What Was The Great Recession?

I was still in diapers when the Great Recession happened. I was not around to understand how this tragic event affected me. My goal is to show how the Great Recession happened and how it affected everyone worldwide. History will repeat itself if we are not aware of how to prevent or how to notice warning signs.

What was the Cause?

The housing market's expansion from the 1990s to the mid-2000s was dramatic. The average housing price of a home from 1998 and 2006 more than doubled in price (Federal Reserve History). The real estate market was booming, but why did this cause the recession?  We can then look back at 2001, when the Dotcom bubble exploded and the 2001 terrorist attack on New York caused the economy to be "hammered"(Bloomberg). The Fed responded to this economic downturn by cutting the interest rates to the lowest levels since the 1970s (Bloomberg). Both the high upside of the real estate market and the low interest rates slowly started to create a housing bubble.

With all these factors, banks were able to lend money to people who would normally not be eligible for mortgages. They called these consumers sub-prime borrowers(Britannica Money). With the demand high and many people having mortgages at low interest rates, once the rates started to climb back up in 2005, we noticed that most consumers could no longer afford their loan payments (Britannica Money). Housing prices peaked in early 2007, and there was concern of an increase in mortgage prices since the downward movement of prices of houses meant larger accountability to the borrowers (Federal Reserve History). With borrowers already "underwater"(Britannica Money) on their homes, many banks found themselves in trouble since no one could make payments. This caused the real estate market to collapse since the demand dramatically decreased and the supply did not change. 

What Happened to the Financial Services Industry?

With banks going into a panic, they started an interbank credit freeze, meaning the banks were not able to extend credit to their clients that were in good health standing (Britannica Money). All businesses had to eliminate costs, which caused large layoffs in all industries (Britannica Money). With the unemployment being so high, demand throughout the U.S. was at a dramatic low. The GDP declined by 0.3% in 2008 and 2.8% in 2009, and unemployment reached up to 10% (Investopedia). All this led to businesses going bankrupt and merging with others, such as General Motors and Chrysler going bankrupt and JPMorgan acquiring Bear Stearns (Britannica Money and Federal Reserve History). Everyone was affected by this housing bubble, just how dramatically.

If you have any more questions, I would recommend going to the Federal Reserve History website for more information!

"Wealth is obtainable, you just have to go a little westward."

Cites:

Team, T. I. (2023, December 18). Great recession: What it was and what caused it. Investopedia. https://www.investopedia.com/terms/g/great-recession.asp

Weinberg, J. (2013, November 22). The great recession and its aftermath. Federal Reserve History. https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath

Duignan, B. (n.d.). Financial Crisis of 2007-08. Encyclopædia Britannica. https://www.britannica.com/money/financial-crisis-of-2007-2008/Key-events-of-the-crisis