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+ | ===== Great Recession ===== | ||
+ | The Great Recession (see " | ||
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+ | The Great Recession stemmed from the collapse of the United States real estate market in relation to the financial crisis of 2007–2008 and the subprime mortgage crisis, though policies of other nations contributed as well. According to the nonprofit National Bureau of Economic Research (the official arbiter of U.S. recessions), | ||
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+ | The recession was not felt equally around the world; whereas most of the world' | ||
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+ | === Terminology === | ||
+ | Two senses of the word " | ||
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+ | Robert Kuttner argues, "' | ||
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+ | === Overview === | ||
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+ | The Great Recession met the IMF criteria for being a global recession only in the single calendar year 2009.[3][4] That IMF definition requires a decline in annual real world GDP per‑capita. Despite the fact that quarterly data are being used as recession definition criteria by all G20 members, representing 85% of the world GDP,[18] the International Monetary Fund (IMF) has decided—in the absence of a complete data set—not to declare/ | ||
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+ | According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the recession began in December 2007 and ended in June 2009, and thus extended over eighteen months.[5][20] | ||
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+ | The years leading up to the crisis were characterized by an exorbitant rise in asset prices and associated boom in economic demand.[21] Further, the U.S. shadow banking system (i.e., non-depository financial institutions such as investment banks) had grown to rival the depository system yet was not subject to the same regulatory oversight, making it vulnerable to a bank run.[22] | ||
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+ | US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world, as they offered higher yields than U.S. government bonds. Many of these securities were backed by subprime mortgages, which collapsed in value when the U.S. housing bubble burst during 2006 and homeowners began to default on their mortgage payments in large numbers starting in 2007.[23] | ||
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+ | The emergence of sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market. There was the equivalent of a bank run on the shadow banking system, resulting in many large and well established investment banks and commercial banks in the United States and Europe suffering huge losses and even facing bankruptcy, resulting in massive public financial assistance (government bailouts).[24] | ||
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+ | The global recession that followed resulted in a sharp drop in international trade, rising unemployment and slumping commodity prices.[25] Several economists predicted that recovery might not appear until 2011 and that the recession would be the worst since the Great Depression of the 1930s.[26][27] Economist Paul Krugman once commented on this as seemingly the beginning of "a second Great Depression" | ||
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+ | Governments and central banks responded with Fiscal policy and monetary policy initiatives to stimulate national economies and reduce financial system risks. The recession renewed interest in Keynesian economic ideas on how to combat recessionary conditions. Economists advise that the stimulus should be withdrawn as soon as the economies recover enough to "chart a path to sustainable growth" | ||
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+ | The distribution of household incomes in the United States has become more unequal during the post-2008 economic recovery.[32] Income inequality in the United States had grown from 2005 to 2012 in more than 2 out of 3 metropolitan areas.[33] Median household wealth fell 35% in the US, from $106,591 to $68,839 between 2005 and 2011.[34] | ||
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+ | === Trade imbalances and debt bubbles === | ||
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+ | The Economist wrote in July 2012 that the inflow of investment dollars required to fund the U.S. trade deficit was a major cause of the housing bubble and financial crisis: "The trade deficit, less than 1% of GDP in the early 1990s, hit 6% in 2006. That deficit was financed by inflows of foreign savings, in particular from East Asia and the Middle East. Much of that money went into dodgy mortgages to buy overvalued houses, and the financial crisis was the result." | ||
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+ | In May 2008, NPR explained in their Peabody Award winning program "The Giant Pool of Money" that a vast inflow of savings from developing nations flowed into the mortgage market, driving the U.S. housing bubble. This pool of fixed income savings increased from around $35 trillion in 2000 to about $70 trillion by 2008. NPR explained this money came from various sources, "[b]ut the main headline is that all sorts of poor countries became kind of rich, making things like TVs and selling us oil. China, India, Abu Dhabi, Saudi Arabia made a lot of money and banked it." | ||
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+ | Describing the crisis in Europe, Paul Krugman wrote in February 2012 that: "What we're basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe." | ||
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+ | === Monetary policy === | ||
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+ | Another narrative about the origin has been focused on the respective parts played by the public monetary policy (in the US notably) and by the practices of private financial institutions. In the U.S., mortgage funding was unusually decentralised, | ||
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+ | While Alan Greenspan' | ||
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+ | === High private debt levels === | ||
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+ | Another narrative focuses on high levels of private debt in the US economy. USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990.[58][59] Faced with increasing mortgage payments as their adjustable rate mortgage payments increased, households began to default in record numbers, rendering mortgage-backed securities worthless. High private debt levels also impact growth by making recessions deeper and the following recovery weaker.[60][61] Robert Reich claims the amount of debt in the US economy can be traced to economic inequality, assuming that middle-class wages remained stagnant while wealth concentrated at the top, and households "pull equity from their homes and overload on debt to maintain living standards" | ||
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+ | The IMF reported in April 2012: " | ||
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