Experts are divided on when the last recession was. The NBER says that the Covid-19 recession was the last recession, even though it doesn’t meet the standard classification criteria for a recession. This is because it disrupted the economy in an unprecedented way. However, other experts disagree with that classification and believe that the last recession was the Great Recession of 2007.
The Great Recession of 2007
The Great Recession is the last recession that all experts agree on. It was also the longest recession in a few decades and had some of the most intense financial impacts since WWII. The Great Recession was completely avoidable. It was caused by:
- Lack of government regulation of the financial industry. At the heart of the issue was banks giving mortgages to people who were clear credit risks or who lacked the ability to repay the mortgage.
- Financial firms taking on too much risk. Financial firms overleveraged themselves due to the aforementioned lack of government regulations. This caused a chain reaction where the financial institutions couldn’t handle the losses they experienced.
- Excessive borrowing. Consumers and businesses alike were taking advantage of the free credit financial institutions were giving away. This created a financial bubble which burst due to financial firms being overleveraged.
There were a number of other circumstances which contributed to the Great Recession. It is unclear whether these played a part in causing the Great Recession or just added to the severity of it. Some of the factors include:
- 9/11
- The Dotcom bubble implosion
- A long period of low interest rates (2001-2004)
- Federal programs to stimulate home ownership
- New financial products (adjustable mortgages and subprime mortgages)
While the Great Recession was avoidable in the sense that it was mainly caused by overleveraged mortgage lenders, the surrounding circumstances created a perfect storm for a recession.
The Impact of the Great Recession
The financial impacts of the Great Recession were some of the most severe since WWII.
- The S&P 500 index fell 57%.
- Home prices fell 30%.
- The unemployment rate peaked at 10%.
- GDP fell 4.3%.
Federal Response to the Great Recession
The severe effects of the Great Recession and the collapse of many financial firms meant that the recession was felt across the globe. The world’s governments responded, first using traditional recession responses, and then using drastic measures.
The traditional measures they used at the start of the recession include reducing the federal funds rate to reduce the risk of deflation, providing monetary stimulus, and lowering interest rates. However, recovery was slow, and soon, the government implemented other methods to improve recovery.
In the US, the federal government introduced the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009.
They also:
- Credit easing programs to reduce the cost of credit
- Large scale asset purchase programs to reduce borrowing rates and increase the availability of credit for homebuyers.
Once the Great Recession officially ended (in June 2009), the Federal Government reviewed the circumstances that brought the recession about. In 2010, Barack Obama signed the Dodd-Frank Act to ensure the government had the power to regulate the financial sector. This move was designed to stop predatory lending practices or greed from causing a similar situation in the future.
While the Great Recession only officially lasted for 18 months, the effects were felt for 5 years. That is how long it took for the stock market to recover. The US GDP took just over 3 years to recover. However, it was a much bleaker picture for employees. It took 8 years for the unemployment rate to return to pre-recession rates. It has been argued that the government response focused too heavily on helping businesses and financial institutions recover from the recession, and they abandoned ordinary people. Some argue that the financial institutions that caused the Great Recession shouldn’t have been bailed out, and the money would’ve been better spent investing in other sectors, creating jobs, and supporting households.
Understanding ‘What Is a Recession‘ can clarify why economic downturns affect industries and individuals differently.
Frequently Asked Questions About the Great Recession
1. How long did the Great Recession last?
Officially, the Great Recession lasted for 18 months, between December 2007 and June 2009. However, the impact on the economy, businesses, and the lives of individuals lasted until well into 2016. As it is one of the biggest recessions to hit the US (and the entire world), it took a while for global economies to recover.
2. Was the Great Recession the Last Recession in the US?
It depends who you ask. Many people see the Great Recession as the last recession. However, some people believe that in 2020, we experienced another recession – the COVID-19 recession.
3. Will We Experience a Recession as Big as the Great Recession Again?
Nobody can know for sure. The financial industry is better regulated now since the government implemented more oversight following the Great Recession. Lessons have been learned following the Great Recession and the Dotcom bubble crash. It is unlikely that a similar type of recession will occur. However, there is no way to foresee if another similarly large event will occur and cause a recession of a similar scale. The Covid-19 pandemic was unexpected and impacted the economy in an unprecedented way, that could have caused a large scale recession if circumstances were different.
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