where the rates had declined. Housing finance, therefore, was the significant impact of the financial crisis and the majority of the countries were faced with the issue of their banks having debts and hence unable to offer credit to the consumers.
Mitigation and responses to the 2008 Great Recession
Owing to the challenges that were becoming difficult for the nations to handle, it became prudent that there was a need to develop actions purposed to mitigate the financial crisis. The United States government, according to Kroft, Lange, Notowidigdo and Katz (2016) , responded by developing aggressive fiscal and monetary policies. The primary goal of these policies was to stabilize the economic system and to resurrect the overall economic state for future growth and sustainability. The collapse of the Lehman brothers led to major financial institutions to fail, and this gave rise to the zero-interest rate policy that was purposed on reducing interests paid through the support given by the Federal Government. They purchased
Treasury bonds in massive amounts while initiating securities in the financial industry that would help to reduce interest rates excreted on money borrowed by the individuals.
The Federal Deposit Insurance Corporation, FDCI, announced various programs that would help access to debts more secure. They offered $50 billion to ensure the installments and debts offered by banks and other financial services. Additionally, they increased the deposit insurance limits to help guarantee debts taken from the bank. The Congress had also developed the Troubled Asset Relief Program, TARP, which injected over $700 billion in the nation’s banks. Tax rebate checks were sent to the households in the nation, with the American Recovery and Reinvestment Act being passed in 2009 to help the community with their financial needs.
The Securities and Exchange Commission terminated the short-selling of the 799 financial stock as a reaction to the mortgage crisis. According to Ramiro and Gomez (2017) , by May 2013, the housing and employment markets had slightly improved owing to the set regulations with the stock market recorded to have higher returns within the country. Other nations such as China responded by cutting interest rates to help curb the financial crisis. Indonesia, on the other hand, reduced the overnight rates at the commercial banks and central banks, which was aimed at helping the economy to grow. Australia responded by injecting about $1.5 Billion into its banking system to facilitate improved economic state. It is evident that in India, about $1.32 billion was added to the banks by the Reserve Bank of India to curb the issue.
Conclusion
This paper has examined the 2008 Great Recession, its causes, and how it developed to affect many countries and their response to mitigating the issue. The specific cause of the recession is debatable due to a variety of narratives suggesting its existence. However, they all facilitated the accelerated spread of the financial crisis across the globe. The detrimental outcomes of this issue were impeccable and primarily affected the housing industry due to increased defaulters on their mortgages and higher debt crisis. Responses from various countries was a welcomed idea primarily through the injection of funds into their banking systems and setting up policies that would help curb the issue adequately.
References
Arestis, P., & Karakitsos, E. (2013). Origins of the ‘Great Recession.’ Financial Stability in the Aftermath of the Great Recession, 13-40.
Del Negro, M., Giannoni, M. P., & Schorfheide, F. (2015). Inflation in the great recession and new Keynesian models. American Economic Journal: Macroeconomics , 7 (1), 168-96.
Kroft, K., Lange, F., Notowidigdo, M. J., & Katz, L. F. (2016). Long-term unemployment and the Great Recession: the role of composition, duration dependence, and nonparticipation. Journal of Labor Economics , 34 (S1), S7-S54.
Kumkar, N. C. (2018). Introduction: Protests in the Wake of the Great Recession. The Tea Party, Occupy Wall Street, and the Great Recession, 1-29.
Mueller, A. I., Rothstein, J., & Von Wachter, T. M. (2016). Unemployment insurance and disability insurance in the Great Recession. Journal of Labor Economics , 34 (S1), S445-S475.
Ramiro, L., & Gomez, R. (2017). Radical-left populism during the great recession: Podemos and its competition with the established radical left. Political Studies , 65 (1_suppl), 108-126.
