As a result, hundreds of thousands of Americans who had significant portions of their life saving invested in the stock market suffered catastrophic financial losses. With the American economy teetering, the U.
Interest rates were at 5. By the end of , the Fed had reduced the target interest rate to zero percent for the first time in history in hopes of once again encouraging borrowing and, by extension, capital investment.
In February , President George W. Bush signed the so-called Economic Stimulus Act into law. This last element was designed to, hopefully, generate new home sales and provide a boost to the economy. In March , investment banking giant Bear Stearns collapsed after attributing its financial troubles to investments in subprime mortgages, and its assets were acquired by JP Morgan Chase at a cut-rate price. A few months later, financial behemoth Lehman Brothers declared bankruptcy for similar reasons, creating the largest bankruptcy filing in U.
TARP essentially provided the U. The deals would enable the government to sell these assets at a later date, hopefully at a profit. January also brought with it a new administration in the White House , that of President Barack Obama. However, many of the old financial problems remained for the new president to tackle. Whether or not these initiatives brought about the end of the Great Recession is a matter of debate. However, at least officially, the National Bureau of Economic Research NBER determined that, based on key economic indicators including unemployment rates and the stock market , the downturn in the United State officially ended in June Although the Great Recession was officially over in the United States in , among many people in America and in other countries around the world, the effects of the downturn were felt for many more years.
The Great Recession also ushered in a new period of financial regulation in the United States and elsewhere. Economists have argued that repeal in the s of the Depression-era regulation known as the Glass-Steagall Act contributed to the problems that caused the recession.
The Dodd-Frank Act , which was signed into law by President Obama in , was designed to restore at least some of the U. After he was inaugurated, President Donald Trump and some members of Congress made several efforts to gut key portions of the Dodd-Frank Act, which would remove some of the rules protecting Americans from another recession. Rich, Robert.
Full Timeline. Federal Reserve Bank of St. Glass, Andrew. Amadeo, Kimberly. Almost 6 million jobs were lost in the 12 months prior to that. Employers were adding temporary workers as they grew too wary of the economy to add full-time employees. But the fields of health care and education continued to expand. One reason the recovery was sluggish was that banks were not lending.
Loans to small businesses fell sharply during the same period as well. This meant banks made larger loans to fewer recipients. The banks said there were fewer qualified borrowers thanks to the recession. Businesses said the banks tightened their lending standards. But if you looked at the 18 months of potential foreclosures in the pipeline, it looked like banks were hoarding cash to prepare for future write-offs.
But that was only after drastically slashing lending in Many people feel that there was no oversight and that the banks just used the money for executive bonuses. In this case, people thought banks should not have been rescued for making bad decisions based on greed. The argument goes that, if we had just let the banks go bankrupt, the worthless assets would be written off. Other companies would purchase the good assets and the economy would be much stronger as a result.
In other words, let laissez-faire capitalism do its thing. The result was a market panic. It created a run on the ultra-safe money market funds, which threatened to shut down cash flow to all businesses, large and small.
In other words, the free market couldn't solve the problem without government help. The other problem is that there were no "new companies," i. Even Citigroup—one of the banks that the government had hoped would bail out the other banks—required a bailout to keep going. Letting the major banks go bankrupt would have left the American economy with no financial system at all.
It might have led to the next Great Depression. President Obama was dealing with more than just the recession as he looked toward the mid-term elections. He launched sorely needed but sharply criticized healthcare reform.
That and new Federal Reserve regulations were designed to prevent another banking collapse. They also made banking much more conservative. As a result, many banks didn't lend as much, because they were conserving capital to conform to regulations and write down bad debt. But bank lending was needed to spur the small business growth needed to create new jobs.
The bill stopped the bank credit panic, allowed LIBOR interest rates to return to normal, and made it possible for everyone to get loans. Without the credit market functioning, businesses were not able to get the capital they need to run their day-to-day business. Without the bill, it would have been impossible for people to get credit applications approved for home mortgages and even car loans. In a few weeks, the lack of capital would have led to a shutdown of small businesses, which couldn't afford the high interest rates.
Also, those whose mortgage rates reset would have seen their loan payments jump. This would have caused even more foreclosures.
The Great Recession would have become a depression. The cause of the meltdown was the deregulation of derivatives that was so complicated that even their originators didn't understand them. Banks became so quick to resell mortgages on the secondary market that they felt immune to the dangers of taking riskier and riskier mortgages.
Other aggressive moves by banks to sell more collateralized debt obligations CDOs and corporations to sell more asset-backed commercial paper helped to push the economy toward a bubble. These derivatives were designed to increase liquidity in the economy, but that liquidity drove housing prices and debt to unmanageable levels. The U. That gives us hope because we learned more about how the economy works and became smarter about managing it.
Without that knowledge, we would be in much worse shape today. Yale School of Management. Bureau of Labor Statistics. Accessed May 12, CNN Money. Center for American Progress. The New York Times. Congressional Budget Office. Council on Foreign Relations. Economic Stimulus Plan. ABC News. Making Home Affordable. They all also invested these securities on their own accounts, frequently using borrowed money to do this. This means that as financial institutions entered the market to lend money to homeowners and became the servicers of those loans, they were also able to create new markets for securities such as an MBS or CDO , and profited at every step of the process by collecting fees for each transaction.
Using annual firm-level data for the top subprime mortgage-backed security issuers, the authors show that when the conventional mortgage market became saturated in , the financial industry began to bundle lower quality mortgages—often subprime mortgage loans—in order to keep generating profits from fees. By , more than half of the largest financial firms in the country were involved in the nonconventional MBS market.
About 45 percent of the largest firms had a large market share in three or four nonconventional loan market functions originating, underwriting, MBS issuance, and servicing. As shown in Figure 1, by , nearly all originated mortgages both conventional and subprime were securitized.
Financial institutions that produced risky securities were more likely to hold onto them as investments. Since these institutions were producing and investing in risky loans, they were thus extremely vulnerable when housing prices dropped and foreclosures increased in A final analysis shows that firms that were engaged in many phases of producing mortgage-backed securities were more likely to experience loss and bankruptcy.
In a working paper, Fligstein and co-author Alexander Roehrkasse doctoral candidate at UC Berkeley 3 examine the causes of fraud in the mortgage securitization industry during the financial crisis. Fraudulent activity leading up to the market crash was widespread: mortgage originators commonly deceived borrowers about loan terms and eligibility requirements, in some cases concealing information about the loan like add-ons or balloon payments.
Banks that created mortgage-backed securities often misrepresented the quality of loans. For example, a suit by the Justice Department and the U. The authors look at predatory lending in mortgage originating markets and securities fraud in the mortgage-backed security issuance and underwriting markets. After constructing an original dataset from the 60 largest firms in these markets, they document the regulatory settlements from alleged instances of predatory lending and mortgage-backed securities fraud from until Fraudulent activity began as early as when conventional mortgages became scarce.
Several firms entered the mortgage marketplace and increased competition, while at the same time, the pool of viable mortgagors and refinancers began to decline rapidly. To increase the pool, the authors argue that large firms encouraged their originators to engage in predatory lending, often finding borrowers who would take on risky nonconventional loans with high interest rates that would benefit the banks.
In other words, banks pursued a new market of mortgages—in the form of nonconventional loans—by finding borrowers who would take on riskier loans. This allowed financial institutions to continue increasing profits at a time when conventional mortgages were scarce. Moreover, because large firms like Lehman Brothers and Bear Stearns were engaged in multiple sectors of the MBS market, they had high incentives to misrepresent the quality of their mortgages and securities at every point along the lending process, from originating and issuing to underwriting the loan.
Fligstein and Roehrkasse make the case that the integrated structure of financial firms into multiple sectors of the MBS industry, alongside the marketplace dynamics of increased scarcity and competition for new mortgages, led firms to engage in fraud.
FOMC members set monetary policy and have partial authority to regulate the U. Fligstein and his colleagues find that FOMC members were prevented from seeing the oncoming crisis by their own assumptions about how the economy works using the framework of macroeconomics. Their analysis of meeting transcripts reveal that as housing prices were quickly rising, FOMC members repeatedly downplayed the seriousness of the housing bubble. Even after Lehman Brothers collapsed in September , the committee showed little recognition that a serious economic downturn was underway.
The authors argue that the committee relied on the framework of macroeconomics to mitigate the seriousness of the oncoming crisis, and to justify that markets were working rationally. They note that most of the committee members had PhDs in Economics, and therefore shared a set of assumptions about how the economy works and relied on common tools to monitor and regulate market anomalies. The meeting transcripts show that the FOMC tried to explain the rise and fall of housing prices in terms of fundamental issues of supply and demand, which was an inadequate frame to recognize the complexity of the changes taking place throughout the entire economy.
FOMC members saw the price fluctuations in the housing market as separate from what was happening in the financial market, and assumed that the overall economic impact of the housing bubble would be limited in scope, even after Lehman Brothers filed for bankruptcy.
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