The Great Recession

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What was 'The Great Recession'

The Great Recession is a term that represents the sharp decline in economic activity during the late 2000s, which is generally considered the largest downturn since the Great Depression. The term “Great Recession” applies to both the U.S. recession, officially lasting from December 2007 to June 2009, and the ensuing global recession in 2009. The economic slump began when the U.S. housing market went from boom to bust and large amounts of mortgage-backed securities and derivatives lost significant value.

BREAKING DOWN 'The Great Recession'

The term "Great Recession" is a play on the term "Great Depression." The latter occurred during the 1930s and featured gross domestic product (GDP) decline in excess of 10% and an unemployment rate that at one point reached 25%. While no explicit criteria exists to differentiate a depression from just a bad recession, there is near-consensus among economists that the late-2000s downturn, during which the U.S. GDP declined by 0.3% in 2008 and 2.8% in 2009, and unemployment briefly touched 10%, did not reach depression status. However, the event being unquestionably the worst economic downturn in the intervening years, the term accurately conveyed its severity by invoking such a well-known economic calamity.

Great Recession Origins and Consequences

During the American housing boom of the mid-2000s, financial institutions began marketing mortgage-backed securities (MBSs) and sophisticated derivative products at unprecedented levels. When the real estate market collapsed in 2007, these securities declined precipitously in value, jeopardizing the solvency of over-leveraged banks and financial institutions in the U.S. and Europe.

Although the global economy was already feeling the grip of a credit crisis that had been unfolding since 2007, things came to a head a year later with the bankruptcy of Lehman Brothers, the country’s fourth-largest investment bank, in September 2008. The contagion quickly spread to other economies around the world, most notably in Europe. As a result of the Great Recession, the United States alone shed more than 7.5 million jobs, causing its unemployment rate to double. Further, American households lost roughly $16 trillion of net worth as a result of the stock market plunge.

Great Recession Recovery

The aggressive policies of the Federal Reserve and other central banks, though not without criticism, are widely credited with preventing even greater damage to the global economy. For example, the Fed lowered a key interest rate to nearly zero in order to promote liquidity and, in an unprecedented move, provided banks with a staggering $7.7 trillion of emergency loans.

The Dow Jones Industrial Average (DJIA), which had lost over half its value from its August 2007 peak, began to recover in March 2009 and, four years later, in March 2013, surpassed its 2007 high. The Great Recession's official end date was June 2009.