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The Great Recession

AP.USH:
KC‑9.3.II.D (KC)
,
Unit 9: Learning Objective F
,
WOR (Theme)
What caused the worst economic crisis since the Great Depression? 

Overview

  • The Great Recession of 2007-2009 was the worst global economic crisis since the Great Depression in the 1930s.
  • The recession resulted from a combination of tax cuts, spending increases, and the devastating effects of a banking crisis in the subprime mortgage market.
  • The recession contributed to rising income inequality and prompted a debate about the role of the federal government in regulating private industry.

George W. Bush’s economic policies

Upon taking office in 2001, US President George W. Bush implemented a series of economic measures that substantially raised the federal budget deficit while almost doubling the federal debt. The Bush administration increased federal spending, most dramatically in the areas of Medicare and defense spending, while the wars in Afghanistan and Iraq consumed vast financial resources.start superscript, 1, end superscript
Meanwhile, the Bush administration enacted some of the largest tax cuts in US history. All marginal tax rates were lowered, while certain tax credits, such as the child tax credit, became more generous. Critics of what became known as the “Bush Tax Cuts” argued that they contributed to increased income inequality by unfairly benefiting the upper class. Others have attributed rising inequality to technological advances, free trade policies, and the declining power of labor unions. While economists will continue to debate the causes and effects of income inequality, what remains certain is that the average American family is now worse off than it was a quarter-century ago.squared
Graph depicting the income limits of each fifth and the top five percent of families between 1947 and 2007, in 2007 dollars. The 20th, 40th, 60th and 80th percentiles have seen small increases over this time period, while the earnings of the top five percent have nearly quadrupled.
US income distribution for each fifth and the top five percent of families between 1947 and 2007, in 2007 dollars. Graph courtesy Wikimedia Commons. Source: US Census Bureau Historical Income Tables.

The recession of 2007-2008

The US economy was already tipping into recession by 2007. Consumer spending was down, unemployment was up, and the financial markets were unstable. But it was the September 2008 collapse of Lehman Brothers, a major Wall Street investment firm, that ushered in the worst banking crisis the country had experienced since the Great Depression.cubed Both the boom-and-bust dynamic associated with free-market capitalism and the monetary policies enacted by the Federal Reserve played a role in creating the crisis.start superscript, 4, end superscript
The Federal Reserve (the US central banking system) had implemented monetary policies aimed at increasing rates of homeownership. Excessive home building, combined with the loosening of credit and the extension of high-risk mortgages, served to create a housing bubble. When that bubble burst, many homeowners were unable to pay their mortgages, while the value of their homes tanked, leaving them with a debt burden that was greater than what their homes were worth.

Bailing out the banks

In order to prevent what Federal Reserve Chairman Ben Bernanke referred to as a “global financial meltdown,” the Bush administration authorized a massive federal intervention to mitigate the worst effects of the crisis.start superscript, 5, end superscript In February 2008, President Bush authorized a $168 billion economic stimulus package, which consisted largely of income tax rebates. The Emergency Economic Stabilization Act of 2008 included $700 billion to fund the Troubled Assets Relief Program (TARP), which provided loans to troubled banks.
Several of the nation’s largest financial institutions were either taken over by other companies or bailed out by the federal government. The bailouts involved the direct transfer of taxpayer money to the banks. In February 2009, US President Barack Obama authorized a $787 billion economic stimulus package composed of spending increases and tax cuts. The US national debt rose by $6 trillion from 2008 to 2012, while unemployment peaked at 10 percent in 2009 and then declined.
Graph depicting the net change in US employment per month from 2009 to 2016. Unemployment peak at ten percent in 2009, and has since steadily dropped to about five percent.
Graph depicting the net change in US employment per month from 2009 to 2016. Unemployment peaked at ten percent in 2009. Graph courtesy Wikimedia Commons.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed. The law attempted to address some of the key causes of the banking crisis but stopped short of breaking up the largest banks, which had become even bigger due to the wave of mergers and acquisitions that ensued in the wake of the housing market collapse.

What do you think?

What caused the Great Recession?
What responsibility does the federal government have to regulate private industry?
Were the relief measures enacted by the Bush and Obama administrations effective?

Want to join the conversation?

  • leaf green style avatar for user c.caldwell
    I will never be able to understand how conservatives, as a whole, not individuals, aim to cut taxes, but they want to increase spending in such major areas. Bush cut taxes and increased rebates, but increased spending? That doesn't make any sense. In no way can this mathematically work. It /sounds/ nice, but in reality... no.
    (9 votes)
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    • old spice man green style avatar for user Beitzela
      The policy of cutting taxes and increasing spending on specific projects is actually based on solid economic theory. Typically, conservative legislators and administrations cut taxes for major corporations and businesses. The thought is that, when these institutions have more money on hand, they will increase production, hire new workers, and generally expand. This expansion will create jobs for individuals that are NOT AT WORK currently, or provide better paying positions/opportunities for people that may have been stuck in low-pay/part-time positions.

      Through this job creation, the amount of money that the federal government spends DIRECTLY on social programs SHOULD decrease; the more people in better paying positions means fewer people on the government dole. Also, with more money circulating among the general population, the government typically sees higher returns via taxes because well-payed, fully-employed people pay taxes. Local governments SHOULD see increases in sales tax revenue, property taxes as people purchase homes, capital gains taxes as the stock market sees improvement, things of that nature. The federal government SHOULD see higher returns in the form of increased income taxes WITHOUT actually increasing the tax rates. It follows: the more people in positions that actually pay wage tax means the more wage tax that the government receives. When the government sees those increases, they have more cash to spend on pointed, specific programs to alleviate some of the stuff that take place at the very bottom of the socio-economic spectrum, infrastructure, education, MILITARY! and otherwise. I hope you get how this thought process is going :).

      What it's typically referred to as is "trickle-down" economics. If you cut the taxes of the rich, they'll spend more and create positions for the benefit of all underneath. But, it's all economic theory. The federal government doesn't typically mandate that large corporations or businesses utilize their non-taxed earnings to expand their companies, and (even if they did) if there is no demand for their product, increasing production can actually ruin the economy (see overproduction).

      Hope that kinda gives you an idea of how conservatives can think CUT TAXES, INCREASE SPENDING!
      (29 votes)
  • leafers ultimate style avatar for user GoofyPhillip
    Excuse me but how could there be an economic failure i do not understand?
    (3 votes)
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    • duskpin tree style avatar for user Nick0077
      The economic collapse occurred mainly in part that people were being approved for mortgages that they should not have been approved for. These people were not able to afford their mortgages and were not able to pay it off, leading to debt. People would buy up bonds, which is essentially debt, and would also not be paid back because the banks were not being paid back by people who had these huge mortgages that they could not afford. In addition, many people had their assets mainly in credit, or borrowed money. Many people lost their credit when the economy collapsed, leading to further turmoil.
      (10 votes)
  • hopper jumping style avatar for user Yago
    It says "[...] what remains certain is that the average American family is now worse off than it was a quarter-century ago." From the graph right beneath that text it seems that this is not the case, since all percentiles had an increase in their income, just at different rates. Can someone clarify this?
    (5 votes)
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    • aqualine ultimate style avatar for user Kristen Lee
      You are correct in stating that all percentiles had increased income - but look at how steep the increase is for the 95% relative to the other lines. The focus of the graph is to illustrate how the top 95% Americans gained substantially, which can be seen from the steep incline, by Bush's Tax Cutes, whereas the average American had their income raised only by a barely-evident degree. This graph also showed that, the lower income you receive, the less you benefitted from Bush's tax cuts, and the upper classes benefitted an unfair amount.
      (3 votes)
  • boggle blue style avatar for user x.asper_
    How was the mental states of people affected by the Great Recession?
    (1 vote)
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  • duskpin tree style avatar for user Mikaiah Oxford
    What was THE date of the crash? (Or is that hard to define?)
    (1 vote)
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  • boggle blue style avatar for user x.asper_
    How can we compare today's economic recession (inflicted by COVID-19) to The Great Recession?
    (1 vote)
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    • female robot amelia style avatar for user RebekahT
      COVID caused a recession because people had to quarantine themselves, so many people lost their jobs and even those who still could work were not leaving the house as often to buy different goods and services, creating a recession. However, the Great Depression was based off of bank failures because people were taking on mortgages that they could not afford. The one was based off of the economy shutting down because people were quarantining, while the other was caused because of debt.
      (2 votes)