High levels of indebtedness among firms and households from the era known as the Great Moderation (late 1980s-2007) meant that the slowdown in the economy led to increases in delinquencies on loans and bankruptcies, further exacerbating the downturn. The U.S. government took unprecedented measures to combat the crisis, using large amounts of public money to try to stabilize the financial system and bail out institutions that had come near to failure. The Federal Reserve also embarked on a course of monetary expansion in an attempt to improve credit conditions, while using unconventional policies such as quantitative easing in order to backstop financial markets. The Great Recession has been cited as a cause of or contributor to a number of long-lasting problems in the U.S., including underinvestment in fixed capital and infrastructure, accelerated deindustrialization, political polarization, and a host of negative societal trends from drug abuse to suicide.
The Global Financial Crisis and U.S. recession
The Global Financial Crisis began in the Summer of 2007, as banks began to experience difficulties in pricing the complex financial products known as derivatives, with which they had become heavily leveraged with during the previous decade. These products, the most famous of which being the residential mortgage-backed security, essentially worked by bundling low-grade mortgages together and then selling insurance on the risk of default, which allowed banks to vastly extend the amount of credit they could issue to home buyers. While this granted access to credit to many buyers who would otherwise have been excluded from the housing market, the trend was combined with the neglect of lending standards and fraudulent practices by credit ratings agencies, therefore it created an unsustainable housing bubble in the United States.As the U.S. economy began to slow in 2006, with the Federal Reserve raising interest rates to combat rising energy prices, delinquencies on residential mortgages began to spike. Housing loans that had been classified by credit ratings agencies as being the highest grade turned out to have been made to borrowers who had little likelihood of being able to make repayments once the initial fixed-rate period of their mortgages expired. The web of financial promises that banks and other financial institutions had made on the assumption of the soundness of the U.S. housing market then began to unravel in the Fall of 2007. It would take until September 2008 for the worst of the crisis to hit, with Lehman Brothers, one of Wall Street's largest investment banks, failing. Financial markets panicked in reaction and inter-bank lending froze in the United States. After this point, the U.S. government would step in to prevent any further failures of financial institutions, while the effects of the crisis spread to the non-financial economy.
The slowdown in the non-financial economy
Real Gross Domestic Product, a broad measure of production and spending in the economy taking inflation into account, contracted sharply in 2009, declining by around 400 billion U.S. dollars. This was driven by a collapse in consumer confidence, reductions in industrial production, and mass layoffs of workers in industries such as construction, manufacturing, and business services. Workers who were not laid off often received pay cuts or had their work hours reduced, further reducing the demand for goods and services by those in employment. This drop in demand was a key factor in the recession and led to fears of a deflationary spiral, whereby the lack of demand and consumer confidence causes a reduction in both prices and wages, which causes further lack of confidence and demand. As deflation makes it increasingly difficult to repay debts, because it effectively causes an increase in the real value of debts incurred, delinquencies on consumer and business loans increased rapidly.The United States' trade deficit nearly halved between 2008 and 2009, as the U.S. dollar depreciated against many other currencies and consumers bought less. While some commentators welcomed the reduction of the trade deficit, maintaining that the high level of imports bought by U.S. consumers before the recession was only made possible by record high levels of debt, the reduction in the United States' demand further aggravated conditions in the global economy, hitting export dependent countries particularly hard. A key outlier to the trend of declining output and revenues in the U.S. economy was the shale oil and gas sector. The sector, which was not commercially viable before the recession, benefitted from a globally high price of oil, which made exploration using shale methods profitable in the U.S. The vast increases in shale oil and gas production during the recession greatly reduced net energy imports, alleviating some of the pressures of the recession and assisting in the recovery.
Public intervention to fight the crisis
The recession of 2008-2009 was an economic crisis which has often been compared to the Great Depression (1929-1933) due to the instability it caused in the financial sector and the immense challenges it posed for economic policy in the country. While the Great Recession was the longest U.S. recession since 1929, its length (18 months) pales in comparison to the Great Depression, which lasted for 43 months. Many observers have attributed the speed of the recovery to the policy response of the U.S. government and Federal Reserve, while others have suggested that these responses had the effect of preserving a broken system. The Bush administration announced in October 2008 that it would allocate up to 700 billion U.S. dollars to backstop the financial system, with a program known as the Troubled Asset Relief Program (TARP). The majority of the funds disbursed from this program went to support banks who were experiencing liquidity problems due to having vast amounts of toxic loans on their balance sheets, while smaller amounts went to bailing out the car manufacturers (Chrysler and General Motors) and the insurance giant AIG.With the election of Barack Obama as President in November 2008, the focus of economic policy moved from support for the financial system towards providing a stimulus to the non-financial economy. The American Recovery and Reinvestment Act (ARRA) of 2009 was the Obama administration's key economic policy package, with around 800 billion U.S. dollars allocated to tax relief for individuals and companies, infrastructure spending, healthcare, and funds for state and local governments, among other programs. The stimulus program has been credited with boosting the U.S. economy, which returned to stable economic growth in 2010, while Republicans and other opponents of fiscal spending blamed the act for inflating the public debt of the U.S.. In terms of monetary policy, the Federal Reserve lowered its key interest rate close to zero percent in 2009, with it staying there until 2015. The Fed also expanded its balance sheet significantly through an unconventional policy called quantitative easing, whereby the Fed bought government bonds and other securities in order to channel liquidity into financial markets.
Long-lasting impacts of the Great Recession
While the recession officially lasted for 18 months between 2008 and 2009, the effects of the Great Recession on the United States' economy, society, and its politics have been long lasting. It took ten years before unemployment in the U.S. returned below its pre-crisis level, with long-term unemployment in particular rising compared to its pre-crisis trend. Long-term unemployment has been linked to deaths of despair, which have spiked in the wake of the recession, particularly in regions that have experienced deindustrialization, notably the 'rust belt' states. In spite of this, the long-term decline in the number of manufacturing workers in the U.S. was actually halted post-2010, the probable causes of which are the economic stimulus packages of the Obama administration, 'reshoring' of jobs from abroad by U.S. manufacturing firms, and the U.S. shale oil boom. The 2010s were also notable for being a period of unprecedentedly low interest rates maintained by the Federal Reserve in order to stimulate the economy, which drove investors towards riskier investments, such as in tech start-ups, which promised higher returns.Politically, the Great Recession emboldened both the left and the right in the United States. The Occupy Wall Street movement arose on the left to oppose bank bailouts by the U.S. government and to demand radical changes to American capitalism, while on the right the Tea Party movement, which opposed the Obama administration's stimulus policies, became influential in the Republican Party. These movements would later coalesce around candidates for U.S. President, such as Bernie Sanders for the Democrats and Donald Trump for the Republicans. Trump's election as President in particular has been pointed to as being influenced by the Great Recession, as he won votes for the Republicans in historically democratic states and districts that had suffered greatly during the recession. In popular culture, the recession has been portrayed in films focusing on the financial crisis such as the Big Short and Margin Call, or focusing on the effects of the recession such as Nomadland, which won the 2021 Oscar for Best Film.
