The Great Recession

AAA

DEFINITION of 'The Great Recession'

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.

VIDEO

Loading the player...

BREAKING DOWN 'The Great Recession'

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.

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.

RELATED TERMS
  1. Biflation

    The simultaneous existence of inflation and deflation in an economy. ...
  2. Nationalization

    Refers to the process of a government taking control of a company ...
  3. Problem Loan

    In the banking industry, a problem loan is one of two things; ...
  4. Subprime Mortgage

    A type of mortgage that is normally made out to borrowers with ...
  5. Recession

    A significant decline in activity across the economy, lasting ...
  6. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraShort Nasdaq Biotech

    Learn more about an innovative inverse-leveraged sector exchange-traded fund, or ETF, the ProShares UltraShort Nasdaq Biotechnology fund.
  2. Entrepreneurship

    Top 5 Startups That Emerged in Detroit

    Learn how startups are changing the face of Detroit, a city long dominated by large corporations, and identify the specific Detroit startups leading the trend.
  3. Economics

    These 5 Countries Move the Supply of Oil

    Learn which countries are the largest source of change in the global supply of oil. Oil prices crashed in 2014 as supply increased and demand dropped.
  4. Investing Basics

    3 Companies That Hate Debt Financing

    Learn how companies such as Chipotle, Bed Bath & Beyond, and Paychex are able to maintain impressive levels of growth without debt financing.
  5. Economics

    Looking to Invest In Oil? Be Patient

    Learn about the best time to pick a bottom in oil. Oil prices have been destroyed due to excess supply and slowing demand from a slow global economy.
  6. Professionals

    Career Advice: Management Consulting Vs. Law

    Compare the career opportunities between management and law using such criteria as skills needed, starting salary and work-life balance.
  7. Economics

    China's Connection to the Recent Gold Crash

    Learn about the connection between the Chinese stock market crash and gold's crash. China is the world's largest source of gold demand.
  8. Investing

    Companies You Never Thought Would Go Bankrupt

    Learn about some of the most shocking corporate bankruptcies in history, including General Motors, Chrysler, Lehman Brothers and Enron.
  9. Economics

    An America with Donald Trump as President

    Take a closer look at some of policy proposals from Republican presidential candidate Donald Trump, and what a future with President Trump might look like.
  10. Stock Analysis

    The 3 Best Buy-and-Hold Stocks For the Next 10 Years

    Find out what makes electric cars, burritos and muscle shirts great buy-and-hold additions to your long-term portfolio.
RELATED FAQS
  1. Who decides when to print money in the US?

    The U.S. Treasury decides to print money in the United States as it owns and operates printing presses. However, the Federal ... Read Full Answer >>
  2. Is my IRA/Roth IRA FDIC-Insured?

    The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
  3. What category of retailers will perform most strongly when the economy is doing well?

    When the economy is doing well, the market segments that perform best are volatile segments with products and services that ... Read Full Answer >>
  4. What does floating stock tell traders about a particular stock?

    Floating stock tells traders about the potential volatility of a stock. Stocks with small float are most susceptible to increases ... Read Full Answer >>
  5. What emerging markets are best suited for getting the most exposure to the industrial ...

    The emerging market best suited for getting the most exposure to the industrial sector is China. There are four major emerging ... Read Full Answer >>
  6. What impact is the farm-to-table movement having on the food & beverage industry?

    The farm-to-table movement is having a negative effect on the large companies in the food and beverage industry while creating ... Read Full Answer >>
  7. How does the long-term outlook of the Internet sector compare to the broader economy?

    The long-term outlook of the Internet sector is brighter than the broader economy, although winners and losers are unclear. ... Read Full Answer >>
  8. In what ways does Bayesian probability support the probability default model when ...

    During the European debt crisis, several countries in the Eurozone were faced with high structural deficits, a slowing economy ... Read Full Answer >>
  9. How did the Great Recession affect structural unemployment?

    The Great Recession greatly increased structural unemployment levels by creating a large disparity between the high supply ... Read Full Answer >>
  10. How do changes in interest rates affect M2?

    Changes in interest rates have a direct effect on M2. In fact, expanding or contracting the M2 money supply is one of the ... Read Full Answer >>
  11. How can central banks use open market operations to manipulate short-term interest ...

    A central bank uses open market operations to manipulate short-term interest rates by increasing or decreasing the money ... Read Full Answer >>
  12. What is the rate of return I can expect on a savings account?

    Prior to the Great Recession, savings account rates offered by banks could typically be found in the 4 to 8% range, depending ... Read Full Answer >>
  13. How do government bailouts increase moral hazard?

    Government bailouts increase moral hazard by engendering a business climate in which companies feel they will be protected ... Read Full Answer >>
  14. What can cause the rate of return to be negative?

    Several factors can cause an investment to have a negative rate of return. Poor performance of a company or companies, turmoil ... Read Full Answer >>
  15. What are some examples of the law of demand in real markets?

    The law of demand posits a negative relationship between the price of a good and quantity demanded if all other factors are ... Read Full Answer >>
  16. What developed countries have the greatest exposure to the automotive sector?

    The developed countries with the greatest exposure to the automotive sector are Japan and Germany. This is based on exposure ... Read Full Answer >>
  17. What country has the richest middle class?

    For decades, the United States boasted the honor of having the richest middle class. However, as of 2015, Canada has the ... Read Full Answer >>
  18. How does the law of supply and demand affect the housing market?

    The law of supply and demand is a basic economic principle that explains the relationship between supply and demand for a ... Read Full Answer >>
  19. What are some examples of expansionary fiscal policy?

    The two major examples of expansionary fiscal policy are tax cuts and increased government spending. Both of these policies ... Read Full Answer >>
  20. Why would growth investors be attracted to the automotive sector?

    Growth investors are attracted to the automotive sector because it offers greater returns than the broader market. Automobile ... Read Full Answer >>
  21. How can I protect my investment portfolio from recessions?

    One of the biggest fears among investors is what happens to their portfolios during a recession. After all, economic contraction ... Read Full Answer >>
  22. What are the main factors that drive share prices in the financial services sector?

    The financial services sector comprises businesses such as large banks, credit services companies, asset management companies, ... Read Full Answer >>
  23. What are the risks associated with investing in the banking sector?

    Risks associated with investing in the banking sector include operational risk, market risk, cybersecurity, funding risks, ... Read Full Answer >>
  24. How much of a diversified portfolio should be exposed to the metals and mining sector?

    The metals and mining sector tends to move inversely with the broader market. As such, many investors use precious metals, ... Read Full Answer >>
  25. How can I profit from a fall in the metals and mining sector?

    Investors profit from a fall in the metals and mining sector by going short on metals or by going long on broader market ... Read Full Answer >>
  26. What can policymakers do to decrease cyclical unemployment?

    Downturns in the business cycle cause cyclical unemployment, so policymakers should focus on expanding output, which they ... Read Full Answer >>
  27. Why are most brokerage firms owned by banks?

    Most brokerage firms are owned by banks because this allows the banks to act as both brokers and dealers, and they have more ... Read Full Answer >>
  28. What is the purpose of a hedge fund?

    A hedge fund is an official partnership of investors who pool money together to be guided by professional management firms, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  2. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  3. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  4. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  5. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  6. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!