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The UK economy endured the worst recession on record as a result of the pandemic with GDP shrinking % between April and June last year.

But a recovery is underway. The British economy grew by % in July as England came out of lockdown and businesses reopened.

This marks the sixth consecutive month of growth, but was much lower than the 1% growth seen in June. Uncertainty still remains, meaning we can&#;t rule out another recession.

In this article we explain:

Read our beginner’s guide to investing

What is a recession?

A country is said to be in recession if GDP (which in the value of all the goods and services produced in the UK) has fallen over two consecutive quarters.

The government restrictions imposed at the outset of the pandemic saw business close their doors and millions of workers put on furlough. This led to dramatic falls in services, production and construction.

The last time the UK fell into recession was in to , following the banking crisis and financial crash. It lasted for five quarters (or 15 months).

Find out more: Coronavirus: what are your rights about going back to work?

What is a double-dip recession?

There were fears the UK may enter a &#;double-dip recession&#;. This is when you have two recessions, separated by a short-lived recovery and is often referred to as a&#;W-shaped recovery&#;.

They are rare: the last time the UK had one was in the s, while the US has only experienced one before.

After the worst recession on record last year, the UK economy did start growing again before shrinking again in November But the country avoided a double-dip recession.

Find out more: Is now the time to start investing… and where should I put my money?

What does a recession mean for my money?

No one knows exactly what lies ahead and what the economic recovery will look like, particularly with the potential for more coronavirus strains and further lockdowns.

Investors should prepare for a rocky ride. However, the stock market still offers the greatest prospect of growing wealth for those with a long-term view, especially as interest rates on savings accounts are meagre.

Find out more: Should I buy stocks during the coronavirus crisis?

Ten rules for investing during a recession

1. Don&#;t panic

Avoid knee-jerk reactions such as selling investments when markets are falling.

You could crystallise some hefty losses by selling out of your investments, depending on when you bought them, and potentially miss out on any recovery.

The ongoing uncertainty over Covid is likely to amplify market volatility in the near future, so the key is to focus on longer-term goals and wait to ride out the inevitable bumps in markets.

2. Diversify and spread risk

Diversification is key for any investment strategy. Hold a mix of cash, fixed interest and shares. Spread across global markets too so you are not over exposed to downturns in any one area.

Make sure you are comfortable with your risk profile. This is the extent to which, in the pursuit of higher returns, you can stomach seeing some investments fall in value. 

3. Keep costs low

All investment platforms charge for running your money and there are typically fees for holding funds, as well as trading costs for funds and shares.

Make sure you’re not paying over the odds for your investments.

Platform costs vary so you might save money by switching to one offering better value, boosting the value of your fund.   

If you’re looking for a low-cost platform, we have given Fidelity and Nutmeg top marks. Find out more here.

4. Drip-feed money into investments 

It is very difficult to time the market, which is where you try to buy or sell investments at just the right moment in anticipation of prices going up or down.

It is even harder in a market characterised by investor fear with increased volatility. Instead establish a regular savings habit and drip-feed your money in.

This will ensure you benefit from pound-cost averaging (where you buy more units in your investments when prices are low).

Find out: How to invest with little money 

5. Choose investments wisely

If you are investing directly in shares, look for firms that have strong balance sheets and business models.

You want to find companies where demand for the product or service is relatively insensitive to the economic cycle, such as companies that provide consumer staples like supermarkets.

You might also want to invest in sectors that will prosper whatever the investment climate.

Learn more: Should I buy stocks during the coronavirus crisis?

6. Take advantage of cheap stocks

Amid a gloomy economic outlook, the stock price of investments may remain depressed. This means there could be a good opportunity to buy stocks at a bargain price.

Some fund managers specialise in looking for undervalued companies that will prosper in the future. These include quality companies in sectors that have been hit by lockdown but can weather the storm.

Find out: How to choose investment funds

7. Be patient in the wait for dividends

Turning to shares to generate income isn’t as simple as it used to be, but all is not lost for investors.

Even where companies have reduced or halted payments, those dividends are likely to be resumed in the future.

Finding good dividend stocks means looking for companies that typically have no debt and plenty of cash on their books.

8. Look for safety nets

As a refuge from volatile stock markets, many investors may be considering holding more money in corporate bonds – where investors are paid interest to lend money to companies.

Elsewhere, gold is perceived to be a reliable store of value during difficult times because its performance is not tied to stock markets. 

Bonds and precious metals can help diversify a portfolio and ensure your investments are not totally reliant on how the FTSE or S&P are performing.

9. Invest in a ready-made portfolio

Many fund supermarkets offer ready-made portfolios, which aim to have a sensible spread of investments, including non-stock market assets such as bonds and property.

Many are labelled according to your risk tolerance. Ensure you are comfortable with your chosen risk category as there are no standard definitions of what a “balanced” or “cautious” portfolio means.

If you&#;re looking for a ready-made investment portfolio, we have given Nutmeg top marks. Find out why here.

You could opt also for a one-stop-shop multi-asset fund with a dedicated fund manager which promises built-in diversification.

Take comfort from the past

Economic downturns do not last forever. If you have an investment horizon of five years or more, you should be able to benefit from the market recovery.

Shares have delivered higher returns than cash deposits in over 76% of all the five-year periods since , according to the Barclays Equity Gilt Study.

 If you&#;re shopping for a self-invested stocks and shares ISAs, Vanguard has been given top marks from us.

What investments do well in a recession?

The best-performing assets in a recessionary environment are those that are not highly leveraged. That is, they don&#;t have a lot of debt compared to their assets.

Those companies that have too much money tied up in risky projects also run a risk of going bankrupt.

You should opt for companies where their business is not determined by the economy.

For example, healthcare is often seen as recession-proof as it is expected to be in receipt of considerable investment over the next decade.

In industries that were the worst affected by the pandemic, those businesses that did the best were those that entered the current climate with strong balance sheets.

Read our guide to investment trends

What is the safest investment during a recession?

Choosing funds that track stock markets such as the FTSE or S&P are always a popular way to invest at any time but especially so during a recession.

With index funds you aren&#;t betting on individual companies but on the long term success of global business.

How you invest during during a recession can be just as important as what you invest in, so its important to stick to the tips mentioned above.

Find out: How to choose investment funds

How do you make money during a recession?

Investors need to be cautious but alert in monitoring the markets during a recession.

There will be opportunities to pick up high-quality assets at discounted prices as businesses are temporarily affected by the situation. Difficult environments are often where the best opportunities can be found.

Look at companies that maintain steady business models and strong balance sheets during a recession.

Examples include utilities and companies that make basic consumer staples and goods.

If you&#;re shopping for a stocks and shares ISA, we list the top ones here.

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The financial crisis of and the great recession that followed is still fresh in the memories of many investors. People saw their portfolios lose 30% or more of their values, and older workers saw their (k) plans and IRAs drop to levels that threatened their plans for retirement. Instead of acting rationally during severe bear markets, many people tend to overreact and make matters worse. However, while many people panicked or were forced to sell assets at low prices, a small group of patient, methodical investors saw the stock market collapse as an opportunity.

Investing in a crisis is no doubt risky, for the timeline and scope of a recovery is uncertain at best. Double-dip recessions are a real possibility, and attempting to pick a bottom is largely a matter of luck. Still, those investors who are able to invest in a crisis without succumbing to irrational fear and anxiety may reap outsized returns during a recovery.

How Crises Affect Investors

Investors generally do not behave as predicted by traditional financial theory, in which each individual behaves rationally to maximize utility. Rather, people often behave irrationally and let emotions get in the way, especially when the economy is experiencing some chaos. The emerging field of behavioral finance attempts to describe how people actually behave versus how financial theory predicts they should.

Behavioral finance shows that people, rather than being merely risk-averse, are actually more loss-averse. This means that people feel the emotional pain of a loss much more than the pleasure gained from an equal-sized profit. Not only that, but loss-aversion describes peoples' tendency to sell winners too early and to hold on to losses for too long; when people are in the black, they act risk-averse, yet when they're in the red they become risk-seeking.

Take for example a blackjack player at a casino. When he is winning, he may start playing more conservatively and betting smaller amounts to preserve his winnings. If that same player is down money, however, he may take on much more risk by doubling down or increasing bets on riskier hands in order to break even. Investors behave similarly. Unfortunately, taking on excess risk when experiencing losses tends to only compound the magnitude of those losses.

These emotional biases may persist even after a recovery has begun. In a survey by online broker Capital One Sharebuilder, 93% of millennials indicated that they distrust the markets and are less confident about investing as a result. Even with historically low-interest rates, more than 40% of this generation's wealth is in the form of cash. Due to the crisis, young Americans are not gaining the stock and bond market exposure that has helped older generations accumulate wealth.

Taking Advantage of a Crisis

While most investors are panicking as asset prices plummet, those with a cool head are able to see the resulting low prices as a buying opportunity. Buying assets from those restless individuals driven by fear is like buying them on sale. Often, fear drives asset prices well below their fundamental or intrinsic values, rewarding patient investors who allow prices to revert to their expected levels. Profiting from investing in a crisis requires discipline, patience, and, of course, enough wealth in liquid assets available to make opportunistic purchases.

When calamity strikes, markets fear the worst and stocks are punished accordingly. But historically, when the dust clears, optimism returns and prices bounce back to where they were, with markets responding once more to fundamental signals rather than to perceived turmoil. A study by Ned Davis Research group looked at 28 global crises over the past hundred years, from the German invasion of France in World War II to terrorist attacks such as that on 9/ Each time, markets overreacted and fell too far only to recover shortly thereafter. Those investors who sold on the fear found themselves having to buy back their portfolios at higher prices, while patient investors were rewarded.

After the Japanese attack on Pearl Harbor, the S&P index fell more than 4% and continued to drop another 14% over the next few months. After that, and through the end of the war in , however, the stock market returned more than 25% per year on average. The same pattern can be observed after other geopolitical events. By recognizing the fact that markets tend to overreact, a smart investor can purchase stocks and other assets at bargain prices.

Right now, the stocks are in the midst of a six-year-long bull market following the great recession. Those who didn't panic saw their portfolio values not only recover, but extend their gains, while those who chose to or were forced to sell, and waited until the bull market was in full swing to re-enter, are still licking their wounds.

Stock markets aren't the only way to invest in a crisis. The great recession also saw a collapse in home prices as the housing market bubble burst. People who could no longer afford their mortgages foreclosed and many homes were underwater, the mortgage amount owed to the bank exceeding the equity value of the property. Homebuyers and those investing in real estate were able to pick up valuable real assets at below normal prices, and as a result have been able to enjoy handsome returns as the housing market has stabilized and recovered. Similarly, so-called vulture investors have also been able to profit from taking over good companies that have been battered by a recession but have otherwise good fundamentals.

Betting on a Crisis to Happen

Another way to make money on a crisis is to bet that one will happen. Short selling stocks or short equity index futures is one way to profit from a bear market. A short seller borrows shares that they don't already own in order to sell them and, hopefully, buy them back at a lower price. Another way to monetize a down market is to use options strategies, such as buying puts which gain in value as the market falls, or by selling call options which will expire to a price of zero if they expire out of the money. Similar strategies can be employed in bond and commodity markets.

Many investors, however, are restricted from short selling or do not have access to derivatives markets. Even if they do, they may have an emotional or cognitive bias against selling short. Furthermore, short-sellers may be forced to cover their positions for a loss if markets rise instead of fall and margin calls are issued. Today, there are ETFs that give longs (holders of the ETF shares) short exposure to the market. So-called inverse ETFs may aim to return +1% for every negative 1% return the underlying index returns. Some inverse ETFs may also employ gearing, or leverage, returning +2% or even +3% for every 1% loss in the underlying.

For those individuals seeking simply to protect themselves from a crisis and not necessarily bet on such an event occurring, owning a well-diversified portfolio, including positions in asset classes with low correlations, can help cushion the blow. Those with access to derivatives markets can also employ hedging strategies, such as a protective put or covered call to lessen the severity of potential losses.

The Bottom Line

Economic crises happen from time to time. Recessions and depressions occur. In the 20th century alone there were around twenty identifiable crises – not including geopolitical events such as wars or terrorist attacks, which also caused markets to suddenly drop. Behavioral finance tells us that people are prone to panic in such events, and will not act rationally the way traditional financial theory predicts. As a result, those with cool heads, discipline, and an understanding that, historically, markets have always rebounded from such events can purchase assets at bargain prices and earn excess returns.

Those with the foresight that a crisis is impending may implement short strategies to profit from a falling market. Of course, timing is everything, and buying too early or late, or holding on to a short position for too long, can serve to compound losses and take away from potential gains.

The global financial crisis (GFC) refers to the period of extreme stress in global financial markets and banking systems between mid and early During the GFC, a downturn in the US housing market was a catalyst for a financial crisis that spread from the United States to the rest of the world through linkages in the global financial system. Many banks around the world incurred large losses and relied on government support to avoid bankruptcy. Millions of people lost their jobs as the major advanced economies experienced their deepest recessions since the Great Depression in the s. Recovery from the crisis was also much slower than past recessions that were not associated with a financial crisis.

Main Causes of the GFC

As for all financial crises, a range of factors explain the GFC and its severity, and people are still debating the relative importance of each factor. Some of the key aspects include:

1. Excessive risk-taking in a favourable macroeconomic environment

In the years leading up to the GFC, economic conditions in the United States and other countries were favourable. Economic growth was strong and stable, and rates of inflation, unemployment and interest were relatively low. In this environment, house prices grew strongly.

Expectations that house prices would continue to rise led households, in the United States especially, to borrow imprudently to purchase and build houses. A similar expectation on house prices also led property developers and households in European countries (such as Iceland, Ireland, Spain and some countries in Eastern Europe) to borrow excessively. Many of the mortgage loans, especially in the United States, were for amounts close to (or even above) the purchase price of a house. A large share of such risky borrowing was done by investors seeking to make short-term profits by ‘flipping’ houses and by ‘subprime’ borrowers (who have higher default risks, mainly because their income and wealth are relatively low and/or they have missed loan repayments in the past).

Banks and other lenders were willing to make increasingly large volumes of risky loans for a range of reasons:

• Competition increased between individual lenders to extend ever-larger amounts of housing loans that, because of the good economic environment, seemed to be very profitable at the time.
• Many lenders providing housing loans did not closely assess borrowers’ abilities to make loan repayments. This also reflected the widespread presumption that favourable conditions would continue. Additionally, lenders had little incentive to take care in their lending decisions because they did not expect to bear any losses. Instead, they sold large amounts of loans to investors, usually in the form of loan packages called ‘mortgage-backed securities’ (MBS), which consisted of thousands of individual mortgage loans of varying quality. Over time, MBS products became increasingly complex and opaque, but continued to be rated by external agencies as if they were very safe.
• Investors who purchased MBS products mistakenly thought that they were buying a very low risk asset: even if some mortgage loans in the package were not repaid, it was assumed that most loans would continue to be repaid. These investors included large US banks, as well as foreign banks from Europe and other economies that sought higher returns than could be achieved in their local markets.

2. Increased borrowing by banks and investors

In the lead up to the GFC, banks and other investors in the United States and abroad borrowed increasing amounts to expand their lending and purchase MBS products. Borrowing money to purchase an asset (known as an increase in leverage) magnifies potential profits but also magnifies potential losses. As a result, when house prices began to fall, banks and investors incurred large losses because they had borrowed so much.

Additionally, banks and some investors increasingly borrowed money for very short periods, including overnight, to purchase assets that could not be sold quickly. Consequently, they became increasingly reliant on lenders – which included other banks – extending new loans as existing short-term loans were repaid.

3. Regulation and policy errors

Regulation of subprime lending and MBS products was too lax. In particular, there was insufficient regulation of the institutions that created and sold the complex and opaque MBS to investors. Not only were many individual borrowers provided with loans so large that they were unlikely to be able to repay them, but fraud was increasingly common – such as overstating a borrower's income and over-promising investors on the safety of the MBS products they were being sold.

In addition, as the crisis unfolded, many central banks and governments did not fully recognise the extent to which bad loans had been extended during the boom and the many ways in which mortgage losses were spreading through the financial system.

How the GFC Unfolded

US house prices fell, borrowers missed repayments

The catalysts for the GFC were falling US house prices and a rising number of borrowers unable to repay their loans. House prices in the United States peaked around mid , coinciding with a rapidly rising supply of newly built houses in some areas. As house prices began to fall, the share of borrowers that failed to make their loan repayments began to rise. Loan repayments were particularly sensitive to house prices in the United States because the proportion of US households (both owner-occupiers and investors) with large debts had risen a lot during the boom and was higher than in other countries.

Stresses in the financial system

Stresses in the financial system first emerged clearly around mid Some lenders and investors began to incur large losses because many of the houses they repossessed after the borrowers missed repayments could only be sold at prices below the loan balance. Relatedly, investors became less willing to purchase MBS products and were actively trying to sell their holdings. As a result, MBS prices declined, which reduced the value of MBS and thus the net worth of MBS investors. In turn, investors who had purchased MBS with short-term loans found it much more difficult to roll over these loans, which further exacerbated MBS selling and declines in MBS prices.

Spillovers to other countries

As noted above, foreign banks were active participants in the US housing market during the boom, including purchasing MBS (with short-term US dollar funding). US banks also had substantial operations in other countries. These interconnections provided a channel for the problems in the US housing market to spill over to financial systems and economies in other countries.

Failure of financial firms, panic in financial markets

Financial stresses peaked following the failure of the US financial firm Lehman Brothers in September Together with the failure or near failure of a range of other financial firms around that time, this triggered a panic in financial markets globally. Investors began pulling their money out of banks and investment funds around the world as they did not know who might be next to fail and how exposed each institution was to subprime and other distressed loans. Consequently, financial markets became dysfunctional as everyone tried to sell at the same time and many institutions wanting new financing could not obtain it. Businesses also became much less willing to invest and households less willing to spend as confidence collapsed. As a result, the United States and some other economies fell into their deepest recessions since the Great Depression.

Policy Responses

Until September , the main policy response to the crisis came from central banks that lowered interest rates to stimulate economic activity, which began to slow in late However, the policy response ramped up following the collapse of Lehman Brothers and the downturn in global growth.

Lower interest rates

Central banks lowered interest rates rapidly to very low levels (often near zero); lent large amounts of money to banks and other institutions with good assets that could not borrow in financial markets; and purchased a substantial amount of financial securities to support dysfunctional markets and to stimulate economic activity once policy interest rates were near zero (known as ‘quantitative easing’).

Increased government spending

Governments increased their spending to stimulate demand and support employment throughout the economy; guaranteed deposits and bank bonds to shore up confidence in financial firms; and purchased ownership stakes in some banks and other financial firms to prevent bankruptcies that could have exacerbated the panic in financial markets.

Although the global economy experienced its sharpest slowdown since the Great Depression, the policy response prevented a global depression. Nevertheless, millions of people lost their jobs, their homes and large amounts of their wealth. Many economies also recovered much more slowly from the GFC than previous recessions that were not associated with financial crises. For example, the US unemployment rate only returned to pre-crisis levels in , about nine years after the onset of the crisis.

Stronger oversight of financial firms

In response to the crisis, regulators strengthened their oversight of banks and other financial institutions. Among many new global regulations, banks must now assess more closely the risk of the loans they are providing and use more resilient funding sources. For example, banks must now operate with lower leverage and can’t use as many short-term loans to fund the loans that they make to their customers. Regulators are also more vigilant about the ways in which risks can spread throughout the financial system, and require actions to prevent the spreading of risks.

Australia and the GFC

Relatively strong economic performance

Australia did not experience a large economic downturn or a financial crisis during the GFC. However, the pace of economic growth did slow significantly, the unemployment rate rose sharply and there was a period of heightened uncertainty. The relatively strong performance of the Australian economy and financial system during the GFC, compared with other countries, reflected a range of factors, including:

• Australian banks had very small exposures to the US housing market and US banks, partly because domestic lending was very profitable.
• Subprime and other high-risk loans were only a small share of lending in Australia, partly because of the historical focus on lending standards by the Australian banking regulator (the Australian Prudential Regulation Authority (APRA)).
• Australia's economy was buoyed by large resource exports to China, whose economy rebounded quickly after the initial GFC shock (mainly due to expansionary fiscal policy).

Also a large policy response

Despite the Australian financial system being in a much better position before the GFC, given the magnitude of the shock to the global economy and to confidence more broadly, there was also a large policy response in Australia to ensure that the economy did not suffer a major downturn. In particular, the Reserve Bank lowered the cash rate significantly, and the Australian Government undertook expansionary fiscal policy and provided guarantees on deposits at and bonds issued by Australian banks.

Following the crisis, APRA implemented the stronger global banking regulations in Australia. Together, APRA and the financial market and corporate regulator, the Australian Securities and Investments Commission, have also strengthened lending standards to make the financial and private sectors more resilient.

The period known as the Great Moderation came to an end when the decade-long expansion in US housing market activity peaked in and residential construction began declining. In , losses on mortgage-related financial assets began to cause strains in global financial markets, and in December the US economy entered a recession. That year several large financial firms experienced financial distress, and many financial markets experienced significant turbulence. In response, the Federal Reserve provided liquidity and support through a range of programs motivated by a desire to improve the functioning of financial markets and institutions, and thereby limit the harm to the US economy.¹  Nonetheless, in the fall of , the economic contraction worsened, ultimately becoming deep enough and protracted enough to acquire the label “the Great Recession." While the US economy bottomed out in the middle of , the recovery in the years immediately following was by some measures unusually slow. The Federal Reserve has provided unprecedented monetary accommodation in response to the severity of the contraction and the gradual pace of the ensuing recovery.  In addition, the financial crisis led to a range of major reforms in banking and financial regulation, congressional legislation that significantly affected the Federal Reserve.

Rise and Fall of the Housing Market

The recession and crisis followed an extended period of expansion in US housing construction, home prices, and housing credit. This expansion began in the s and continued unabated through the recession, accelerating in the mids. Average home prices in the United States more than doubled between and , the sharpest increase recorded in US history, and even larger gains were recorded in some regions. Home ownership in this period rose from 64 percent in to 69 percent in , and residential investment grew from about percent of US gross domestic product to about percent over the same period. Roughly 40 percent of net private sector job creation between and was accounted for by employment in housing-related sectors.

The expansion in the housing sector was accompanied by an expansion in home mortgage borrowing by US households. Mortgage debt of US households rose from 61 percent of GDP in to 97 percent in A number of factors appear to have contributed to the growth in home mortgage debt. In the period after the recession, the Federal Open Market Committee (FOMC) maintained a low federal funds rate, and some observers have suggested that by keeping interest rates low for a “prolonged period” and by only increasing them at a “measured pace” after , the Federal Reserve contributed to the expansion in housing market activity (Taylor ).  However, other analysts have suggested that such factors can only account for a small portion of the increase in housing activity (Bernanke ).  Moreover, the historically low level of interest rates may have been due, in part, to large accumulations of savings in some emerging market economies, which acted to depress interest rates globally (Bernanke ). Others point to the growth of the market for mortgage-backed securities as contributing to the increase in borrowing. Historically, it was difficult for borrowers to obtain mortgages if they were perceived as a poor credit risk, perhaps because of a below-average credit history or the inability to provide a large down payment. But during the early and mids, high-risk, or “subprime,” mortgages were offered by lenders who repackaged these loans into securities. The result was a large expansion in access to housing credit, helping to fuel the subsequent increase in demand that bid up home prices nationwide.

Effects on the Financial Sector

After home prices peaked in the beginning of , according to the Federal Housing Finance Agency House Price Index, the extent to which prices might eventually fall became a significant question for the pricing of mortgage-related securities because large declines in home prices were viewed as likely to lead to an increase in mortgage defaults and higher losses to holders of such securities. Large, nationwide declines in home prices had been relatively rare in the US historical data, but the run-up in home prices also had been unprecedented in its scale and scope. Ultimately, home prices fell by over a fifth on average across the nation from the first quarter of to the second quarter of This decline in home prices helped to spark the financial crisis of , as financial market participants faced considerable uncertainty about the incidence of losses on mortgage-related assets. In August , pressures emerged in certain financial markets, particularly the market for asset-backed commercial paper, as money market investors became wary of exposures to subprime mortgages (Covitz, Liang, and Suarez ). In the spring of , the investment bank Bear Stearns was acquired by JPMorgan Chase with the assistance of the Federal Reserve. In September, Lehman Brothers filed for bankruptcy, and the next day the Federal Reserve provided support to AIG, a large insurance and financial services company. Citigroup and Bank of America sought support from the Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation.

The Fed’s support to specific financial institutions was not the only expansion of central bank credit in response to the crisis. The Fed also introduced a number of new lending programs that provided liquidity to support a range of financial institutions and markets. These included a credit facility for “primary dealers,” the broker-dealers that serve as counterparties for the Fed’s open market operations, as well as lending programs designed to provide liquidity to money market mutual funds and the commercial paper market.  Also introduced, in cooperation with the US Department of the Treasury, was the Term Asset-Backed Securities Loan Facility (TALF), which was designed to ease credit conditions for households and businesses by extending credit to US holders of high-quality asset-backed securities.

Initially, the expansion of Federal Reserve credit was financed by reducing the Federal Reserve’s holdings of Treasury securities, in order to avoid an increase in bank reserves that would drive the federal funds rate below its target as banks sought to lend out their excess reserves. But in October , the Federal Reserve gained the authority to pay banks interest on their excess reserves. This gave banks an incentive to hold onto their reserves rather than lending them out, thus mitigating the need for the Federal Reserve to offset its expanded lending with reductions in other assets.²

Effects on the Broader Economy

The housing sector led not only the financial crisis, but also the downturn in broader economic activity. Residential investment peaked in , as did employment in residential construction. The overall economy peaked in December , the month the National Bureau of Economic Research recognizes as the beginning of the recession. The decline in overall economic activity was modest at first, but it steepened sharply in the fall of as stresses in financial markets reached their climax. From peak to trough, US gross domestic product fell by percent, making this the deepest recession since World War II. It was also the longest, lasting eighteen months. The unemployment rate more than doubled, from less than 5 percent to 10 percent. 

In response to weakening economic conditions, the FOMC lowered its target for the federal funds rate from percent at the end of to 2 percent at the beginning of September As the financial crisis and the economic contraction intensified in the fall of , the FOMC accelerated its interest rate cuts, taking the rate to its effective floor – a target range of 0 to 25 basis points – by the end of the year. In November , the Federal Reserve also initiated the first in a series of large-scale asset purchase (LSAP) programs, buying mortgage-backed securities and longer-term Treasury securities. These purchases were intended to put downward pressure on long-term interest rates and improve financial conditions more broadly, thereby supporting economic activity (Bernanke ).

The recession ended in June , but economic weakness persisted. Economic growth was only moderate – averaging about 2 percent in the first four years of the recovery – and the unemployment rate, particularly the rate of long-term unemployment, remained at historically elevated levels. In the face of this prolonged weakness, the Federal Reserve maintained an exceptionally low level for the federal funds rate target and sought new ways to provide additional monetary accommodation. These included additional LSAP programs, known more popularly as quantitative easing, or QE. The FOMC also began communicating its intentions for future policy settings more explicitly in its public statements, particularly the circumstances under which exceptionally low interest rates were likely to be appropriate. For example, in December , the committee stated that it anticipates that exceptionally low interest rates would likely remain appropriate at least as long as the unemployment rate was above a threshold value of percent and inflation was expected to be no more than a half percentage point above the committee’s 2 percent longer-run goal. This strategy, known as “forward guidance,” was intended to convince the public that rates would stay low at least until certain economic conditions were met, thereby putting downward pressure on longer-term interest rates.

Effects on Financial Regulation

When the financial market turmoil had subsided, attention naturally turned to reforms to the financial sector and its supervision and regulation, motivated by a desire to avoid similar events in the future. A number of measures have been proposed or put in place to reduce the risk of financial distress. For traditional banks, there are significant increases in the amount of required capital overall, with larger increases for so-called “systemically important” institutions (Bank for International Settlements a;  b).  Liquidity standards will for the first time formally limit the amount of banks’ maturity transformation (Bank for International Settlements ).  Regular stress testing will help both banks and regulators understand risks and will force banks to use earnings to build capital instead of paying dividends as conditions deteriorate (Board of Governors ).    

The Dodd-Frank Act of  also created new provisions for the treatment of large financial institutions. For example, the Financial Stability Oversight Council has the authority to designate nontraditional credit intermediaries “Systemically Important Financial Institutions” (SIFIs), which subjects them to the oversight of the Federal Reserve. The act also created the Orderly Liquidation Authority (OLA), which allows the Federal Deposit Insurance Corporation to wind down certain institutions when the firm’s failure is expected to pose a great risk to the financial system. Another provision of the act requires large financial institutions to create “living wills,” which are detailed plans laying out how the institution could be resolved under US bankruptcy code without jeopardizing the rest of the financial system or requiring government support.

Like the Great Depression of the s and the Great Inflation of the s, the financial crisis of and the ensuing recession are vital areas of study for economists and policymakers. 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.

Early 21st-century global economic decline

For background on financial market events beginning in , see Financial crisis of – For the recession, see COVID recession.

Not to be confused with the Great Depression during the s or the Great Resignation.

The Great Recession was a period of marked general decline (recession) observed in national economies globally that occurred between and The scale and timing of the recession varied from country to country (see map).^[1][2] At the time, the International Monetary Fund (IMF) concluded that it was the most severe economic and financial meltdown since the Great Depression. One result was a serious disruption of normal international relations.

The causes of the Great Recession include a combination of vulnerabilities that developed in the financial system, along with a series of triggering events that began with the bursting of the United States housing bubble in –^[3][4] When housing prices fell and homeowners began to abandon their mortgages, the value of mortgage-backed securities held by investment banks declined in –, causing several to collapse or be bailed out in September This – phase was called the subprime mortgage crisis. The combination of banks unable to provide funds to businesses, and homeowners paying down debt rather than borrowing and spending, resulted in the Great Recession that began in the U.S. officially in December and lasted until June , thus extending over 19 months.^[5][6] As with most other recessions, it appears that no known formal theoretical or empirical model was able to accurately predict the advance of this recession, except for minor signals in the sudden rise of forecast probabilities, which were still well under 50%.^[7]

The recession was not felt equally around the world; whereas most of the world's developed economies, particularly in North America, South America and Europe, fell into a severe, sustained recession, many more recently developed economies suffered far less impact, particularly China, India and Indonesia, whose economies grew substantially during this period. Similarly, Oceania suffered minimal impact, in part due to its proximity to Asian markets.^{[citation needed]}

Terminology[edit]

Two senses of the word "recession" exist: one sense referring broadly to "a period of reduced economic activity"^[8] and ongoing hardship; and the more precise sense used in economics, which is defined operationally, referring specifically to the contraction phase of a business cycle, with two or more consecutive quarters of GDP contraction (negative GDP growth rate).

The definition of "great" is amount or intensity considerably above the normal or average and, contrary to some common beliefs, does not infer a positive connotation, merely large in size or scope. (e.g. the Great Depression).

Under the academic definition, the recession ended in the United States in June or July ^{[9][10][11][12][13][14][15][16][17]}

Robert Kuttner argues, "&#;'The Great Recession,' is a misnomer. We should stop using it. Recessions are mild dips in the business cycle that are either self-correcting or soon cured by modest fiscal or monetary stimulus. Because of the continuing deflationary trap, it would be more accurate to call this decade's stagnant economy The Lesser Depression or The Great Deflation."^[18]

Overview[edit]

The Great Recession met the IMF criteria for being a global recession only in the single calendar year ^[19][20] That IMF definition requires a decline in annual real world GDP per&#x;capita. Despite the fact that quarterly data are being used as recession definition criteria by all G20 members, representing 85% of the world GDP,^[21] the International Monetary Fund (IMF) has decided—in the absence of a complete data set—not to declare/measure global recessions according to quarterly GDP data. The seasonally adjusted PPP&#x;weighted real GDP for the G20&#x;zone, however, is a good indicator for the world GDP, and it was measured to have suffered a direct quarter on quarter decline during the three quarters from Q3&#x; until Q1&#x;, which more accurately mark when the recession took place at the global level.^[22]

According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the recession began in December and ended in June , and thus extended over eighteen months.^[6][23]

The years leading up to the crisis were characterized by an exorbitant rise in asset prices and associated boom in economic demand.^[24] Further, the U.S. shadow banking system (i.e., non-depository financial institutions such as investment banks) had grown to rival the depository system yet was not subject to the same regulatory oversight, making it vulnerable to a bank run.^[25]

US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world, as they offered higher yields than U.S. government bonds. Many of these securities were backed by subprime mortgages, which collapsed in value when the U.S. housing bubble burst during and homeowners began to default on their mortgage payments in large numbers starting in ^[26]

The emergence of sub-prime loan losses in began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15, , a major panic broke out on the inter-bank loan market. There was the equivalent of a bank run on the shadow banking system, resulting in many large and well established investment banks and commercial banks in the United States and Europe suffering huge losses and even facing bankruptcy, resulting in massive public financial assistance (government bailouts).^[27]

The global recession that followed resulted in a sharp drop in international trade, rising unemployment and slumping commodity prices.^[28] Several economists predicted that recovery might not appear until and that the recession would be the worst since the Great Depression of the s.^[29][30] Economist Paul Krugman once commented on this as seemingly the beginning of "a second Great Depression".^[31]

Governments and central banks responded with fiscal policy and monetary policy initiatives to stimulate national economies and reduce financial system risks. The recession renewed interest in Keynesian' economic ideas on how to combat recessionary conditions. Economists advise that the stimulus measures such as quantitative easing (pumping money into the system) and holding down central bank wholesale lending interest rate should be withdrawn as soon as economies recover enough to "chart a path to sustainable growth".^[32][33][34]

The distribution of household incomes in the United States became more unequal during the post economic recovery.^[35]Income inequality in the United States grew from to in more than two-thirds of metropolitan areas.^[36] Median household wealth fell 35% in the US, from $, to $68, between and ^[37]

Causes[edit]

Main article: Causes of the Great Recession

The great asset bubble:^[38]
1.Central banks' gold reserves: $ trillion.
2.M0 (paper money): $ trillion.
3.Traditional (fractional reserve) banking assets: $39 trillion.
4.Shadow banking assets: $62 trillion.
5.Other assets: $ trillion.
6.Bail-out money (early ): $ trillion.

Further information: Financial crisis of –

Panel reports[edit]

The majority report provided by US Financial Crisis Inquiry Commission, composed of six Democratic and four Republican appointees, reported its findings in January It concluded that "the crisis was avoidable and was caused by:

• Widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages;
• Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk;
• An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis;
• Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels."^[39]

There were two Republican dissenting FCIC reports. One of them, signed by three Republican appointees, concluded that there were multiple causes. In his separate dissent to the majority and minority opinions of the FCIC, Commissioner Peter J. Wallison of the American Enterprise Institute (AEI) primarily blamed U.S. housing policy, including the actions of Fannie & Freddie, for the crisis. He wrote: "When the bubble began to deflate in mid, the low quality and high risk loans engendered by government policies failed in unprecedented numbers."^[40]

In its "Declaration of the Summit on Financial Markets and the World Economy," dated November 15, , leaders of the Group of 20 cited the following causes:

During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.^[41]

Federal Reserve Chair Ben Bernanke testified in September before the FCIC regarding the causes of the crisis. He wrote that there were shocks or triggers (i.e., particular events that touched off the crisis) and vulnerabilities (i.e., structural weaknesses in the financial system, regulation and supervision) that amplified the shocks. Examples of triggers included: losses on subprime mortgage securities that began in and a run on the shadow banking system that began in mid, which adversely affected the functioning of money markets. Examples of vulnerabilities in the private sector included: financial institution dependence on unstable sources of short-term funding such as repurchase agreements or Repos; deficiencies in corporate risk management; excessive use of leverage (borrowing to invest); and inappropriate usage of derivatives as a tool for taking excessive risks. Examples of vulnerabilities in the public sector included: statutory gaps and conflicts between regulators; ineffective use of regulatory authority; and ineffective crisis management capabilities. Bernanke also discussed "Too big to fail" institutions, monetary policy, and trade deficits.^[5]

Narratives[edit]

U.S. residential and non-residential investment fell relative to GDP during the crisis

There are several "narratives" attempting to place the causes of the recession into context, with overlapping elements. Five such narratives include:

1. There was the equivalent of a bank run on the shadow banking system, which includes investment banks and other non-depository financial entities. This system had grown to rival the depository system in scale yet was not subject to the same regulatory safeguards. Its failure disrupted the flow of credit to consumers and corporations.^[27][42]
2. The U.S. economy was being driven by a housing bubble. When it burst, private residential investment (i.e., housing construction) fell by over four percent of GDP.^[43][44] Consumption enabled by bubble-generated housing wealth also slowed. This created a gap in annual demand (GDP) of nearly $1 trillion. The U.S. government was unwilling to make up for this private sector shortfall.^[45][46]
3. Record levels of household debt accumulated in the decades preceding the crisis resulted in a balance sheet recession (similar to debt deflation) once housing prices began falling in Consumers began paying off debt, which reduces their consumption, slowing down the economy for an extended period while debt levels are reduced.^[27][47]
4. U.S. government policies encouraged home ownership even for those who could not afford it, contributing to lax lending standards, unsustainable housing price increases, and indebtedness.^[48]
5. Wealthy and middle-class house flippers with mid-to-good credit scores created a speculative bubble in house prices, and then wrecked local housing markets and financial institutions after they defaulted on their debt en masse.^[49]

Underlying narratives #1–3 is a hypothesis that growing income inequality and wage stagnation encouraged families to increase their household debt to maintain their desired living standard, fueling the bubble. Further, this greater share of income flowing to the top increased the political power of business interests, who used that power to deregulate or limit regulation of the shadow banking system.^[50][51][52]

Narrative #5 challenges the popular claim (narrative #4) that subprime borrowers with shoddy credit caused the crisis by buying homes they couldn't afford. This narrative is supported by new research showing that the biggest growth of mortgage debt during the U.S. housing boom came from those with good credit scores in the middle and top of the credit score distribution—and that these borrowers accounted for a disproportionate share of defaults.^[53]

Trade imbalances and debt bubbles[edit]

U.S. households and financial businesses significantly increased borrowing (leverage) in the years leading up to the crisis

The Economist wrote in July that the inflow of investment dollars required to fund the U.S. trade deficit was a major cause of the housing bubble and financial crisis: "The trade deficit, less than 1% of GDP in the early s, hit 6% in That deficit was financed by inflows of foreign savings, in particular from East Asia and the Middle East. Much of that money went into dodgy mortgages to buy overvalued houses, and the financial crisis was the result."^[54]

In May , NPR explained in their Peabody Award winning program "The Giant Pool of Money" that a vast inflow of savings from developing nations flowed into the mortgage market, driving the U.S. housing bubble. This pool of fixed income savings increased from around $35 trillion in to about $70 trillion by NPR explained this money came from various sources, "[b]ut the main headline is that all sorts of poor countries became kind of rich, making things like TVs and selling us oil. China, India, Abu Dhabi, Saudi Arabia made a lot of money and banked it."^[55]

Describing the crisis in Europe, Paul Krugman wrote in February that: "What we're basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe."^[56]

Monetary policy[edit]

Another narrative about the origin has been focused on the respective parts played by the public monetary policy (in the US notably) and by the practices of private financial institutions. In the U.S., mortgage funding was unusually decentralised, opaque, and competitive, and it is believed that competition between lenders for revenue and market share contributed to declining underwriting standards and risky lending.

While Alan Greenspan's role as Chairman of the Federal Reserve has been widely discussed, the main point of controversy remains the lowering of the Federal funds rate to 1% for more than a year, which, according to Austrian theorists, injected huge amounts of "easy" credit-based money into the financial system and created an unsustainable economic boom),^[57] there is also the argument that Greenspan's actions in the years – were actually motivated by the need to take the U.S. economy out of the early s recession caused by the bursting of the dot-com bubble—although by doing so he did not help avert the crisis, but only postpone it.^[58][59]

High private debt levels[edit]

US household debt relative to disposable income and GDP.

U.S. Changes in Household Debt as a percentage of GDP for – Homeowners paying down debt for – was a headwind to the recovery. Economist Carmen Reinhartexplained that this behavior tends to slow recoveries from financial crises relative to typical recessions.^[60]

Another narrative focuses on high levels of private debt in the US economy. USA household debt as a percentage of annual disposable personal income was % at the end of , versus 77% in ^[61][62] Faced with increasing mortgage payments as their adjustable rate mortgage payments increased, households began to default in record numbers, rendering mortgage-backed securities worthless. High private debt levels also impact growth by making recessions deeper and the following recovery weaker.^[63][64]Robert Reich claims the amount of debt in the US economy can be traced to economic inequality, assuming that middle-class wages remained stagnant while wealth concentrated at the top, and households "pull equity from their homes and overload on debt to maintain living standards".^[65]

The IMF reported in April "Household debt soared in the years leading up to the downturn. In advanced economies, during the five years preceding , the ratio of household debt to income rose by an average of 39 percentage points, to percent. In Denmark, Iceland, Ireland, the Netherlands, and Norway, debt peaked at more than percent of household income. A surge in household debt to historic highs also occurred in emerging economies such as Estonia, Hungary, Latvia, and Lithuania. The concurrent boom in both house prices and the stock market meant that household debt relative to assets held broadly stable, which masked households' growing exposure to a sharp fall in asset prices. When house prices declined, ushering in the global financial crisis, many households saw their wealth shrink relative to their debt, and, with less income and more unemployment, found it harder to meet mortgage payments. By the end of , real house prices had fallen from their peak by about 41% in Ireland, 29% in Iceland, 23% in Spain and the United States, and 21% in Denmark. Household defaults, underwater mortgages (where the loan balance exceeds the house value), foreclosures, and fire sales are now endemic to a number of economies. Household deleveraging by paying off debts or defaulting on them has begun in some countries. It has been most pronounced in the United States, where about two-thirds of the debt reduction reflects defaults."^[66][67]

Pre-recession warnings[edit]

The onset of the economic crisis took most people by surprise. A paper identifies twelve economists and commentators who, between and , predicted a recession based on the collapse of the then-booming housing market in the United States:^[68]Dean Baker, Wynne Godley, Fred Harrison, Michael Hudson, Eric Janszen, Med Jones^[69]Steve Keen, Jakob Brøchner Madsen, Jens Kjaer Sørensen, Kurt Richebächer, Nouriel Roubini, Peter Schiff, and Robert Shiller.^[68][70]

Housing bubbles[edit]

Housing price appreciation in selected countries, –

Further information: Real estate bubble

By , real estate bubbles were still under way in many parts of the world,^[71] especially in the United States, France, the United Kingdom, Spain, The Netherlands, Australia, the United Arab Emirates, New Zealand, Ireland, Poland,^[72]South Africa, Greece, Bulgaria, Croatia,^[73]Norway, Singapore, South Korea, Sweden, Finland, Argentina,^[74] the Baltic states, India, Romania, Ukraine and China.^[75] U.S. Federal Reserve Chairman Alan Greenspan said in mid that "at a minimum, there's a little 'froth' [in the U.S. housing market]it's hard not to see that there are a lot of local bubbles".^[76]

The Economist, writing at the same time, went further, saying, "[T]he worldwide rise in house prices is the biggest bubble in history".^[77] Real estate bubbles are (by definition of the word "bubble") followed by a price decrease (also known as a housing price crash) that can result in many owners holding negative equity (a mortgage debt higher than the current value of the property).

Ineffective or inappropriate regulation[edit]

Regulations encouraging lax lending standards[edit]

Several analysts, such as Peter Wallison and Edward Pinto of the American Enterprise Institute, have asserted that private lenders were encouraged to relax lending standards by government affordable housing policies.^[78][79] They cite The Housing and Community Development Act of , which initially required that 30 percent or more of Fannie's and Freddie's loan purchases be related to affordable housing. The legislation gave HUD the power to set future requirements. These rose to 42 percent in and 50 percent in , and by (under the G.W. Bush Administration) a 56 percent minimum was established.^[80] To fulfill the requirements, Fannie Mae and Freddie Mac established programs to purchase $5 trillion in affordable housing loans,^[81] and encouraged lenders to relax underwriting standards to produce those loans.^[80]

These critics also cite, as inappropriate regulation, "The National Homeownership Strategy: Partners in the American Dream ("Strategy"), which was compiled in by Henry Cisneros, President Clinton's HUD Secretary. In , the independent research company, Graham Fisher & Company, stated: "While the underlying initiatives of the [Strategy] were broad in content, the main theme was the relaxation of credit standards."^[82] Critics of this argument have pointed out that loans to lower income people only represented a small percentage of these loans. ^[83]

The Community Reinvestment Act (CRA) is also identified as one of the causes of the recession, by some critics. They contend that lenders relaxed lending standards in an effort to meet CRA commitments, and they note that publicly announced CRA loan commitments were massive, totaling $ trillion in the years between and ^[84]

However, the Financial Crisis Inquiry Commission (FCIC) Democratic majority report concluded that Fannie & Freddie "were not a primary cause" of the crisis and that CRA was not a factor in the crisis.^[39] Further, since housing bubbles appeared in multiple countries in Europe as well, the FCIC Republican minority dissenting report also concluded that U.S. housing policies were not a robust explanation for a wider global housing bubble.^[39] The hypothesis that a primary cause of the crisis was U.S. government housing policy requiring banks to make risky loans has been widely disputed,^[85] with Paul Krugman referring to it as "imaginary history".^[86]

One of the other challenges with blaming government regulations for essentially forcing banks to make risky loans is the timing. Subprime lending increased from around 10% of mortgage origination historically to about 20% only from to , with housing prices peaking in Blaming affordable housing regulations established in the s for a sudden spike in subprime origination is problematic at best.^[39] A more proximate government action to the sudden rise in subprime lending was the SEC relaxing lending standards for the top investment banks during an April meeting with bank leaders. These banks increased their risk-taking shortly thereafter, significantly increasing their purchases and securitization of lower-quality mortgages, thus encouraging additional subprime and Alt-A lending by mortgage companies.^[87] This action by its investment bank competitors also resulted in Fannie Mae and Freddie Mac taking on more risk.^[88]

The Gramm–Leach–Bliley Act (), which reduced the regulation of banks by allowing commercial and investment banks to merge, has also been blamed for the crisis, by Nobel Prize-winning economist Joseph Stiglitz among others.^[89]

Derivatives[edit]

Several sources have noted the failure of the US government to supervise or even require transparency of the financial instruments known as derivatives.^[90][91][92] Derivatives such as credit default swaps (CDSs) were unregulated or barely regulated. Michael Lewis noted CDSs enabled speculators to stack bets on the same mortgage securities. This is analogous to allowing many persons to buy insurance on the same house. Speculators that bought CDS protection were betting significant mortgage security defaults would occur, while the sellers (such as AIG) bet they would not. An unlimited amount could be wagered on the same housing-related securities, provided buyers and sellers of the CDS could be found.^[93] When massive defaults occurred on underlying mortgage securities, companies like AIG that were selling CDS were unable to perform their side of the obligation and defaulted; U.S. taxpayers paid over $ billion to global financial institutions to honor AIG obligations, generating considerable outrage.^[94]

A investigative article in the Washington Post found leading government officials at the time (Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and SEC Chairman Arthur Levitt) vehemently opposed any regulation of derivatives. In , Brooksley E. Born, head of the Commodity Futures Trading Commission, put forth a policy paper asking for feedback from regulators, lobbyists, and legislators on the question of whether derivatives should be reported, sold through a central facility, or whether capital requirements should be required of their buyers. Greenspan, Rubin, and Levitt pressured her to withdraw the paper and Greenspan persuaded Congress to pass a resolution preventing CFTC from regulating derivatives for another six months&#;— when Born's term of office would expire.^[91] Ultimately, it was the collapse of a specific kind of derivative, the mortgage-backed security, that triggered the economic crisis of ^[92]

Shadow banking system[edit]

Securitization markets were impaired during the crisis.

Paul Krugman wrote in that the run on the shadow banking system was the fundamental cause of the crisis. "As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realised that they were re-creating the kind of financial vulnerability that made the Great Depression possible&#;– and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank." He referred to this lack of controls as "malign neglect".^[95][96]

During , three of the largest U.S. investment banks either went bankrupt (Lehman Brothers) or were sold at fire sale prices to other banks (Bear Stearns and Merrill Lynch). The investment banks were not subject to the more stringent regulations applied to depository banks. These failures exacerbated the instability in the global financial system. The remaining two investment banks, Morgan Stanley and Goldman Sachs, potentially facing failure, opted to become commercial banks, thereby subjecting themselves to more stringent regulation but receiving access to credit via the Federal Reserve.^[97][98] Further, American International Group (AIG) had insured mortgage-backed and other securities but was not required to maintain sufficient reserves to pay its obligations when debtors defaulted on these securities. AIG was contractually required to post additional collateral with many creditors and counter-parties, touching off controversy when over $&#;billion of U.S. taxpayer money was paid out to major global financial institutions on behalf of AIG. While this money was legally owed to the banks by AIG (under agreements made via credit default swaps purchased from AIG by the institutions), a number of Congressmen and media members expressed outrage that taxpayer money was used to bail out banks.^[94]

Economist Gary Gorton wrote in May

Unlike the historical banking panics of the 19th and early 20th centuries, the current banking panic is a wholesale panic, not a retail panic. In the earlier episodes, depositors ran to their banks and demanded cash in exchange for their checking accounts. Unable to meet those demands, the banking system became insolvent. The current panic involved financial firms "running" on other financial firms by not renewing sale and repurchase agreements (repo) or increasing the repo margin ("haircut"), forcing massive deleveraging, and resulting in the banking system being insolvent.^[99]

The Financial Crisis Inquiry Commission reported in January

In the early part of the 20th century, we erected a series of protections&#;– the Federal Reserve as a lender of last resort, federal deposit insurance, ample regulations&#;– to provide a bulwark against the panics that had regularly plagued America's banking system in the 19th century. Yet, over the past plus years, we permitted the growth of a shadow banking system&#;– opaque and laden with short term debt&#;– that rivaled the size of the traditional banking system. Key components of the market&#;– for example, the multitrillion-dollar repo lending market, off-balance-sheet entities, and the use of over-the-counter derivatives&#;– were hidden from view, without the protections we had constructed to prevent financial meltdowns. We had a 21st-century financial system with 19th-century safeguards.^[39]

Systemic crisis[edit]

The financial crisis and the recession have been described as a symptom of another, deeper crisis by a number of economists. For example, Ravi Batra argues that growing inequality of financial capitalism produces speculative bubbles that burst and result in depression and major political changes.^[][] Feminist economists Ailsa McKay and Margunn Bjørnholt argue that the financial crisis and the response to it revealed a crisis of ideas in mainstream economics and within the economics profession, and call for a reshaping of both the economy, economic theory and the economics profession. They argue that such a reshaping should include new advances within feminist economics and ecological economics that take as their starting point the socially responsible, sensible and accountable subject in creating an economy and economic theories that fully acknowledge care for each other as well as the planet.^[]

Effects[edit]

Main article: Effects of the Great Recession

Effects on the United States[edit]

Several major U.S. economic variables had recovered from the – Subprime mortgage crisisand Great Recession by the – time period.

U.S. Real GDP&#;– Contributions to Percent Change by Component –

Further information: Great Recession in the United States, Unemployment in the United States, and National debt of the United States

The Great Recession had a significant economic and political impact on the United States. While the recession technically lasted from December &#;&#; June (the nominal GDP trough), many important economic variables did not regain pre-recession (November or Q4 ) levels until – For example, real GDP fell $ billion (%) and did not recover its $15 trillion pre-recession level until Q3 ^[] Household net worth, which reflects the value of both stock markets and housing prices, fell $ trillion (%) and did not regain its pre-recession level of $ trillion until Q3 ^[] The number of persons with jobs (total non-farm payrolls) fell million (%) and did not regain the pre-recession level of million until May ^[] The unemployment rate peaked at % in October and did not return to its pre-recession level of % until May ^[]

A key dynamic slowing the recovery was that both individuals and businesses paid down debts for several years, as opposed to borrowing and spending or investing as had historically been the case. This shift to a private sector surplus drove a sizable government deficit.^[] However, the federal government held spending at about $ trillion from fiscal years – (thereby decreasing it as a percent of GDP), a form of austerity. Then-Fed Chair Ben Bernanke explained during November several of the economic headwinds that slowed the recovery:

• The housing sector did not rebound, as was the case in prior recession recoveries, as the sector was severely damaged during the crisis. Millions of foreclosures had created a large surplus of properties and consumers were paying down their debts rather than purchasing homes.
• Credit for borrowing and spending by individuals (or investing by corporations) was not readily available as banks paid down their debts.
• Restrained government spending following initial stimulus efforts (i.e., austerity) was not sufficient to offset private sector weaknesses.^[]

On the political front, widespread anger at banking bailouts and stimulus measures (begun by President George W. Bush and continued or expanded by President Obama) with few consequences for banking leadership, were a factor in driving the country politically rightward starting in The Troubled Asset Relief Program (TARP) was the largest of the bailouts. In , TARP allocated $ billion to various major financial institutions. However, the US collected $ billion in return from these loans in , recording a profit of $ billion.^[] Nonetheless, there was a political shift from the Democratic party. Examples include the rise of the Tea Party and the loss of Democratic majorities in subsequent elections. President Obama declared the bailout measures started under the Bush administration and continued during his administration as completed and mostly profitable as of December&#;^[update].^[] As of January&#;^[update], bailout funds had been fully recovered by the government, when interest on loans is taken into consideration. A total of $B was invested, loaned, or granted due to various bailout measures, while $B had been returned to the Treasury. The Treasury had earned another $B in interest on bailout loans, resulting in an $87B profit.^[] Economic and political commentators have argued the Great Recession was also an important factor in the rise of populist sentiment that resulted in the election of President Trump in , and left-wing populist Bernie Sanders' candidacy for the Democratic nomination.^[][][][]

Effects on Europe[edit]

Further information: European debt crisis, Austerity, and Great Recession in Europe

Public Debt to GDP Ratio for Selected European Countries – to Source Data: Eurostat

The crisis in Europe generally progressed from banking system crises to sovereign debt crises, as many countries elected to bail out their banking systems using taxpayer money.^{[citation needed]} Greece was different in that it faced large public debts rather than problems within its banking system. Several countries received bailout packages from the troika (European Commission, European Central Bank, International Monetary Fund), which also implemented a series of emergency measures.

Many European countries embarked on austerity programs, reducing their budget deficits relative to GDP from to For example, according to the CIA World Factbook Greece improved its budget deficit from % GDP in to % in Iceland, Italy, Ireland, Portugal, France, and Spain also improved their budget deficits from to relative to GDP.^[][]

However, with the exception of Germany, each of these countries had public-debt-to-GDP ratios that increased (i.e., worsened) from to , as indicated in the chart at right. Greece's public-debt-to-GDP ratio increased from % in to % in ^[] to % in This indicates that despite improving budget deficits, GDP growth was not sufficient to support a decline (improvement) in the debt-to-GDP ratio for these countries during this period. Eurostat reported that the debt to GDP ratio for the 17 Euro area countries together was % in , % in , % in , and % in ^[][]

According to the CIA World Factbook, from to , the unemployment rates in Spain, Greece, Italy, Ireland, Portugal, and the UK increased. France had no significant changes, while in Germany and Iceland the unemployment rate declined.^[] Eurostat reported that Eurozone unemployment reached record levels in September at %, up from % the prior year. Unemployment varied significantly by country.^[]

Economist Martin Wolf analysed the relationship between cumulative GDP growth from to and total reduction in budget deficits due to austerity policies (see chart at right) in several European countries during April He concluded that: "In all, there is no evidence here that large fiscal contractions [budget deficit reductions] bring benefits to confidence and growth that offset the direct effects of the contractions. They bring exactly what one would expect: small contractions bring recessions and big contractions bring depressions." Changes in budget balances (deficits or surpluses) explained approximately 53% of the change in GDP, according to the equation derived from the IMF data used in his analysis.^[]

Economist Paul Krugman analysed the relationship between GDP and reduction in budget deficits for several European countries in April and concluded that austerity was slowing growth, similar to Martin Wolf. He also wrote: "&#;this also implies that 1 euro of austerity yields only about euros of reduced deficit, even in the short run. No wonder, then, that the whole austerity enterprise is spiraling into disaster."^[]

Britain's decision to leave the European Union in has been partly attributed to the after-effects of the Great Recession on the country.^[][][][][]

Countries that avoided recession[edit]

Poland and Slovakia were the only two members of the European Union to avoid a GDP recession during the Great Recession. As of December , the Polish economy had not entered recession nor even contracted, while its IMF GDP growth forecast of percent was expected to be upgraded.^[][][] Analysts identified several causes for the positive economic development in Poland: Extremely low levels of bank lending and a relatively very small mortgage market; the relatively recent dismantling of EU trade barriers and the resulting surge in demand for Polish goods since ; Poland being the recipient of direct EU funding since ; lack of over-dependence on a single export sector; a tradition of government fiscal responsibility; a relatively large internal market; the free-floating Polish zloty; low labour costs attracting continued foreign direct investment; economic difficulties at the start of the decade, which prompted austerity measures in advance of the world crisis.^{[citation needed]}

While India, Uzbekistan, China, and Iran experienced slowing growth, they did not enter recessions.

South Korea narrowly avoided technical recession in the first quarter of ^[] The International Energy Agency stated in mid September that South Korea could be the only large OECD country to avoid recession for the whole of ^[] It was the only developed economy to expand in the first half of

Australia avoided a technical recession after experiencing only one quarter of negative growth in the fourth quarter of , with GDP returning to positive in the first quarter of ^[][]

The financial crisis did not affect developing countries to a great extent. Experts see several reasons: Africa was not affected because it is not fully integrated in the world market. Latin America and Asia seemed better prepared, since they have experienced crises before. In Latin America, for example, banking laws and regulations are very stringent. Bruno Wenn of the German DEG suggests that Western countries could learn from these countries when it comes to regulations of financial markets.^[]

Timeline of effects[edit]

Main article: Timeline of the Great Recession

The table below displays all national recessions appearing in (for the 71 countries with available data), according to the common recession definition, saying that a recession occurred whenever seasonally adjusted real GDP contracts quarter on quarter, through minimum two consecutive quarters. Only 11 out of the 71 listed countries with quarterly GDP data (Poland, Slovakia, Moldova, India, China, South Korea, Indonesia, Australia, Uruguay, Colombia and Bolivia) escaped a recession in this time period.

The few recessions appearing early in are commonly never associated to be part of the Great Recession, which is illustrated by the fact that only two countries (Iceland and Jamaica) were in recession in Q

One year before the maximum, in Q, only six countries were in recession (Iceland, Sweden, Finland, Ireland, Portugal and New Zealand). The number of countries in recession was 25 in Q2&#x;, 39 in Q3&#x; and 53 in Q4&#x; At the steepest part of the Great Recession in Q1&#x;, a total of 59 out of 71 countries were simultaneously in recession. The number of countries in recession was 37 in Q2&#x;, 13 in Q3&#x; and 11 in Q4&#x; One year after the maximum, in Q1&#x;, only seven countries were in recession (Greece, Croatia, Romania, Iceland, Jamaica, Venezuela and Belize).

The recession data for the overall Gzone (representing 85% of all GWP), depict that the Great Recession existed as a global recession throughout Q3&#x; until Q1&#x;

Subsequent follow-up recessions in &#x; were confined to Belize, El Salvador, Paraguay, Jamaica, Japan, Taiwan, New Zealand and 24 out of 50 European countries (including Greece). As of October , only five out of the 71 countries with available quarterly data (Cyprus, Italy, Croatia, Belize and El Salvador), were still in ongoing recessions.^[22][] The many follow-up recessions hitting the European countries, are commonly referred to as being direct repercussions of the European&#;sovereign&#x;debt&#;crisis.

Country specific details about recession timelines[edit]

Iceland fell into an economic depression in following the collapse of its banking system (see – Icelandic financial crisis). By mid Iceland is regarded as one of Europe's recovery success stories largely as a result of a currency devaluation that has effectively reduced wages by 50%--making exports more competitive.^[]

The following countries had a recession starting in the fourth quarter of United States,^[22]

The following countries had a recession already starting in the first quarter of Latvia,^[] Ireland,^[] New Zealand,^[] and Sweden.^[22]

The following countries/territories had a recession starting in the second quarter of Japan,^[] Hong Kong,^[] Singapore,^[] Italy,^[] Turkey,^[22] Germany,^[] United Kingdom,^[22] the Eurozone,^[] the European Union,^[22] and OECD.^[22]

The following countries/territories had a recession starting in the third quarter of Spain,^[] and Taiwan.^[]

The following countries/territories had a recession starting in the fourth quarter of Switzerland.^[]

South Korea miraculously avoided recession with GDP returning positive at a % expansion in the first quarter of ^[]

Of the seven largest economies in the world by GDP, only China avoided a recession in In the year to the third quarter of China grew by 9%. Until recently Chinese officials considered 8% GDP growth to be required simply to create enough jobs for rural people moving to urban centres.^[] This figure may more accurately be considered to be 5–7% now^[when?] that the main growth in working population is receding.^{[citation needed]}

Ukraine went into technical depression in January with a GDP growth of −20%, when comparing on a monthly basis with the GDP level in January ^[] Overall the Ukrainian real GDP fell % when comparing the entire part of with ^[] When measured quarter-on-quarter by changes of seasonally adjusted real GDP, Ukraine was more precisely in recession/depression throughout the four quarters from Q until Q (with respective qoq-changes of: %, %, %, %), and the two quarters from Q until Q (with respective qoq-changes of: % and −%).^[]

Japan was in recovery in the middle of the decade s but slipped back into recession and deflation in ^[] The recession in Japan intensified in the fourth quarter of with a GDP growth of −%,^[] and deepened further in the first quarter of with a GDP growth of −%.^[]

Political instability related to the economic crisis[edit]

On February 26, , an Economic Intelligence Briefing was added to the daily intelligence briefings prepared for the President of the United States. This addition reflects the assessment of U.S. intelligence agencies that the global financial crisis presents a serious threat to international stability.^[]

Business Week stated in March that global political instability is rising fast because of the global financial crisis and is creating new challenges that need managing.^[] The Associated Press reported in March that: United States "Director of National Intelligence Dennis Blair has said the economic weakness could lead to political instability in many developing nations."^[] Even some developed countries are seeing political instability.^[] NPR reports that David Gordon, a former intelligence officer who now leads research at the Eurasia Group, said: "Many, if not most, of the big countries out there have room to accommodate economic downturns without having large-scale political instability if we're in a recession of normal length. If you're in a much longer-run downturn, then all bets are off."^[]

Political scientists have argued that the economic stasis triggered social churning that got expressed through protests on a variety of issues across the developing world. In Brazil, disaffected youth rallied against a minor bus-fare hike;^[] in Turkey, they agitated against the conversion of a park to a mall^[] and in Israel, they protested against high rents in Tel Aviv. In all these cases, the ostensible immediate cause of the protest was amplified by the underlying social suffering induced by the great recession.

In January , the government leaders of Iceland were forced to call elections two years early after the people of Iceland staged mass protests and clashed with the police because of the government's handling of the economy.^[] Hundreds of thousands protested in France against President Sarkozy's economic policies.^[] Prompted by the financial crisis in Latvia, the opposition and trade unions there organised a rally against the cabinet of premier Ivars Godmanis. The rally gathered some 10–20 thousand people. In the evening the rally turned into a Riot. The crowd moved to the building of the parliament and attempted to force their way into it, but were repelled by the state's police. In late February many Greeks took part in a massive general strike because of the economic situation and they shut down schools, airports, and many other services in Greece.^[] Police and protesters clashed in Lithuania where people protesting the economic conditions were shot with rubber bullets.^[] Communists and others rallied in Moscow to protest the Russian government's economic plans.^[] However the impact was mild in Russia, whose economy gained from high oil prices.^[]

Asian countries saw various degrees of protest.^[] Protests have also occurred in China as demands from the west for exports have been dramatically reduced and unemployment has increased. Beyond these initial protests, the protest movement has grown and continued in In late , the Occupy Wall Street protest took place in the United States, spawning several offshoots that came to be known as the Occupy movement.

In the economic difficulties in Spain increased support for secession movements. In Catalonia, support for the secession movement exceeded. On September 11, a pro-independence march drew a crowd that police estimated at &#;million.^[]

Policy responses[edit]

Main article: National fiscal policy response to the Great Recession

See also: – Keynesian resurgence

The financial phase of the crisis led to emergency interventions in many national financial systems. As the crisis developed into genuine recession in many major economies, economic stimulus meant to revive economic growth became the most common policy tool. After having implemented rescue plans for the banking system, major developed and emerging countries announced plans to relieve their economies. In particular, economic stimulus plans were announced in China, the United States, and the European Union.^[] In the final quarter of , the financial crisis saw the G group of major economies assume a new significance as a focus of economic and financial crisis management.

United States policy responses[edit]

Main article: Subprime mortgage crisis

Federal Reserve Holdings of Treasury and Mortgage-Backed Securities

The U.S. government passed the Emergency Economic Stabilization Act of (EESA or TARP) during October This law included $ billion in funding for the "Troubled Assets Relief Program" (TARP). Following a model initiated by the United Kingdom bank rescue package,^[][] $ billion was used in the Capital Purchase Program to lend funds to banks in exchange for dividend-paying preferred stock.^[][]

On February 17, , U.S. President Barack Obama signed the American Recovery and Reinvestment Act of , an $ billion stimulus package with a broad spectrum of spending and tax cuts.^[] Over $75 billion of the package was specifically allocated to programs which help struggling homeowners. This program was referred to as the Homeowner Affordability and Stability Plan.^[]

The U.S. Federal Reserve (central bank) lowered interest rates and significantly expanded the money supply to help address the crisis. The New York Times reported in February that the Fed continued to support the economy with various monetary stimulus measures: "The Fed, which has amassed almost $3 trillion in Treasury and mortgage-backed securities to promote more borrowing and lending, is expanding those holdings by $85 billion a month until it sees clear improvement in the labor market. It plans to hold short-term interest rates near zero even longer, at least until the unemployment rate falls below percent."^[]

Asia-Pacific policy responses[edit]

On September 15, , China cut its interest rate for the first time since Indonesia reduced its overnight rate, at which commercial banks can borrow overnight funds from the central bank, by two percentage points to percent. The Reserve Bank of Australia injected nearly $ billion into the banking system, nearly three times as much as the market's estimated requirement. The Reserve Bank of India added almost $ billion, through a refinance operation, its biggest in at least a month.^[]

On November 9, , the Chinese economic stimulus program, a RMB¥ 4 trillion ($ billion) stimulus package, was announced by the central government of the People's Republic of China in its biggest move to stop the global financial crisis from hitting the world's second largest economy. A statement on the government's website said the State Council had approved a plan to invest 4 trillion yuan ($ billion) in infrastructure and social welfare by the end of The stimulus package was invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income-building, tax cuts, and finance.

Later that month, China's export driven economy was starting to feel the impact of the economic slowdown in the United States and Europe despite the government already cutting key interest rates three times in less than two months in a bid to spur economic expansion. On November 28, , the Ministry of Finance of the People's Republic of China and the State Administration of Taxation jointly announced a rise in export tax rebate rates on some labour-intensive goods. These additional tax rebates took place on December 1, ^[]

The stimulus package was welcomed by world leaders and analysts as larger than expected and a sign that by boosting its own economy, China is helping to stabilise the global economy. News of the announcement of the stimulus package sent markets up across the world. However, Marc Faber claimed that he thought China was still in recession on January

In Taiwan, the central bank on September 16, , said it would cut its required reserve ratios for the first time in eight years. The central bank added $ billion into the foreign-currency interbank market the same day. Bank of Japan pumped $ billion into the financial system on September 17, , and the Reserve Bank of Australia added $ billion the same day.^[]

In developing and emerging economies, responses to the global crisis mainly consisted in low-rates monetary policy (Asia and the Middle East mainly) coupled with the depreciation of the currency against the dollar. There were also stimulus plans in some Asian countries, in the Middle East and in Argentina. In Asia, plans generally amounted to 1 to 3% of GDP, with the notable exception of China, which announced a plan accounting for 16% of GDP (6% of GDP per year).

European policy responses[edit]

Until September , European policy measures were limited to a small number of countries (Spain and Italy). In both countries, the measures were dedicated to households (tax rebates) reform of the taxation system to support specific sectors such as housing. The European Commission proposed a € billion stimulus plan to be implemented at the European level by the countries. At the beginning of , the UK and Spain completed their initial plans, while Germany announced a new plan.

On September 29, , the Belgian, Luxembourg and Dutch authorities partially nationalised Fortis. The German government bailed out Hypo Real Estate.

On October 8, , the British Government announced a bank rescue package of around £ billion^[] ($ billion at the time). The plan comprises three parts. The first £ billion would be made in regard to the banks in liquidity stack. The second part will consist of the state government increasing the capital market within the banks. Along with this, £50&#;billion will be made available if the banks needed it, finally the government will write off any eligible lending between the British banks with a limit to £ billion.

In early December , German Finance Minister Peer Steinbrück indicated a lack of belief in a "Great Rescue Plan" and reluctance to spend more money addressing the crisis.^[] In March , The European Union Presidency confirmed that the EU was at the time strongly resisting the US pressure to increase European budget deficits.^[]

From , the United Kingdom began a fiscal consolidation program to reduce debt and deficit levels while at the same time stimulating economic recovery.^[] Other European countries also began fiscal consolidation with similar aims.^[]

Global responses[edit]

Most political responses to the economic and financial crisis has been taken, as seen above, by individual nations. Some coordination took place at the European level, but the need to cooperate at the global level has led leaders to activate the G major economies entity. A first summit dedicated to the crisis took place, at the Heads of state level in November ( G Washington summit).

The G countries met in a summit held on November in Washington to address the economic crisis. Apart from proposals on international financial regulation, they pledged to take measures to support their economy and to coordinate them, and refused any resort to protectionism.

Another G summit was held in London on April Finance ministers and central banks leaders of the G met in Horsham, England, on March to prepare the summit, and pledged to restore global growth as soon as possible. They decided to coordinate their actions and to stimulate demand and employment. They also pledged to fight against all forms of protectionism and to maintain trade and foreign investments. These actions will cost $tn.^[]

They also committed to maintain the supply of credit by providing more liquidity and recapitalising the banking system, and to implement rapidly the stimulus plans. As for central bankers, they pledged to maintain low-rates policies as long as necessary. Finally, the leaders decided to help emerging and developing countries, through a strengthening of the IMF.

Policy recommendations[edit]

IMF recommendation[edit]

The IMF stated in September that the financial crisis would not end without a major decrease in unemployment as hundreds of millions of people were unemployed worldwide. The IMF urged governments to expand social safety nets and to generate job creation even as they are under pressure to cut spending. The IMF also encouraged governments to invest in skills training for the unemployed and even governments of countries, similar to that of Greece, with major debt risk to first focus on long-term economic recovery by creating jobs.^[]

Raising interest rates[edit]

Further information: Corporate debt bubble

The Bank of Israel was the first to raise interest rates after the global recession began.^[] It increased rates in August ^[]

On October 6, , Australia became the first G20 country to raise its main interest rate, with the Reserve Bank of Australia moving rates up from % to %.^[]

The Norges Bank of Norway and the Reserve Bank of India raised interest rates in March ^[]

On November 2, , the Bank of England raised interest rates for the first time since March from % to % in an attempt to curb inflation.

Comparisons with the Great Depression[edit]

Main article: Comparisons between the Great Recession and the Great Depression

On April 17, , the then head of the IMF Dominique Strauss-Kahn said that there was a chance that certain countries may not implement the proper policies to avoid feedback mechanisms that could eventually turn the recession into a depression. "The free-fall in the global economy may be starting to abate, with a recovery emerging in , but this depends crucially on the right policies being adopted today." The IMF pointed out that unlike the Great Depression, this recession was synchronised by global integration of markets. Such synchronized recessions were explained to last longer than typical economic downturns and have slower recoveries.^[]

Olivier Blanchard, IMF Chief Economist, stated that the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time. "Long-term unemployment is alarmingly high: in the United States, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression." The IMF also stated that a link between rising inequality within Western economies and deflating demand may exist. The last time that the wealth gap reached such skewed extremes was in –^[]

See also[edit]

References[edit]

Artwork: Felice Varini, Drill Hall, , Singapore Biennale, Singapore

Great leaders know that how they fight a war often decides whether they will win the peace. Yet as CEOs continue to combat the myriad challenges thrown up by the Great Recession of , they are increasingly unsure about what strategic approaches to deploy. Many worry that the month slowdown is far from over in the United States. Others feel that although a recovery may have begun, it could prove to be short-lived, and they would do well to brace for a double-dip recession. Almost all business leaders reluctantly admit that the current crisis also marks an inflection point: The world after it is unlikely to resemble the one before it. Their priority, when they get a moment’s respite, must be to remake their organizations to cope with the “new normal.” But CEOs, like generals in the heat of battle, are so busy tackling short-term priorities that the future is obscured by the fog of war.

Unfortunately, little research has been done on strategies that can help companies survive a recession, get ahead during a slow-growth recovery, and be ready to win when good times return. Folksy wisdom abounds (how many times have you read that Procter & Gamble, Chevy, and Camel flourished during the Great Depression because they advertised heavily?), but empirical studies are few. That’s why we decided to mount a yearlong project to analyze strategy selection and corporate performance during the past three global recessions: the crisis (which lasted from to ), the slowdown ( to ), and the bust ( to ). We studied 4, public companies, breaking down the data into three periods: the three years before a recession, the three years after, and the recession years themselves. (See the sidebar “Analyzing Strategy Shifts.”)

Our findings are stark and startling. Seventeen percent of the companies in our study didn’t survive a recession: They went bankrupt, were acquired, or became private. The survivors were painfully slow to recover from the battering. About 80% of them had not yet regained their prerecession growth rates for sales and profits three years after a recession; in fact, 40% of them hadn’t even returned to their absolute prerecession sales and profits levels by the end of that time period. Only a small number of companies—approximately 9% of our sample—flourished after a slowdown, doing better on key financial parameters than they had before it and outperforming rivals in their industry by at least 10% in terms of sales and profits growth.

These postrecession winners aren’t the usual suspects. Firms that cut costs faster and deeper than rivals don’t necessarily flourish. They have the lowest probability—21%—of pulling ahead of the competition when times get better, according to our study. Businesses that boldly invest more than their rivals during a recession don’t always fare well either. They enjoy only a 26% chance of becoming leaders after a downturn. And companies that were growth leaders coming into a recession often can’t retain their momentum; about 85% are toppled during bad times.

Just who are the postrecession winners? What strategies do they deploy? Can other corporations emulate them? According to our research, companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after a recession. Within this group, a subset that deploys a specific combination of defensive and offensive moves has the highest probability—37%—of breaking away from the pack. These companies reduce costs selectively by focusing more on operational efficiency than their rivals do, even as they invest relatively comprehensively in the future by spending on marketing, R&D, and new assets. Their multipronged strategy, which we will discuss in the following pages, is the best antidote to a recession.

Four Responses to a Slowdown

Companies, not surprisingly, don’t all follow the same strategies during a recession. That could be because of differences in executives’ cognitive orientation during a crisis. According to Tory Higgins, a Columbia University psychologist, human beings are hedonistic—we avoid pain and seek pleasure—but they differ in how they try to achieve those aims. There are two basic modes of self-regulation. Some people are driven most by goals, such as achievement, advancement, and growth. These promotion-focused individuals are motivated by ideals and aspirations that provide pleasure if realized and disappointment if not. Other people are prevention-focused—concerned mainly with safety, security, and responsibility. They strive to avoid bad outcomes, experiencing relief if they succeed and pain if they fail. Situations have a potent influence on cognitive orientation: A recession, for example, can trigger a response that overrides a person’s usual orientation.

By applying this perspective to our empirical research, we were able to classify companies and their approaches to managing during a recession into four types:

Prevention-focused companies, which make primarily defensive moves and are more concerned than their rivals with avoiding losses and minimizing downside risks.

Promotion-focused companies, which invest more in offensive moves that provide upside benefits than their peers do.

Pragmatic companies, which combine defensive and offensive moves.

Progressive companies, which deploy the optimal combination of defense and offense.

Let’s now analyze these groups.

Don’t Be Too Defensive

Confronted by a recession, many CEOs swing into crisis mode, believing that their sole responsibility is to prevent the company from getting badly hurt or going under. They quickly implement policies that will reduce operating costs, shrink discretionary expenditures, eliminate frills, rationalize business portfolios, lower head count, and preserve cash. They also postpone making fresh investments in R&D, developing new businesses, or buying assets such as plants and machinery. As a rule, prevention-focused leaders cut back on almost every item of cost and investment and reduce expenditures significantly more than their competitors on at least one dimension.

Sony, which announced a cost-reduction target of $ billion in December , epitomizes the prevention-focused approach. It plans to close several factories and eliminate 16, jobs, and will delay investments—such as building a much-needed LCD television factory in Slovakia—in its core electronics business. This strategy resembles the approach Sony took during the downturn, when over a two-year period the Japanese giant cut its workforce by 11%, its R&D expenditures by 12%, and its capital expenditures by 23%. The cuts helped Sony increase its profit margin from 8% in to 12% in , but growth in its sales tumbled from an average of 11% in the three years before the recession to 1% thereafter. In fact, Sony has struggled since then to regain momentum. It has invested in developing new products such as electronic book readers, gaming consoles, and organic light-emitting diode TV sets, but finds itself bested in those product categories by Amazon, Microsoft and Nintendo, and Samsung, respectively.

A focus solely on cost cutting causes several problems. One, executives and employees start approaching every decision through a loss-minimizing lens. A siege mentality leads the organization to aim low and keep both innovation and cost cutting incremental. Two, instead of learning to operate more efficiently, the organization tries to do more of the same with less. That often results in lower quality and therefore a drop in customer satisfaction. Three, cost-cutting decisions become centralized: The finance department makes across-the-board cuts, paying little attention to initiatives that may be the nuclei of postrecession growth. Four, pessimism permeates the organization. Centralization, strict controls, and the constant threat of more cuts build a feeling of disempowerment. The focus becomes survival—both personal and organizational.

Few prevention-focused corporations do well after a recession, according to our study. They trail the other groups, with growth, on average, of 6% in sales and 4% in profits, compared with 13% and 12% for progressive companies. Whereas in the three years after the recession, sales for the largest companies grew by an average of $12 billion over prerecession levels, the prevention-focused enterprises among them saw sales grow by an average of just $5 billion. Moreover, cost cutting didn’t lead to above-average growth in earnings. Postrecession profits for prevention-focused enterprises typically rose by only $ million, whereas for progressive companies they increased by an average of $ billion.

Don’t Be Too Aggressive

Some business leaders pursue opportunity even in the face of adversity. They use a recession as a pretext to push change through, get closer to customers who may be ignored by competitors, make strategic investments that have long-term payoffs, and act opportunistically to acquire talent, assets, or businesses that become available during the downturn. These strategies are designed to garner upside benefits.

At the height of the recession, for example, Hewlett-Packard drew up an ambitious change agenda even though sales and profits were falling. Carly Fiorina, then the CEO, asserted, “In blackjack, you double down when you have an increasing probability of winning. We’re going to double down.” HP embarked on a massive restructuring program, made the largest acquisition in its history by buying Compaq for $25 billion, and increased R&D expenditures by 9%. It also spent $ million on a corporate branding campaign and $1 billion on expanding the availability of information technology in developing countries. These initiatives strained the organization and spread top management’s attention too thin. When the recession ended, the company found it tough to match the profitability levels of IBM and Dell. By HP’s earnings, at %, had slipped below IBM’s % and Dell’s %. (Throughout this article, “profits” and “earnings” refer to earnings before interest, taxes, depreciation, and amortization [EBITDA] as a percentage of sales.)

Organizations that focus purely on promotion develop a culture of optimism that leads them to deny the gravity of a crisis for a long time. They ignore early warning signs, such as customers’ budget cuts, and are steadfast in the belief that as long as they innovate, their sales and profits will continue to rise. Even as customers clamor for lower prices and greater value for money, these companies add bells and whistles to their products. They simply don’t notice that because the pie is shrinking, they must capture an even larger share from rivals to keep growing. Optimistic leaders attract employees who thrive in a forward-looking, growth-oriented environment. When positive groupthink permeates an organization, naysayers are marginalized and realities are overlooked. That’s why promotion-focused organizations are often blindsided by poor financial results.

Worse, when these companies are forced to tackle bloated cost structures, the changes they make often prove to be too little, too late. Because each function and business firmly believes that it contributes to corporate success, finger-pointing increases. Trade-offs are difficult to make and decision making becomes sclerotic.

Whereas prevention-oriented companies lower their cost-to-sales ratio by about three percentage points relative to peers over the course of a recession, promotion-focused enterprises are unable to reduce that ratio. Promotion-focused CEOs sometimes increase expenditures rather than cutting back, believing that this will push them ahead. If investments take longer than expected to generate paybacks, or innovations don’t resonate with customers, these companies run headlong into trouble.

Despite a focus on growth, promotion-focused companies’ postrecession sales and earnings rise by only 8% and 6% respectively, whereas those of progressive companies’ shoot up by 13% and 12%. Among the largest companies that tackled the recession, promotion-focused enterprises grew sales by $15 billion and profits by $ billion, on average—far lower than progressive companies’ average increases of $28 billion in sales and $ billion in profits.

The Elusive Balance

The companies most likely to outperform their competitors after a recession are pragmatic as William James defined the term: “The attitude of looking away from first things, principles, ‘categories,’ supposed necessities; and of looking towards last things, fruits, consequences, facts.” The CEOs of pragmatic companies recognize that cost cutting is necessary to survive a recession, that investment is equally essential to spur growth, and that they must manage both at the same time if their companies are to emerge as postrecession leaders.

A combination strategy sounds easy to develop: a little offense, a little defense, and voilà, you’re a winner. If only it were that simple. Companies typically combine three defensive approaches—reducing the number of employees, improving operational efficiency, or both—with three offensive ones: developing new markets, investing in new assets, or both. This yields nine possible combinations, some of which are more effective than others. (See the exhibit “What’s the Best Combination of Moves?”)

One combination has the greatest likelihood of producing postrecession winners: the one pursued by progressive enterprises. These companies’ defensive moves are selective. They cut costs mainly by improving operational efficiency rather than by slashing the number of employees relative to peers. However, their offensive moves are comprehensive. They develop new business opportunities by making significantly greater investments than their rivals do in R&D and marketing, and they invest in assets such as plants and machinery. Their postrecession growth in sales and earnings is the best among the groups in our study. It’s important to understand why the companies that use this combination do so well after a recession.

Operational efficiency.

Most enterprises implement aggressive cost-reduction plans to survive a recession. But companies that attend to improving operational efficiency fare better than those that focus on reducing the number of employees. Don’t get us wrong: Progressive companies also lay off employees, but they rely on that approach much less than their peers do. Only 23% of progressive enterprises cut staff—whereas 56% of prevention-focused companies do—and they lay off far fewer people.

Companies that rely solely on cutting the workforce have only an 11% probability of achieving breakaway performance after a downturn. There may be several reasons for this. In our experience, morale is usually better at companies that stress operational efficiency. Employees at these companies appreciate top management’s commitment to them, and they are more creative in reducing costs as a result. They don’t spend their time worrying about job security—as do people at companies that rely on deep staff cuts. And although layoffs may reduce costs quickly, they make recovery more difficult. Companies run the risk of scaling up too late, especially if hiring is more difficult than they anticipated. People are loath to work for organizations that reduce head count in difficult times. Moreover, as these companies rehire, costs shoot up.

In contrast, companies that respond to a slowdown by reexamining every aspect of their business models—from how they have configured supply chains to how they are organized and structured—reduce their operating costs on a permanent basis. When demand returns, costs will stay low, allowing their profits to grow faster than those of competitors.

During the recession, Office Depot and Staples took differing approaches to cost management. Office Depot cut 6% of its workforce, but it couldn’t reduce operating costs significantly. Although the company created an incentive plan to boost sales, its sales growth fell from 19% before the recession to 8% after—five percentage points below Staples’ postrecession sales growth rate.

By contrast, Staples closed down some underperforming facilities but increased its workforce by 10% during the recession, mainly to support the high-end product categories and services it introduced. At the same time, the company contained its operating costs and came out of the recession stronger, bigger, and more profitable than it had been in Its sales doubled, from $ billion in to $ billion in , while Office Depot’s rose by about 50%, from $ billion to $ billion. On average, Staples was about 30% more profitable than its archrival in the three years after that recession.

Investment in both existing and new businesses.

During recessions, progressive companies develop new markets and invest to enlarge their asset bases. They take advantage of depressed prices to buy property, plants, and equipment. This helps them both during the recession and afterward, when they can respond faster than rivals to a rise in demand. Because their asset costs are lower than their noninvesting competitors’, their earnings can be relatively higher.

These companies also judiciously increase spending on R&D and marketing, which may produce only modest benefits during the recession, but adds substantially to sales and profits afterward. The resources freed up by improving operational efficiency finance much of this expenditure. In turbulent times, it’s tough for companies to know where to place their bets for both the immediate term and the long run. Progressive companies stay closely connected to customer needs—a powerful filter through which to make investment decisions.

Getting It Right

Pursuing a Janus-faced strategy isn’t easy. Cutting budgets in one area while expanding them in another means explaining to those who are being asked to bear the burden of the former why the company is spending where no immediate benefits are apparent. It’s easier to exhort everyone to sacrifice and share the pain or to show courage and invest for gain. To pull off a combination of cutbacks and strategic investments, CEOs have to exercise cost discipline and financial prudence and detect opportunities that offer reliable returns in reasonable payback periods.

Let’s look at how one company has managed this difficult balancing act. During the recession, Target increased its marketing and sales expenditures by 20% and its capital expenditures by 50% over prerecession levels. It increased the number of stores it operated from to 1, and added 88 SuperTarget stores to the 30 it had already set up. It expanded into several new merchandise segments, ramped up investment in credit-card programs, and grew its internet business. The company made several smart choices along the way. Instead of trying to go it alone online, Target partnered with Amazon to sell its products. It also teamed up with well-known designers such as Michael Graves, Philippe Starck, and Todd Oldham to cement its reputation for cheap chic, thereby differentiating its products.

Meanwhile, Target relentlessly tried to reduce costs, improve productivity, and enhance the efficiency of its supply chain operations. For instance, in it was one of the 12 retailers that founded the WorldWide Retail Exchange, a global business-to-business electronic marketplace, to facilitate trading between retailers and vendors. In January Target consolidated its Dayton’s and Hudson’s stores under Marshall Field’s to take advantage of the well-known brand name. These moves helped the company grow sales by 40% and profits by 50% over the course of the recession. Its profit margin increased from 9% in the three years before the recession to 10% after it.

These strategies contrast sharply with those of other retailers, which focus primarily on growing store networks. For example, the discount retailer TJX Companies, which operates T.J. Maxx and Marshalls, added stores to its network of 1, from to , increasing its retail square footage by almost 25% and nearly doubling its capital expenditures. TJX’s competitors were scaling back growth plans, so real estate options were more plentiful and prices were lower. Although the increase in retail floor space fueled some healthy medium-term sales growth—four percentage points above peers’ growth in the postrecession period—it didn’t improve the bottom line. That’s because TJX did little to change its business model; it just scaled up its centralized buying and flexible distribution of merchandise. This more-of-the-same approach put TJX’s bottom-line growth, which had been on a par with rivals’ before the recession, at 9% lower three years afterward.

Many CEOs find investing in bargain-basement assets a tempting offensive move in a downturn. But the revenues and profits from opportunistic investments can take a long time to materialize, leaving a company saddled with an asset base that doesn’t significantly boost returns. As TJX found, focusing purely on assets also keeps companies from looking for more-imaginative ways to build new businesses that will drive growth when the recession is over.

Target hasn’t faced this problem. During the current recession, the retailer initially saw a decline in same-store sales, in part because Wal-Mart’s message of everyday low prices went down well with customers. Realizing that spending on “wants” was decreasing sharply, Target strengthened its position in a key “needs” segment: food. It launched a new store format that doubles the amount of floor space devoted to food; extended the range of its food brands, Market Pantry and Archer Farms; and overhauled its operations to support the emphasis on food. The retailer also increased media spending and reaffirmed its positioning with the slogan “Expect more, pay less”—with an emphasis on the second half. These are early days, but the results appear promising: By Market Pantry’s sales had increased by 30% and Archer Farms’ by 13%. And food has become a $ billion business for Target.

Few progressive business leaders have a master plan when they enter a recession. They encourage their organizations to discover what works and combine those findings in a portfolio of initiatives that improve efficiency along with market and asset development. This agility, even as leaders hold the course toward long-term growth and profitability, serves organizations well during a recession. An analysis of the stock market performance of companies that use progressive strategies reveals that they can also ride the momentum after a recession is over. Their approach doesn’t just combat a downturn; it can lay the foundation for continued success once the downturn ends.

The financial crisis of and the great recession that followed is still fresh in the memories of many investors. People saw their portfolios lose 30% or more of their values, and older workers saw their (k) plans and IRAs drop to levels that threatened their plans for retirement. Instead of acting rationally during severe bear markets, many people tend to overreact and make matters worse. However, while many people panicked or were forced to sell assets at low prices, a small group of patient, methodical investors saw the stock market collapse as an opportunity.

Investing in a crisis is no doubt risky, for the timeline and scope of a recovery is uncertain at best. Double-dip recessions are a real possibility, and attempting to pick a bottom is largely a matter of luck. Still, those investors who are able to invest in a crisis without succumbing to irrational fear and anxiety may reap outsized returns during a recovery.

How Crises Affect Investors

Investors generally do not behave as predicted by traditional financial theory, in which each individual behaves rationally to maximize utility. Rather, people often behave irrationally and let emotions get in the way, especially when the economy is experiencing some chaos. The emerging field of behavioral finance attempts to describe how people actually behave versus how financial theory predicts they should.

Behavioral finance shows that people, rather than being merely risk-averse, are actually more loss-averse. This means that people feel the emotional pain of a loss much more than the pleasure gained from an equal-sized profit. Not only that, but loss-aversion describes peoples' tendency to sell winners too early and to hold on to losses for too long; when people are in the black, they act risk-averse, yet when they're in the red they become risk-seeking.

Take for example a blackjack player at a casino. When he is winning, he may start playing more conservatively and betting smaller amounts to preserve his winnings. If that same player is down money, however, he may take on much more risk by doubling down or increasing bets on riskier hands in order to break even. Investors behave similarly. Unfortunately, taking on excess risk when experiencing losses tends to only compound the magnitude of those losses.

These emotional biases may persist even after a recovery has begun. In a survey by online broker Capital One Sharebuilder, 93% of millennials indicated that they distrust the markets and are less confident about investing as a result. Even with historically low-interest rates, more than 40% of this generation's wealth is in the form of cash. Due to the crisis, young Americans are not gaining the stock and bond market exposure that has helped older generations accumulate wealth.

Taking Advantage of a Crisis

While most investors are panicking as asset prices plummet, those with a cool head are able to see the resulting low prices as a buying opportunity. Buying assets from those restless individuals driven by fear is like buying them on sale. Often, fear drives asset prices well below their fundamental or intrinsic values, rewarding patient investors who allow prices to revert to their expected levels. Profiting from investing in a crisis requires discipline, patience, and, of course, enough wealth in liquid assets available to make opportunistic purchases.

When calamity strikes, markets fear the worst and stocks are punished accordingly. But historically, when the dust clears, optimism returns and prices bounce back to where they were, with markets responding once more to fundamental signals rather than to perceived turmoil. A study by Ned Davis Research group looked at 28 global crises over the past hundred years, from the German invasion of France in World War II to terrorist attacks such as that on 9/ Each time, markets overreacted and fell too far only to recover shortly thereafter. Those investors who sold on the fear found themselves having to buy back their portfolios at higher prices, while patient investors were rewarded.

After the Japanese attack on Pearl Harbor, the S&P index fell more than 4% and continued to drop another 14% over the next few months. After that, and through the end of the war in , however, the stock market returned more than 25% per year on average. The same pattern can be observed after other geopolitical events. By recognizing the fact that markets tend to overreact, a smart investor can purchase stocks and other assets at bargain prices.

Right now, the stocks are in the midst of a six-year-long bull market following the great recession. Those who didn't panic saw their portfolio values not only recover, but extend their gains, while those who chose to or were forced to sell, and waited until the bull market was in full swing to re-enter, are still licking their wounds.

Stock markets aren't the only way to invest in a crisis. The great recession also saw a collapse in home prices as the housing market bubble burst. People who could no longer afford their mortgages foreclosed and many homes were underwater, the mortgage amount owed to the bank exceeding the equity value of the property. Homebuyers and those investing in real estate were able to pick up valuable real assets at below normal prices, and as a result have been able to enjoy handsome returns as the housing market has stabilized and recovered. Similarly, so-called vulture investors have also been able to profit from taking over good companies that have been battered by a recession but have otherwise good fundamentals.

Betting on a Crisis to Happen

Another way to make money on a crisis is to bet that one will happen. Short selling stocks or short equity index futures is one way to profit from a bear market. A short seller borrows shares that they don't already own in order to sell them and, hopefully, buy them back at a lower price. Another way to monetize a down market is to use options strategies, such as buying puts which gain in value as the market falls, or by selling call options which will expire to a price of zero if they expire out of the money. Similar strategies can be employed in bond and commodity markets.

Many investors, however, are restricted from short selling or do not have access to derivatives markets. Even if they do, they may have an emotional or cognitive bias against selling short. Furthermore, short-sellers may be forced to cover their positions for a loss if markets rise instead of fall and margin calls are issued. Today, there are ETFs that give longs (holders of the ETF shares) short exposure to the market. So-called inverse ETFs may aim to return +1% for every negative 1% return the underlying index returns. Some inverse ETFs may also employ gearing, or leverage, returning +2% or even +3% for every 1% loss in the underlying.

For those individuals seeking simply to protect themselves from a crisis and not necessarily bet on such an event occurring, owning a well-diversified portfolio, including positions in asset classes with low correlations, can help cushion the blow. Those with access to derivatives markets can also employ hedging strategies, such as a protective put or covered call to lessen the severity of potential losses.

The Bottom Line

Economic crises happen from time to time. Recessions and depressions occur. In the 20th century alone there were around twenty identifiable crises – not including geopolitical events such as wars or terrorist attacks, which also caused markets to suddenly drop. Behavioral finance tells us that people are prone to panic in such events, and will not act rationally the way traditional financial theory predicts. As a result, those with cool heads, discipline, and an understanding that, historically, markets have always rebounded from such events can purchase assets at bargain prices and earn excess returns.

Those with the foresight that a crisis is impending may implement short strategies to profit from a falling market. Of course, timing is everything, and buying too early or late, or holding on to a short position for too long, can serve to compound losses and take away from potential gains.

The global financial crisis (GFC) refers to the period of extreme stress in global financial markets and banking systems between mid and early During the GFC, a downturn in the US housing market was a catalyst for a financial crisis that spread from the United States to the rest of the world through linkages in the global financial system. Many banks around the world incurred large losses and relied on government support to avoid bankruptcy. Millions of people lost their jobs as the major advanced economies experienced their deepest recessions since the Great Depression in the s. Recovery from the crisis was also much slower than past recessions that were not associated with a financial crisis.

Main Causes of the GFC

As for all financial crises, a range of factors explain the GFC and its severity, and people are still debating the relative importance of each factor. Some of the key aspects include:

1. Excessive risk-taking in a favourable macroeconomic environment

In the years leading up to the GFC, economic conditions in the United States and other countries were favourable. Economic growth was strong and stable, and rates of inflation, unemployment and interest were relatively low. In this environment, house prices grew strongly.

Expectations that house prices would continue to rise led households, in the United States especially, to borrow imprudently to purchase and build houses. A similar expectation on house prices also led property developers and households in European countries (such as Iceland, Ireland, Spain and some countries in Eastern Europe) to borrow excessively. Many of the mortgage loans, especially in the United States, were for amounts close to (or even above) the purchase price of a house. A large share of such risky borrowing was done by investors seeking to make short-term profits by ‘flipping’ houses and by ‘subprime’ borrowers (who have higher default risks, mainly because their income and wealth are relatively low and/or they have missed loan repayments in the past).

Banks and other lenders were willing to make increasingly large volumes of risky loans for a range of reasons:

• Competition increased between individual lenders to extend ever-larger amounts of housing loans that, because of the good economic environment, seemed to be very profitable at the time.
• Many lenders providing housing loans did not closely assess borrowers’ abilities to make loan repayments. This also reflected the widespread presumption that favourable conditions would continue. Additionally, lenders had little incentive to take care in their lending decisions because they did not expect to bear any losses. Instead, they sold large amounts of loans to investors, usually in the form of loan packages called ‘mortgage-backed securities’ (MBS), which consisted of thousands of individual mortgage loans of varying quality. Over time, MBS products became increasingly complex and opaque, but continued to be rated by external agencies as if they were very safe.
• Investors who purchased MBS products mistakenly thought that they were buying a very low risk asset: even if some mortgage loans in the package were not repaid, it was assumed that most loans would continue to be repaid. These investors included large US banks, as well as foreign banks from Europe and other economies that sought higher returns than could be achieved in their local markets.

2. Increased borrowing by banks and investors

In the lead up to the GFC, banks and other investors in the United States and abroad borrowed increasing amounts to expand their lending and purchase MBS products. Borrowing money to purchase an asset (known as an increase in leverage) magnifies potential profits but also magnifies potential losses. As a result, when house prices began to fall, banks and investors incurred large losses because they had borrowed so much.

Additionally, banks and some investors increasingly borrowed money for very short periods, including overnight, to purchase assets that could not be sold quickly. Consequently, they became increasingly reliant on lenders – which included other banks – extending new loans as existing short-term loans were repaid.

3. Regulation and policy errors

Regulation of subprime lending and MBS products was too lax. In particular, there was insufficient regulation of the institutions that created and sold the complex and opaque MBS to investors. Not only were many individual borrowers provided with loans so large that they were unlikely to be able to repay them, but fraud was increasingly common – such as overstating a borrower's income and over-promising investors on the safety of the MBS products they were being sold.

In addition, as the crisis unfolded, many central banks and governments did not fully recognise the extent to which bad loans had been extended during the boom and the many ways in which mortgage losses were spreading through the financial system.

How the GFC Unfolded

US house prices fell, borrowers missed repayments

The catalysts for the GFC were falling US house prices and a rising number of borrowers unable to repay their loans. House prices in the United States peaked around mid , coinciding with a rapidly rising supply of newly built houses in some areas. As house prices began to fall, the share of borrowers that failed to make their loan repayments began to rise. Loan repayments were particularly sensitive to house prices in the United States because the proportion of US households (both owner-occupiers and investors) with large debts had risen a lot during the boom and was higher than in other countries.

Stresses in the financial system

Stresses in the financial system first emerged clearly around mid Some lenders and investors began to incur large losses because many of the houses they repossessed after the borrowers missed repayments could only be sold at prices below the loan balance. Relatedly, investors became less willing to purchase MBS products and were actively trying to sell their holdings. As a result, MBS prices declined, which reduced the value of MBS and thus the net worth of MBS investors. In turn, investors who had purchased MBS with short-term loans found it much more difficult to roll over these loans, which further exacerbated MBS selling and declines in MBS prices.

Spillovers to other countries

As noted above, foreign banks were active participants in the US housing market during the boom, including purchasing MBS (with short-term US dollar funding). US banks also had substantial operations in other countries. These interconnections provided a channel for the problems in the US housing market to spill over to financial systems and economies in other countries.

Failure of financial firms, panic in financial markets

Financial stresses peaked following the failure of the US financial firm Lehman Brothers in September Together with the failure or near failure of a range of other financial firms around that time, this triggered a panic in financial markets globally. Investors began pulling their money out of banks and investment funds around the world as they did not know who might be next to fail and how exposed each institution was to subprime and other distressed loans. Consequently, financial markets became dysfunctional as everyone tried to sell at the same time and many institutions wanting new financing could not obtain it. Businesses also became much less willing to invest and households less willing to spend as confidence collapsed. As a result, the United States and some other economies fell into their deepest recessions since the Great Depression.

Policy Responses

Until September , the main policy response to the crisis came from central banks that lowered interest rates to stimulate economic activity, which began to slow in late However, the policy response ramped up following the collapse of Lehman Brothers and the downturn in global growth.

Lower interest rates

Central banks lowered interest rates rapidly to very low levels (often near zero); lent large amounts of money to banks and other institutions with good assets that could not borrow in financial markets; and purchased a substantial amount of financial securities to support dysfunctional markets and to stimulate economic activity once policy interest rates were near zero (known as ‘quantitative easing’).

Increased government spending

Governments increased their spending to stimulate demand and support employment throughout the economy; guaranteed deposits and bank bonds to shore up confidence in financial firms; and purchased ownership stakes in some banks and other financial firms to prevent bankruptcies that could have exacerbated the panic in financial markets.

Although the global economy experienced its sharpest slowdown since the Great Depression, the policy response prevented a global depression. Nevertheless, millions of people lost their jobs, their homes and large amounts of their wealth. Many economies also recovered much more slowly from the GFC than previous recessions that were not associated with financial crises. For example, the US unemployment rate only returned to pre-crisis levels in , about nine years after the onset of the crisis.

Stronger oversight of financial firms

In response to the crisis, regulators strengthened their oversight of banks and other financial institutions. Among many new global regulations, banks must now assess more closely the risk of the loans they are providing and use more resilient funding sources. For example, banks must now operate with lower leverage and can’t use as many short-term loans to fund the loans that they make to their customers. Regulators are also more vigilant about the ways in which risks can spread throughout the financial system, and require actions to prevent the spreading of risks.

Australia and the GFC

Relatively strong economic performance

Australia did not experience a large economic downturn or a financial crisis during the GFC. However, the pace of economic growth did slow significantly, the unemployment rate rose sharply and there was a period of heightened uncertainty. The relatively strong performance of the Australian economy and financial system during the GFC, compared with other countries, reflected a range of factors, including:

• Australian banks had very small exposures to the US housing market and US banks, partly because domestic lending was very profitable.
• Subprime and other high-risk loans were only a small share of lending in Australia, partly because of the historical focus on lending standards by the Australian banking regulator (the Australian Prudential Regulation Authority (APRA)).
• Australia's economy was buoyed by large resource exports to China, whose economy rebounded quickly after the initial GFC shock (mainly due to expansionary fiscal policy).

Also a large policy response

Despite the Australian financial system being in a much better position before the GFC, given the magnitude of the shock to the global economy and to confidence more broadly, there was also a large policy response in Australia to ensure that the economy did not suffer a major downturn. In particular, the Reserve Bank lowered the cash rate significantly, and the Australian Government undertook expansionary fiscal policy and provided guarantees on deposits at and bonds issued by Australian banks.

Following the crisis, APRA implemented the stronger global banking regulations in Australia. Together, APRA and the financial market and corporate regulator, the Australian Securities and Investments Commission, have also strengthened lending standards to make the financial and private sectors more resilient.

During a recession, investors need to act cautiously but remain vigilant in monitoring the market landscape for opportunities to pick up high-quality assets at discounted prices. These are difficult environments, but they also coincide with the best opportunities.

In a recessionary environment, the worst-performing assets are highly leveraged, cyclical, and speculative. Companies that fall into any of these categories can be risky for investors because of the potential they could go bankrupt.

Conversely, investors who want to survive and thrive during a recession will invest in high-quality companies that have strong balance sheets, low debt, good cash flow, and are in industries that historically do well during tough economic times.

Types of Stocks With the Biggest Risk

Knowing which assets to avoid investing in can be just as important to an investor during a recession as knowing which companies make good investments. The companies and assets with the biggest risk during a recession are those that are highly leveraged, cyclical, or speculative.

Highly Leveraged Companies

During a recession, most investors would be wise to avoid highly leveraged companies that have huge debt loads on their balance sheet. These companies often suffer under the burden of higher-than-average interest payments that lead to an unsustainable debt-to-equity (DE) ratio.

While these companies are struggling to make their debt payments, they are also faced with a decrease in revenue brought about by the recession. The likelihood of bankruptcy (or at the very least a precipitous drop in shareholder value) is higher for such companies than those with lower debt loads.

Cyclical Stocks

Cyclical stocks are often tied to employment and consumer confidence, which are battered in a recession. Cyclical stocks tend to do well during boom times when consumers have more discretionary income to spend on non-essential or luxury items. Examples would be companies that manufacture high-end cars, furniture, or clothing.

When the economy falters, however, consumers typically cut back their spending on these discretionary expenses. They reduce spending on things like travel, restaurants, and leisure services. Because of this, cyclical stocks in these industries tend to suffer, making them less attractive investments for investors during a recession.

Speculative Stocks

Speculative stocks are richly valued based on optimism among the shareholder base. This optimism is tested during recessions and these assets are typically the worst performers in a recession.

Speculative stocks have not yet proven their value and are often seen as "under-the-radar" opportunities by investors looking to get in on the ground floor of the next big investment opportunity. These high-risk stocks often fall the fastest during a recession as investors pull their money from the market and rush toward safe-haven investments that limit their exposure during market turbulence.

Stocks That Do Well During Recessions

While it might be tempting to ride out a recession with no exposure to stocks, investors may find themselves missing out on significant opportunities if they do so. Historically, there are companies that do well during economic downturns. Investors might consider developing a strategy based on counter-cyclical stocks with strong balance sheets in recession-resistant industries.

Strong Balance Sheets

A good investment strategy during a recession is to look for companies that are maintaining strong balance sheets or steady business models despite the economic headwinds. Some examples of these types of companies include utilities, basic consumer goods conglomerates, and defense stocks. In anticipation of weakening economic conditions, investors often add exposure to these groups in their portfolios.

By studying a company's financial reports, you can determine if they have low debt, healthy cash flows, and are generating a profit. These are all factors to consider before making an investment.

Recession-Resistant Industries

While it might seem surprising, some industries perform quite well during recessions. Investors looking for an investment strategy during market downturns often add stocks from some of these recession-resistant industries to their portfolio.

Counter-cyclical stocks like these tend to do well during recessions because their demand tends to increase when incomes fall or when economic uncertainty prevails. The stock price for counter-cyclical stocks generally moves in the opposite direction of the prevailing economic trend. During a recession, these stocks increase in value. During an expansion, they decrease.

These outperformers generally include companies in the following industries: consumer staples, grocery stores, discount stores, firearm and ammunition makers, alcohol manufacturers, cosmetics, and funeral services.

Investing During the Recovery

Once the economy is moving from recession to recovery, investors should adjust their strategies. This environment is marked by low interest rates and rising growth.

The best performers are those highly leveraged, cyclical, and speculative companies that survived the recession. As economic conditions normalize, they are the first to bounce back and benefit from increasing enthusiasm and optimism as the recovery takes hold. Counter-cyclical stocks tend not to do well in this environment. Instead, they encounter selling pressure as investors move into more growth-oriented assets.

When the market is soaring, it’s easy to forget that what goes up can also come down. But economic slowdowns tend to be cyclical, which means that another recession is in the future. Whether it’s fast-approaching or still a ways off, it’s wise to prepare for its eventuality. This way, you won’t join the panicking stampede out of stocks and into cash. Instead, you’ll remember that stocks can perform even during a recession – you just need to know which ones. A financial advisor could help you build a recession-resistant investing plan. Here are five things to invest in when a recession hits.

1. Seek Out Core Sector Stocks

During a recession, you might be inclined to give up on stocks, but experts say it’s best not to flee equities completely. When the rest of the economy is on shaky ground, there are often a handful of sectors that continue to forge ahead and provide investors with steady returns.

So if you want to insulate yourself during a recession partly with stocks, consider investing in the healthcare, utilities and consumer goods sectors. People are still going to spend money on medical care, household items, electricity and food, regardless of the state of the economy. As a result, these stocks tend to do well during busts (and underperform during booms).

2. Focus on Reliable Dividend Stocks

Investing in dividend stocks can be a great way to generate passive income. When you’re comparing dividend stocks, some experts say it’s a good idea to look for companies with low debt-to-equity ratios and strong balance sheets.

If you don’t know where to start, you may want to look into dividend aristocrats. These are companies that have increased their dividend payouts for at least 25 consecutive years.

3. Consider Buying Real Estate

The housing market collapse was a nightmare for homeowners. However, it turned out to be a boon for some real estate investors. When a recession hits and home values drop, it may be a buying opportunity for investment properties.

If you can rent out a property to a reliable tenant, you’ll have a steady stream of income while you ride out the recession. Once real estate values start to rise again, you can sell at a profit.

4. Purchase Precious Metal Investments

Precious metals, like gold or silver, tend to perform well during market slowdowns. But since the demand for these kinds of commodities often increases during recessions, their prices usually go up too.

You can invest in precious metals in a few different ways. The most straightforward route is buying coins or bars from a seller or coin dealer. While this is different than buying a security, it’s technically as good as any other option.

If you’re more interested in buying precious metal securities, turn your attention to ETFs. These funds are collections of investments within a single industry, which, in this case, is the precious metal market. You could also purchase a gold IRA if you’re saving specifically for retirement.

5. “Invest” in Yourself

If you’re lose your job and income during a recession, you can rebound by “investing in yourself.” You could go back to school to gain additional knowledge or skills that could help you get a better job.

Paying down debt is another option if you worry that your job situation might go south at some point. The less money you have to spend on bills, the less stressed you’ll feel during an economic crisis.

Bottom Line

If you’re investing for the long term, a looming recession shouldn’t panic you. You may want to off-load some investments to take some profits off the table. But for the most part, your strategy should not be to sell when prices are low. You may think you’ll get back in when prices have stopped falling, but it’s impossible to call a bottom until it has passed.

Instead, you should hold the positions that you entered as long-term investments. That said, if you have cash to invest, you may want to consider buying recession-friendly sectors such as consumer staples, utilities and health care. Stocks that have been paying a dividend for many years are also a good choice, since they tend to be long established companies that can withstand a downturn.

Tips for Smart Investing

• If you’re unsure of how to build a recession-proof portfolio, a financial advisor can help. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• A recession has the potential to bring serious losses. That’s why any investing plan starts with understanding how much risk you can tolerate. Our asset allocation calculator considers your risk tolerance to guide you to the optimal portfolio.

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Early 21st-century global economic decline

For background on financial market events beginning in , see Financial crisis of – For the recession, see COVID recession.

Not to be confused with the Great Depression during the s or the Great Resignation.

The Great Recession was a period of marked general decline (recession) observed in national economies globally that occurred between and The scale and timing of the recession varied from country to country (see map).^[1][2] At the time, the International Monetary Fund (IMF) concluded that it was the most severe economic and financial meltdown since the Great Depression. One result was a serious disruption of normal international relations.

The causes of the Great Recession include a combination of vulnerabilities that developed in the financial system, along with a series of triggering events that began with the bursting of the United States housing bubble in –^[3][4] When housing prices fell and homeowners began to abandon their mortgages, the value of mortgage-backed securities held by investment banks declined in –, causing several to collapse or be bailed out in September This – phase was called the subprime mortgage crisis. The combination of banks unable to provide funds to businesses, and homeowners paying down debt rather than borrowing and spending, resulted in the Great Recession that began in the U.S. officially in December and lasted until June , thus extending over 19 months.^[5][6] As with most other recessions, it appears that no known formal theoretical or empirical model was able to accurately predict the advance of this recession, except for minor signals in the sudden rise of forecast probabilities, which were still well under 50%.^[7]

The recession was not felt equally around the world; whereas most of the world's developed economies, particularly in North America, South America and Europe, fell into a severe, sustained recession, many more recently developed economies suffered far less impact, particularly China, India and Indonesia, whose economies grew substantially during this period. Similarly, Oceania suffered minimal impact, in part due to its proximity to Asian markets.^{[citation needed]}

Terminology[edit]

Two senses of the word "recession" exist: one sense referring broadly to "a period of reduced economic activity"^[8] and ongoing hardship; and the more precise sense used in economics, which is defined operationally, referring specifically to the contraction phase of a business cycle, with two or more consecutive quarters of GDP contraction (negative GDP growth rate).

The definition of "great" is amount or intensity considerably above the normal or average and, contrary to some common beliefs, does not infer a positive connotation, merely large in size or scope. (e.g. the Great Depression).

Under the academic definition, the recession ended in the United States in June or July ^{[9][10][11][12][13][14][15][16][17]}

Robert Kuttner argues, "&#;'The Great Recession,' is a misnomer. We should stop using it. Recessions are mild dips in the business cycle that are either self-correcting or soon cured by modest fiscal or monetary stimulus. Because of the continuing deflationary trap, it would be more accurate to call this decade's stagnant economy The Lesser Depression or The Great Deflation."^[18]

Overview[edit]

The Great Recession met the IMF criteria for being a global recession only in the single calendar year ^[19][20] That IMF definition requires a decline in annual real world GDP per&#x;capita. Despite the fact that quarterly data are being used as recession definition criteria by all G20 members, representing 85% of the world GDP,^[21] the International Monetary Fund (IMF) has decided—in the absence of a complete data set—not to declare/measure global recessions according to quarterly GDP data. The seasonally adjusted PPP&#x;weighted real GDP for the G20&#x;zone, however, is a good indicator for the world GDP, and it was measured to have suffered a direct quarter on quarter decline during the three quarters from Q3&#x; until Q1&#x;, which more accurately mark when the recession took place at the global level.^[22]

According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the recession began in December and ended in June , and thus extended over eighteen months.^[6][23]

The years leading up to the crisis were characterized by an exorbitant rise in asset prices and associated boom in economic demand.^[24] Further, the U.S. shadow banking system (i.e., non-depository financial institutions such as investment banks) had grown to rival the depository system yet was not subject to the same regulatory oversight, making it vulnerable to a bank run.^[25]

US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world, as they offered higher yields than U.S. government bonds. Many of these securities were backed by subprime mortgages, which collapsed in value when the U.S. housing bubble burst during and homeowners began to default on their mortgage payments in large numbers starting in ^[26]

The emergence of sub-prime loan losses in began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15, , a major panic broke out on the inter-bank loan market. There was the equivalent of a bank run on the shadow banking system, resulting in many large and well established investment banks and commercial banks in the United States and Europe suffering huge losses and even facing bankruptcy, resulting in massive public financial assistance (government bailouts).^[27]

The global recession that followed resulted in a sharp drop in international trade, rising unemployment and slumping commodity prices.^[28] Several economists predicted that recovery might not appear until and that the recession would be the worst since the Great Depression of the s.^[29][30] Economist Paul Krugman once commented on this as seemingly the beginning of "a second Great Depression".^[31]

Governments and central banks responded with fiscal policy and monetary policy initiatives to stimulate national economies and reduce financial system risks. The recession renewed interest in Keynesian' economic ideas on how to combat recessionary conditions. Economists advise that the stimulus measures such as quantitative easing (pumping money into the system) and holding down central bank wholesale lending interest rate should be withdrawn as soon as economies recover enough to "chart a path to sustainable growth".^[32][33][34]

The distribution of household incomes in the United States became more unequal during the post economic recovery.^[35]Income inequality in the United States grew from to in more than two-thirds of metropolitan areas.^[36] Median household wealth fell 35% in the US, from $, to $68, between and ^[37]

Causes[edit]

Main article: Causes of the Great Recession

The great asset bubble:^[38]
1.Central banks' gold reserves: $ trillion.
2.M0 (paper money): $ trillion.
3.Traditional (fractional reserve) banking assets: $39 trillion.
4.Shadow banking assets: $62 trillion.
5.Other assets: $ trillion.
6.Bail-out money (early ): $ trillion.

Further information: Financial crisis of –

Panel reports[edit]

The majority report provided by US Financial Crisis Inquiry Commission, composed of six Democratic and four Republican appointees, reported its findings in January It concluded that "the crisis was avoidable and was caused by:

• Widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages;
• Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk;
• An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis;
• Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels."^[39]

There were two Republican dissenting FCIC reports. One of them, signed by three Republican appointees, concluded that there were multiple causes. In his separate dissent to the majority and minority opinions of the FCIC, Commissioner Peter J. Wallison of the American Enterprise Institute (AEI) primarily blamed U.S. housing policy, including the actions of Fannie & Freddie, for the crisis. He wrote: "When the bubble began to deflate in mid, the low quality and high risk loans engendered by government policies failed in unprecedented numbers."^[40]

In its "Declaration of the Summit on Financial Markets and the World Economy," dated November 15, , leaders of the Group of 20 cited the following causes:

During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.^[41]

Federal Reserve Chair Ben Bernanke testified in September before the FCIC regarding the causes of the crisis. He wrote that there were shocks or triggers (i.e., particular events that touched off the crisis) and vulnerabilities (i.e., structural weaknesses in the financial system, regulation and supervision) that amplified the shocks. Examples of triggers included: losses on subprime mortgage securities that began in and a run on the shadow banking system that began in mid, which adversely affected the functioning of money markets. Examples of vulnerabilities in the private sector included: financial institution dependence on unstable sources of short-term funding such as repurchase agreements or Repos; deficiencies in corporate risk management; excessive use of leverage (borrowing to invest); and inappropriate usage of derivatives as a tool for taking excessive risks. Examples of vulnerabilities in the public sector included: statutory gaps and conflicts between regulators; ineffective use of regulatory authority; and ineffective crisis management capabilities. Bernanke also discussed "Too big to fail" institutions, monetary policy, and trade deficits.^[5]

Narratives[edit]

U.S. residential and non-residential investment fell relative to GDP during the crisis

There are several "narratives" attempting to place the causes of the recession into context, with overlapping elements. Five such narratives include:

1. There was the equivalent of a bank run on the shadow banking system, which includes investment banks and other non-depository financial entities. This system had grown to rival the depository system in scale yet was not subject to the same regulatory safeguards. Its failure disrupted the flow of credit to consumers and corporations.^[27][42]
2. The U.S. economy was being driven by a housing bubble. When it burst, private residential investment (i.e., housing construction) fell by over four percent of GDP.^[43][44] Consumption enabled by bubble-generated housing wealth also slowed. This created a gap in annual demand (GDP) of nearly $1 trillion. The U.S. government was unwilling to make up for this private sector shortfall.^[45][46]
3. Record levels of household debt accumulated in the decades preceding the crisis resulted in a balance sheet recession (similar to debt deflation) once housing prices began falling in Consumers began paying off debt, which reduces their consumption, slowing down the economy for an extended period while debt levels are reduced.^[27][47]
4. U.S. government policies encouraged home ownership even for those who could not afford it, contributing to lax lending standards, unsustainable housing price increases, and indebtedness.^[48]
5. Wealthy and middle-class house flippers with mid-to-good credit scores created a speculative bubble in house prices, and then wrecked local housing markets and financial institutions after they defaulted on their debt en masse.^[49]

Underlying narratives #1–3 is a hypothesis that growing income inequality and wage stagnation encouraged families to increase their household debt to maintain their desired living standard, fueling the bubble. Further, this greater share of income flowing to the top increased the political power of business interests, who used that power to deregulate or limit regulation of the shadow banking system.^[50][51][52]

Narrative #5 challenges the popular claim (narrative #4) that subprime borrowers with shoddy credit caused the crisis by buying homes they couldn't afford. This narrative is supported by new research showing that the biggest growth of mortgage debt during the U.S. housing boom came from those with good credit scores in the middle and top of the credit score distribution—and that these borrowers accounted for a disproportionate share of defaults.^[53]

Trade imbalances and debt bubbles[edit]

U.S. households and financial businesses significantly increased borrowing (leverage) in the years leading up to the crisis

The Economist wrote in July that the inflow of investment dollars required to fund the U.S. trade deficit was a major cause of the housing bubble and financial crisis: "The trade deficit, less than 1% of GDP in the early s, hit 6% in That deficit was financed by inflows of foreign savings, in particular from East Asia and the Middle East. Much of that money went into dodgy mortgages to buy overvalued houses, and the financial crisis was the result."^[54]

In May , NPR explained in their Peabody Award winning program "The Giant Pool of Money" that a vast inflow of savings from developing nations flowed into the mortgage market, driving the U.S. housing bubble. This pool of fixed income savings increased from around $35 trillion in to about $70 trillion by NPR explained this money came from various sources, "[b]ut the main headline is that all sorts of poor countries became kind of rich, making things like TVs and selling us oil. China, India, Abu Dhabi, Saudi Arabia made a lot of money and banked it."^[55]

Describing the crisis in Europe, Paul Krugman wrote in February that: "What we're basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe."^[56]

Monetary policy[edit]

Another narrative about the origin has been focused on the respective parts played by the public monetary policy (in the US notably) and by the practices of private financial institutions. In the U.S., mortgage funding was unusually decentralised, opaque, and competitive, and it is believed that competition between lenders for revenue and market share contributed to declining underwriting standards and risky lending.

While Alan Greenspan's role as Chairman of the Federal Reserve has been widely discussed, the main point of controversy remains the lowering of the Federal funds rate to 1% for more than a year, which, according to Austrian theorists, injected huge amounts of "easy" credit-based money into the financial system and created an unsustainable economic boom),^[57] there is also the argument that Greenspan's actions in the years – were actually motivated by the need to take the U.S. economy out of the early s recession caused by the bursting of the dot-com bubble—although by doing so he did not help avert the crisis, but only postpone it.^[58][59]

High private debt levels[edit]

US household debt relative to disposable income and GDP.

U.S. Changes in Household Debt as a percentage of GDP for – Homeowners paying down debt for – was a headwind to the recovery. Economist Carmen Reinhartexplained that this behavior tends to slow recoveries from financial crises relative to typical recessions.^[60]

Another narrative focuses on high levels of private debt in the US economy. USA household debt as a percentage of annual disposable personal income was % at the end of , versus 77% in ^[61][62] Faced with increasing mortgage payments as their adjustable rate mortgage payments increased, households began to default in record numbers, rendering mortgage-backed securities worthless. High private debt levels also impact growth by making recessions deeper and the following recovery weaker.^[63][64]Robert Reich claims the amount of debt in the US economy can be traced to economic inequality, assuming that middle-class wages remained stagnant while wealth concentrated at the top, and households "pull equity from their homes and overload on debt to maintain living standards".^[65]

The IMF reported in April "Household debt soared in the years leading up to the downturn. In advanced economies, during the five years preceding , the ratio of household debt to income rose by an average of 39 percentage points, to percent. In Denmark, Iceland, Ireland, the Netherlands, and Norway, debt peaked at more than percent of household income. A surge in household debt to historic highs also occurred in emerging economies such as Estonia, Hungary, Latvia, and Lithuania. The concurrent boom in both house prices and the stock market meant that household debt relative to assets held broadly stable, which masked households' growing exposure to a sharp fall in asset prices. When house prices declined, ushering in the global financial crisis, many households saw their wealth shrink relative to their debt, and, with less income and more unemployment, found it harder to meet mortgage payments. By the end of , real house prices had fallen from their peak by about 41% in Ireland, 29% in Iceland, 23% in Spain and the United States, and 21% in Denmark. Household defaults, underwater mortgages (where the loan balance exceeds the house value), foreclosures, and fire sales are now endemic to a number of economies. Household deleveraging by paying off debts or defaulting on them has begun in some countries. It has been most pronounced in the United States, where about two-thirds of the debt reduction reflects defaults."^[66][67]

Pre-recession warnings[edit]

The onset of the economic crisis took most people by surprise. A paper identifies twelve economists and commentators who, between and , predicted a recession based on the collapse of the then-booming housing market in the United States:^[68]Dean Baker, Wynne Godley, Fred Harrison, Michael Hudson, Eric Janszen, Med Jones^[69]Steve Keen, Jakob Brøchner Madsen, Jens Kjaer Sørensen, Kurt Richebächer, Nouriel Roubini, Peter Schiff, and Robert Shiller.^[68][70]

Housing bubbles[edit]

Housing price appreciation in selected countries, –

Further information: Real estate bubble

By , real estate bubbles were still under way in many parts of the world,^[71] especially in the United States, France, the United Kingdom, Spain, The Netherlands, Australia, the United Arab Emirates, New Zealand, Ireland, Poland,^[72]South Africa, Greece, Bulgaria, Croatia,^[73]Norway, Singapore, South Korea, Sweden, Finland, Argentina,^[74] the Baltic states, India, Romania, Ukraine and China.^[75] U.S. Federal Reserve Chairman Alan Greenspan said in mid that "at a minimum, there's a little 'froth' [in the U.S. housing market]it's hard not to see that there are a lot of local bubbles".^[76]

The Economist, writing at the same time, went further, saying, "[T]he worldwide rise in house prices is the biggest bubble in history".^[77] Real estate bubbles are (by definition of the word "bubble") followed by a price decrease (also known as a housing price crash) that can result in many owners holding negative equity (a mortgage debt higher than the current value of the property).

Ineffective or inappropriate regulation[edit]

Regulations encouraging lax lending standards[edit]

Several analysts, such as Peter Wallison and Edward Pinto of the American Enterprise Institute, have asserted that private lenders were encouraged to relax lending standards by government affordable housing policies.^[78][79] They cite The Housing and Community Development Act of , which initially required that 30 percent or more of Fannie's and Freddie's loan purchases be related to affordable housing. The legislation gave HUD the power to set future requirements. These rose to 42 percent in and 50 percent in , and by (under the G.W. Bush Administration) a 56 percent minimum was established.^[80] To fulfill the requirements, Fannie Mae and Freddie Mac established programs to purchase $5 trillion in affordable housing loans,^[81] and encouraged lenders to relax underwriting standards to produce those loans.^[80]

These critics also cite, as inappropriate regulation, "The National Homeownership Strategy: Partners in the American Dream ("Strategy"), which was compiled in by Henry Cisneros, President Clinton's HUD Secretary. In , the independent research company, Graham Fisher & Company, stated: "While the underlying initiatives of the [Strategy] were broad in content, the main theme was the relaxation of credit standards."^[82] Critics of this argument have pointed out that loans to lower income people only represented a small percentage of these loans. ^[83]

The Community Reinvestment Act (CRA) is also identified as one of the causes of the recession, by some critics. They contend that lenders relaxed lending standards in an effort to meet CRA commitments, and they note that publicly announced CRA loan commitments were massive, totaling $ trillion in the years between and ^[84]

However, the Financial Crisis Inquiry Commission (FCIC) Democratic majority report concluded that Fannie & Freddie "were not a primary cause" of the crisis and that CRA was not a factor in the crisis.^[39] Further, since housing bubbles appeared in multiple countries in Europe as well, the FCIC Republican minority dissenting report also concluded that U.S. housing policies were not a robust explanation for a wider global housing bubble.^[39] The hypothesis that a primary cause of the crisis was U.S. government housing policy requiring banks to make risky loans has been widely disputed,^[85] with Paul Krugman referring to it as "imaginary history".^[86]

One of the other challenges with blaming government regulations for essentially forcing banks to make risky loans is the timing. Subprime lending increased from around 10% of mortgage origination historically to about 20% only from to , with housing prices peaking in Blaming affordable housing regulations established in the s for a sudden spike in subprime origination is problematic at best.^[39] A more proximate government action to the sudden rise in subprime lending was the SEC relaxing lending standards for the top investment banks during an April meeting with bank leaders. These banks increased their risk-taking shortly thereafter, significantly increasing their purchases and securitization of lower-quality mortgages, thus encouraging additional subprime and Alt-A lending by mortgage companies.^[87] This action by its investment bank competitors also resulted in Fannie Mae and Freddie Mac taking on more risk.^[88]

The Gramm–Leach–Bliley Act (), which reduced the regulation of banks by allowing commercial and investment banks to merge, has also been blamed for the crisis, by Nobel Prize-winning economist Joseph Stiglitz among others.^[89]

Derivatives[edit]

Several sources have noted the failure of the US government to supervise or even require transparency of the financial instruments known as derivatives.^[90][91][92] Derivatives such as credit default swaps (CDSs) were unregulated or barely regulated. Michael Lewis noted CDSs enabled speculators to stack bets on the same mortgage securities. This is analogous to allowing many persons to buy insurance on the same house. Speculators that bought CDS protection were betting significant mortgage security defaults would occur, while the sellers (such as AIG) bet they would not. An unlimited amount could be wagered on the same housing-related securities, provided buyers and sellers of the CDS could be found.^[93] When massive defaults occurred on underlying mortgage securities, companies like AIG that were selling CDS were unable to perform their side of the obligation and defaulted; U.S. taxpayers paid over $ billion to global financial institutions to honor AIG obligations, generating considerable outrage.^[94]

A investigative article in the Washington Post found leading government officials at the time (Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and SEC Chairman Arthur Levitt) vehemently opposed any regulation of derivatives. In , Brooksley E. Born, head of the Commodity Futures Trading Commission, put forth a policy paper asking for feedback from regulators, lobbyists, and legislators on the question of whether derivatives should be reported, sold through a central facility, or whether capital requirements should be required of their buyers. Greenspan, Rubin, and Levitt pressured her to withdraw the paper and Greenspan persuaded Congress to pass a resolution preventing CFTC from regulating derivatives for another six months&#;— when Born's term of office would expire.^[91] Ultimately, it was the collapse of a specific kind of derivative, the mortgage-backed security, that triggered the economic crisis of ^[92]

Shadow banking system[edit]

Securitization markets were impaired during the crisis.

Paul Krugman wrote in that the run on the shadow banking system was the fundamental cause of the crisis. "As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realised that they were re-creating the kind of financial vulnerability that made the Great Depression possible&#;– and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank." He referred to this lack of controls as "malign neglect".^[95][96]

During , three of the largest U.S. investment banks either went bankrupt (Lehman Brothers) or were sold at fire sale prices to other banks (Bear Stearns and Merrill Lynch). The investment banks were not subject to the more stringent regulations applied to depository banks. These failures exacerbated the instability in the global financial system. The remaining two investment banks, Morgan Stanley and Goldman Sachs, potentially facing failure, opted to become commercial banks, thereby subjecting themselves to more stringent regulation but receiving access to credit via the Federal Reserve.^[97][98] Further, American International Group (AIG) had insured mortgage-backed and other securities but was not required to maintain sufficient reserves to pay its obligations when debtors defaulted on these securities. AIG was contractually required to post additional collateral with many creditors and counter-parties, touching off controversy when over $&#;billion of U.S. taxpayer money was paid out to major global financial institutions on behalf of AIG. While this money was legally owed to the banks by AIG (under agreements made via credit default swaps purchased from AIG by the institutions), a number of Congressmen and media members expressed outrage that taxpayer money was used to bail out banks.^[94]

Economist Gary Gorton wrote in May

Unlike the historical banking panics of the 19th and early 20th centuries, the current banking panic is a wholesale panic, not a retail panic. In the earlier episodes, depositors ran to their banks and demanded cash in exchange for their checking accounts. Unable to meet those demands, the banking system became insolvent. The current panic involved financial firms "running" on other financial firms by not renewing sale and repurchase agreements (repo) or increasing the repo margin ("haircut"), forcing massive deleveraging, and resulting in the banking system being insolvent.^[99]

The Financial Crisis Inquiry Commission reported in January

In the early part of the 20th century, we erected a series of protections&#;– the Federal Reserve as a lender of last resort, federal deposit insurance, ample regulations&#;– to provide a bulwark against the panics that had regularly plagued America's banking system in the 19th century. Yet, over the past plus years, we permitted the growth of a shadow banking system&#;– opaque and laden with short term debt&#;– that rivaled the size of the traditional banking system. Key components of the market&#;– for example, the multitrillion-dollar repo lending market, off-balance-sheet entities, and the use of over-the-counter derivatives&#;– were hidden from view, without the protections we had constructed to prevent financial meltdowns. We had a 21st-century financial system with 19th-century safeguards.^[39]

Systemic crisis[edit]

The financial crisis and the recession have been described as a symptom of another, deeper crisis by a number of economists. For example, Ravi Batra argues that growing inequality of financial capitalism produces speculative bubbles that burst and result in depression and major political changes.^[][] Feminist economists Ailsa McKay and Margunn Bjørnholt argue that the financial crisis and the response to it revealed a crisis of ideas in mainstream economics and within the economics profession, and call for a reshaping of both the economy, economic theory and the economics profession. They argue that such a reshaping should include new advances within feminist economics and ecological economics that take as their starting point the socially responsible, sensible and accountable subject in creating an economy and economic theories that fully acknowledge care for each other as well as the planet.^[]

Effects[edit]

Main article: Effects of the Great Recession

Effects on the United States[edit]

Several major U.S. economic variables had recovered from the – Subprime mortgage crisisand Great Recession by the – time period.

U.S. Real GDP&#;– Contributions to Percent Change by Component –

Further information: Great Recession in the United States, Unemployment in the United States, and National debt of the United States

The Great Recession had a significant economic and political impact on the United States. While the recession technically lasted from December &#;&#; June (the nominal GDP trough), many important economic variables did not regain pre-recession (November or Q4 ) levels until – For example, real GDP fell $ billion (%) and did not recover its $15 trillion pre-recession level until Q3 ^[] Household net worth, which reflects the value of both stock markets and housing prices, fell $ trillion (%) and did not regain its pre-recession level of $ trillion until Q3 ^[] The number of persons with jobs (total non-farm payrolls) fell million (%) and did not regain the pre-recession level of million until May ^[] The unemployment rate peaked at % in October and did not return to its pre-recession level of % until May ^[]

A key dynamic slowing the recovery was that both individuals and businesses paid down debts for several years, as opposed to borrowing and spending or investing as had historically been the case. This shift to a private sector surplus drove a sizable government deficit.^[] However, the federal government held spending at about $ trillion from fiscal years – (thereby decreasing it as a percent of GDP), a form of austerity. Then-Fed Chair Ben Bernanke explained during November several of the economic headwinds that slowed the recovery:

• The housing sector did not rebound, as was the case in prior recession recoveries, as the sector was severely damaged during the crisis. Millions of foreclosures had created a large surplus of properties and consumers were paying down their debts rather than purchasing homes.
• Credit for borrowing and spending by individuals (or investing by corporations) was not readily available as banks paid down their debts.
• Restrained government spending following initial stimulus efforts (i.e., austerity) was not sufficient to offset private sector weaknesses.^[]

On the political front, widespread anger at banking bailouts and stimulus measures (begun by President George W. Bush and continued or expanded by President Obama) with few consequences for banking leadership, were a factor in driving the country politically rightward starting in The Troubled Asset Relief Program (TARP) was the largest of the bailouts. In , TARP allocated $ billion to various major financial institutions. However, the US collected $ billion in return from these loans in , recording a profit of $ billion.^[] Nonetheless, there was a political shift from the Democratic party. Examples include the rise of the Tea Party and the loss of Democratic majorities in subsequent elections. President Obama declared the bailout measures started under the Bush administration and continued during his administration as completed and mostly profitable as of December&#;^[update].^[] As of January&#;^[update], bailout funds had been fully recovered by the government, when interest on loans is taken into consideration. A total of $B was invested, loaned, or granted due to various bailout measures, while $B had been returned to the Treasury. The Treasury had earned another $B in interest on bailout loans, resulting in an $87B profit.^[] Economic and political commentators have argued the Great Recession was also an important factor in the rise of populist sentiment that resulted in the election of President Trump in , and left-wing populist Bernie Sanders' candidacy for the Democratic nomination.^[][][][]

Effects on Europe[edit]

Further information: European debt crisis, Austerity, and Great Recession in Europe

Public Debt to GDP Ratio for Selected European Countries – to Source Data: Eurostat

The crisis in Europe generally progressed from banking system crises to sovereign debt crises, as many countries elected to bail out their banking systems using taxpayer money.^{[citation needed]} Greece was different in that it faced large public debts rather than problems within its banking system. Several countries received bailout packages from the troika (European Commission, European Central Bank, International Monetary Fund), which also implemented a series of emergency measures.

Many European countries embarked on austerity programs, reducing their budget deficits relative to GDP from to For example, according to the CIA World Factbook Greece improved its budget deficit from % GDP in to % in Iceland, Italy, Ireland, Portugal, France, and Spain also improved their budget deficits from to relative to GDP.^[][]

However, with the exception of Germany, each of these countries had public-debt-to-GDP ratios that increased (i.e., worsened) from to , as indicated in the chart at right. Greece's public-debt-to-GDP ratio increased from % in to % in ^[] to % in This indicates that despite improving budget deficits, GDP growth was not sufficient to support a decline (improvement) in the debt-to-GDP ratio for these countries during this period. Eurostat reported that the debt to GDP ratio for the 17 Euro area countries together was % in , % in , % in , and % in ^[][]

According to the CIA World Factbook, from to , the unemployment rates in Spain, Greece, Italy, Ireland, Portugal, and the UK increased. France had no significant changes, while in Germany and Iceland the unemployment rate declined.^[] Eurostat reported that Eurozone unemployment reached record levels in September at %, up from % the prior year. Unemployment varied significantly by country.^[]

Economist Martin Wolf analysed the relationship between cumulative GDP growth from to and total reduction in budget deficits due to austerity policies (see chart at right) in several European countries during April He concluded that: "In all, there is no evidence here that large fiscal contractions [budget deficit reductions] bring benefits to confidence and growth that offset the direct effects of the contractions. They bring exactly what one would expect: small contractions bring recessions and big contractions bring depressions." Changes in budget balances (deficits or surpluses) explained approximately 53% of the change in GDP, according to the equation derived from the IMF data used in his analysis.^[]

Economist Paul Krugman analysed the relationship between GDP and reduction in budget deficits for several European countries in April and concluded that austerity was slowing growth, similar to Martin Wolf. He also wrote: "&#;this also implies that 1 euro of austerity yields only about euros of reduced deficit, even in the short run. No wonder, then, that the whole austerity enterprise is spiraling into disaster."^[]

Britain's decision to leave the European Union in has been partly attributed to the after-effects of the Great Recession on the country.^[][][][][]

Countries that avoided recession[edit]

Poland and Slovakia were the only two members of the European Union to avoid a GDP recession during the Great Recession. As of December , the Polish economy had not entered recession nor even contracted, while its IMF GDP growth forecast of percent was expected to be upgraded.^[][][] Analysts identified several causes for the positive economic development in Poland: Extremely low levels of bank lending and a relatively very small mortgage market; the relatively recent dismantling of EU trade barriers and the resulting surge in demand for Polish goods since ; Poland being the recipient of direct EU funding since ; lack of over-dependence on a single export sector; a tradition of government fiscal responsibility; a relatively large internal market; the free-floating Polish zloty; low labour costs attracting continued foreign direct investment; economic difficulties at the start of the decade, which prompted austerity measures in advance of the world crisis.^{[citation needed]}

While India, Uzbekistan, China, and Iran experienced slowing growth, they did not enter recessions.

South Korea narrowly avoided technical recession in the first quarter of ^[] The International Energy Agency stated in mid September that South Korea could be the only large OECD country to avoid recession for the whole of ^[] It was the only developed economy to expand in the first half of

Australia avoided a technical recession after experiencing only one quarter of negative growth in the fourth quarter of , with GDP returning to positive in the first quarter of ^[][]

The financial crisis did not affect developing countries to a great extent. Experts see several reasons: Africa was not affected because it is not fully integrated in the world market. Latin America and Asia seemed better prepared, since they have experienced crises before. In Latin America, for example, banking laws and regulations are very stringent. Bruno Wenn of the German DEG suggests that Western countries could learn from these countries when it comes to regulations of financial markets.^[]

Timeline of effects[edit]

Main article: Timeline of the Great Recession

The table below displays all national recessions appearing in (for the 71 countries with available data), according to the common recession definition, saying that a recession occurred whenever seasonally adjusted real GDP contracts quarter on quarter, through minimum two consecutive quarters. Only 11 out of the 71 listed countries with quarterly GDP data (Poland, Slovakia, Moldova, India, China, South Korea, Indonesia, Australia, Uruguay, Colombia and Bolivia) escaped a recession in this time period.

The few recessions appearing early in are commonly never associated to be part of the Great Recession, which is illustrated by the fact that only two countries (Iceland and Jamaica) were in recession in Q

One year before the maximum, in Q, only six countries were in recession (Iceland, Sweden, Finland, Ireland, Portugal and New Zealand). The number of countries in recession was 25 in Q2&#x;, 39 in Q3&#x; and 53 in Q4&#x; At the steepest part of the Great Recession in Q1&#x;, a total of 59 out of 71 countries were simultaneously in recession. The number of countries in recession was 37 in Q2&#x;, 13 in Q3&#x; and 11 in Q4&#x; One year after the maximum, in Q1&#x;, only seven countries were in recession (Greece, Croatia, Romania, Iceland, Jamaica, Venezuela and Belize).

The recession data for the overall Gzone (representing 85% of all GWP), depict that the Great Recession existed as a global recession throughout Q3&#x; until Q1&#x;

Subsequent follow-up recessions in &#x; were confined to Belize, El Salvador, Paraguay, Jamaica, Japan, Taiwan, New Zealand and 24 out of 50 European countries (including Greece). As of October , only five out of the 71 countries with available quarterly data (Cyprus, Italy, Croatia, Belize and El Salvador), were still in ongoing recessions.^[22][] The many follow-up recessions hitting the European countries, are commonly referred to as being direct repercussions of the European&#;sovereign&#x;debt&#;crisis.

Country specific details about recession timelines[edit]

Iceland fell into an economic depression in following the collapse of its banking system (see – Icelandic financial crisis). By mid Iceland is regarded as one of Europe's recovery success stories largely as a result of a currency devaluation that has effectively reduced wages by 50%--making exports more competitive.^[]

The following countries had a recession starting in the fourth quarter of United States,^[22]

The following countries had a recession already starting in the first quarter of Latvia,^[] Ireland,^[] New Zealand,^[] and Sweden.^[22]

The following countries/territories had a recession starting in the second quarter of Japan,^[] Hong Kong,^[] Singapore,^[] Italy,^[] Turkey,^[22] Germany,^[] United Kingdom,^[22] the Eurozone,^[] the European Union,^[22] and OECD.^[22]

The following countries/territories had a recession starting in the third quarter of Spain,^[] and Taiwan.^[]

The following countries/territories had a recession starting in the fourth quarter of Switzerland.^[]

South Korea miraculously avoided recession with GDP returning positive at a % expansion in the first quarter of ^[]

Of the seven largest economies in the world by GDP, only China avoided a recession in In the year to the third quarter of China grew by 9%. Until recently Chinese officials considered 8% GDP growth to be required simply to create enough jobs for rural people moving to urban centres.^[] This figure may more accurately be considered to be 5–7% now^[when?] that the main growth in working population is receding.^{[citation needed]}

Ukraine went into technical depression in January with a GDP growth of −20%, when comparing on a monthly basis with the GDP level in January ^[] Overall the Ukrainian real GDP fell % when comparing the entire part of with ^[] When measured quarter-on-quarter by changes of seasonally adjusted real GDP, Ukraine was more precisely in recession/depression throughout the four quarters from Q until Q (with respective qoq-changes of: %, %, %, %), and the two quarters from Q until Q (with respective qoq-changes of: % and −%).^[]

Japan was in recovery in the middle of the decade s but slipped back into recession and deflation in ^[] The recession in Japan intensified in the fourth quarter of with a GDP growth of −%,^[] and deepened further in the first quarter of with a GDP growth of −%.^[]

Political instability related to the economic crisis[edit]

On February 26, , an Economic Intelligence Briefing was added to the daily intelligence briefings prepared for the President of the United States. This addition reflects the assessment of U.S. intelligence agencies that the global financial crisis presents a serious threat to international stability.^[]

Business Week stated in March that global political instability is rising fast because of the global financial crisis and is creating new challenges that need managing.^[] The Associated Press reported in March that: United States "Director of National Intelligence Dennis Blair has said the economic weakness could lead to political instability in many developing nations."^[] Even some developed countries are seeing political instability.^[] NPR reports that David Gordon, a former intelligence officer who now leads research at the Eurasia Group, said: "Many, if not most, of the big countries out there have room to accommodate economic downturns without having large-scale political instability if we're in a recession of normal length. If you're in a much longer-run downturn, then all bets are off."^[]

Political scientists have argued that the economic stasis triggered social churning that got expressed through protests on a variety of issues across the developing world. In Brazil, disaffected youth rallied against a minor bus-fare hike;^[] in Turkey, they agitated against the conversion of a park to a mall^[] and in Israel, they protested against high rents in Tel Aviv. In all these cases, the ostensible immediate cause of the protest was amplified by the underlying social suffering induced by the great recession.

In January , the government leaders of Iceland were forced to call elections two years early after the people of Iceland staged mass protests and clashed with the police because of the government's handling of the economy.^[] Hundreds of thousands protested in France against President Sarkozy's economic policies.^[] Prompted by the financial crisis in Latvia, the opposition and trade unions there organised a rally against the cabinet of premier Ivars Godmanis. The rally gathered some 10–20 thousand people. In the evening the rally turned into a Riot. The crowd moved to the building of the parliament and attempted to force their way into it, but were repelled by the state's police. In late February many Greeks took part in a massive general strike because of the economic situation and they shut down schools, airports, and many other services in Greece.^[] Police and protesters clashed in Lithuania where people protesting the economic conditions were shot with rubber bullets.^[] Communists and others rallied in Moscow to protest the Russian government's economic plans.^[] However the impact was mild in Russia, whose economy gained from high oil prices.^[]

Asian countries saw various degrees of protest.^[] Protests have also occurred in China as demands from the west for exports have been dramatically reduced and unemployment has increased. Beyond these initial protests, the protest movement has grown and continued in In late , the Occupy Wall Street protest took place in the United States, spawning several offshoots that came to be known as the Occupy movement.

In the economic difficulties in Spain increased support for secession movements. In Catalonia, support for the secession movement exceeded. On September 11, a pro-independence march drew a crowd that police estimated at &#;million.^[]

Policy responses[edit]

Main article: National fiscal policy response to the Great Recession

See also: – Keynesian resurgence

The financial phase of the crisis led to emergency interventions in many national financial systems. As the crisis developed into genuine recession in many major economies, economic stimulus meant to revive economic growth became the most common policy tool. After having implemented rescue plans for the banking system, major developed and emerging countries announced plans to relieve their economies. In particular, economic stimulus plans were announced in China, the United States, and the European Union.^[] In the final quarter of , the financial crisis saw the G group of major economies assume a new significance as a focus of economic and financial crisis management.

United States policy responses[edit]

Main article: Subprime mortgage crisis

Federal Reserve Holdings of Treasury and Mortgage-Backed Securities

The U.S. government passed the Emergency Economic Stabilization Act of (EESA or TARP) during October This law included $ billion in funding for the "Troubled Assets Relief Program" (TARP). Following a model initiated by the United Kingdom bank rescue package,^[][] $ billion was used in the Capital Purchase Program to lend funds to banks in exchange for dividend-paying preferred stock.^[][]

On February 17, , U.S. President Barack Obama signed the American Recovery and Reinvestment Act of , an $ billion stimulus package with a broad spectrum of spending and tax cuts.^[] Over $75 billion of the package was specifically allocated to programs which help struggling homeowners. This program was referred to as the Homeowner Affordability and Stability Plan.^[]

The U.S. Federal Reserve (central bank) lowered interest rates and significantly expanded the money supply to help address the crisis. The New York Times reported in February that the Fed continued to support the economy with various monetary stimulus measures: "The Fed, which has amassed almost $3 trillion in Treasury and mortgage-backed securities to promote more borrowing and lending, is expanding those holdings by $85 billion a month until it sees clear improvement in the labor market. It plans to hold short-term interest rates near zero even longer, at least until the unemployment rate falls below percent."^[]

Asia-Pacific policy responses[edit]

On September 15, , China cut its interest rate for the first time since Indonesia reduced its overnight rate, at which commercial banks can borrow overnight funds from the central bank, by two percentage points to percent. The Reserve Bank of Australia injected nearly $ billion into the banking system, nearly three times as much as the market's estimated requirement. The Reserve Bank of India added almost $ billion, through a refinance operation, its biggest in at least a month.^[]

On November 9, , the Chinese economic stimulus program, a RMB¥ 4 trillion ($ billion) stimulus package, was announced by the central government of the People's Republic of China in its biggest move to stop the global financial crisis from hitting the world's second largest economy. A statement on the government's website said the State Council had approved a plan to invest 4 trillion yuan ($ billion) in infrastructure and social welfare by the end of The stimulus package was invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income-building, tax cuts, and finance.

Later that month, China's export driven economy was starting to feel the impact of the economic slowdown in the United States and Europe despite the government already cutting key interest rates three times in less than two months in a bid to spur economic expansion. On November 28, , the Ministry of Finance of the People's Republic of China and the State Administration of Taxation jointly announced a rise in export tax rebate rates on some labour-intensive goods. These additional tax rebates took place on December 1, ^[]

The stimulus package was welcomed by world leaders and analysts as larger than expected and a sign that by boosting its own economy, China is helping to stabilise the global economy. News of the announcement of the stimulus package sent markets up across the world. However, Marc Faber claimed that he thought China was still in recession on January

In Taiwan, the central bank on September 16, , said it would cut its required reserve ratios for the first time in eight years. The central bank added $ billion into the foreign-currency interbank market the same day. Bank of Japan pumped $ billion into the financial system on September 17, , and the Reserve Bank of Australia added $ billion the same day.^[]

In developing and emerging economies, responses to the global crisis mainly consisted in low-rates monetary policy (Asia and the Middle East mainly) coupled with the depreciation of the currency against the dollar. There were also stimulus plans in some Asian countries, in the Middle East and in Argentina. In Asia, plans generally amounted to 1 to 3% of GDP, with the notable exception of China, which announced a plan accounting for 16% of GDP (6% of GDP per year).

European policy responses[edit]

Until September , European policy measures were limited to a small number of countries (Spain and Italy). In both countries, the measures were dedicated to households (tax rebates) reform of the taxation system to support specific sectors such as housing. The European Commission proposed a € billion stimulus plan to be implemented at the European level by the countries. At the beginning of , the UK and Spain completed their initial plans, while Germany announced a new plan.

On September 29, , the Belgian, Luxembourg and Dutch authorities partially nationalised Fortis. The German government bailed out Hypo Real Estate.

On October 8, , the British Government announced a bank rescue package of around £ billion^[] ($ billion at the time). The plan comprises three parts. The first £ billion would be made in regard to the banks in liquidity stack. The second part will consist of the state government increasing the capital market within the banks. Along with this, £50&#;billion will be made available if the banks needed it, finally the government will write off any eligible lending between the British banks with a limit to £ billion.

In early December , German Finance Minister Peer Steinbrück indicated a lack of belief in a "Great Rescue Plan" and reluctance to spend more money addressing the crisis.^[] In March , The European Union Presidency confirmed that the EU was at the time strongly resisting the US pressure to increase European budget deficits.^[]

From , the United Kingdom began a fiscal consolidation program to reduce debt and deficit levels while at the same time stimulating economic recovery.^[] Other European countries also began fiscal consolidation with similar aims.^[]

Global responses[edit]

Most political responses to the economic and financial crisis has been taken, as seen above, by individual nations. Some coordination took place at the European level, but the need to cooperate at the global level has led leaders to activate the G major economies entity. A first summit dedicated to the crisis took place, at the Heads of state level in November ( G Washington summit).

The G countries met in a summit held on November in Washington to address the economic crisis. Apart from proposals on international financial regulation, they pledged to take measures to support their economy and to coordinate them, and refused any resort to protectionism.

Another G summit was held in London on April Finance ministers and central banks leaders of the G met in Horsham, England, on March to prepare the summit, and pledged to restore global growth as soon as possible. They decided to coordinate their actions and to stimulate demand and employment. They also pledged to fight against all forms of protectionism and to maintain trade and foreign investments. These actions will cost $tn.^[]

They also committed to maintain the supply of credit by providing more liquidity and recapitalising the banking system, and to implement rapidly the stimulus plans. As for central bankers, they pledged to maintain low-rates policies as long as necessary. Finally, the leaders decided to help emerging and developing countries, through a strengthening of the IMF.

Policy recommendations[edit]

IMF recommendation[edit]

The IMF stated in September that the financial crisis would not end without a major decrease in unemployment as hundreds of millions of people were unemployed worldwide. The IMF urged governments to expand social safety nets and to generate job creation even as they are under pressure to cut spending. The IMF also encouraged governments to invest in skills training for the unemployed and even governments of countries, similar to that of Greece, with major debt risk to first focus on long-term economic recovery by creating jobs.^[]

Raising interest rates[edit]

Further information: Corporate debt bubble

The Bank of Israel was the first to raise interest rates after the global recession began.^[] It increased rates in August ^[]

On October 6, , Australia became the first G20 country to raise its main interest rate, with the Reserve Bank of Australia moving rates up from % to %.^[]

The Norges Bank of Norway and the Reserve Bank of India raised interest rates in March ^[]

On November 2, , the Bank of England raised interest rates for the first time since March from % to % in an attempt to curb inflation.

Comparisons with the Great Depression[edit]

Main article: Comparisons between the Great Recession and the Great Depression

On April 17, , the then head of the IMF Dominique Strauss-Kahn said that there was a chance that certain countries may not implement the proper policies to avoid feedback mechanisms that could eventually turn the recession into a depression. "The free-fall in the global economy may be starting to abate, with a recovery emerging in , but this depends crucially on the right policies being adopted today." The IMF pointed out that unlike the Great Depression, this recession was synchronised by global integration of markets. Such synchronized recessions were explained to last longer than typical economic downturns and have slower recoveries.^[]

Olivier Blanchard, IMF Chief Economist, stated that the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time. "Long-term unemployment is alarmingly high: in the United States, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression." The IMF also stated that a link between rising inequality within Western economies and deflating demand may exist. The last time that the wealth gap reached such skewed extremes was in –^[]

See also[edit]

References[edit]