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The rise of sub-prime mortgage loans and heightened real estate speculation led to the collapse of the housing market, which ushered in the Great Recession in 2007. Learn more about this economic downturn and its effects in this lesson.

Origins of the Great Recession

The roots of the most significant economic contraction in the United States since the Great Depression can be traced to 2007. Historians and economists agree that the economic collapse, or the Great Recession as it became known, began in earnest during the aforementioned year and lasted until roughly 2009, although lingering effects are continuing, and will continue, to impact Americans. You may be wondering why understanding the Great Recession is important, especially considering that the United States has gone through economic decline many times throughout its lengthy history.Admittedly, this is correct.

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However, this period of stagnation rivaled only that of the Great Depression, and we understand the devastation that event caused. At its peak, the Great Recession caused severe bankruptcy, widespread foreclosures, the collapse of American investment, significant unemployment, heightened poverty, income disparity, limited job creation and a sluggish recovery. Let’s take a closer look at this powerful economic disaster.So how did the Great Recession begin in 2007? A major criticism against President George W. Bush, his administration, and Congress was that all parties failed to establish a firm policy of oversight within the economy. As a result, many financial institutions expanded the ease of access to credit lines as well as sub-prime loans. With new access to a slew of lending, consumers increased their share of household debt.

Likewise, investors used the available funds to invest heavily into speculative markets, such as the housing industry.In December 2007, the housing market, worth approximately $8 trillion, collapsed. The price of homes plummeted, and investments into the market ceased to exist. In March 2008, Bear Stearns investment was on the verge of bankruptcy, but the United States intervened and offered financial support to the organization.

In September 2008, Lehman Brothers Financial, one of the leading investment firms in the United States, declared bankruptcy. This sparked a chain reaction leading to dozens of financial closures throughout the United States.To further complicate the issue, Americans withdrew their money from the economy.

As food, oil and material prices soared to unprecedented levels, investment came to a standstill. Consumers refused to purchase items as a way to salvage money from losses in the market. Commercial investors severely cut back the amount of money being funneled into corporations and manufacturing. As a result, the economy contracted further and led to significant job loss and negligible job creation.

In fact, between 2008 and 2009, the United States lost over 8 million jobs. Even after the recession ended, the United States only created jobs at a fraction of its pre-recession economy.

Economic Fallout

The fallout from the Great Recession was widespread. The Gross Domestic Product (or GDP) of the United States struggled to grow between 2008 and 2009. It was only during 2010 that the GDP began to show an upward trend. Unemployment affected every American. Between 2007 and 2009, the national unemployment rate rose to 10%, although the rate for Hispanic and African Americans was significantly higher (some economists even estimate it was double).

This number also did not consider the amount of Americans who were underemployed, meaning they had to accept part-time work as a means of surviving the recession as well as those who stopped seeking work entirely.Net worth and income also dropped sharply during the recession. The wealth of white Americans fell between 10% and 15%; the losses for Hispanic and African Americans reached a staggering 75%. Meanwhile, the average median income for white Americans departed by roughly $3,000; again, Hispanic and African Americans, as well as Americans aged 18 and under, faced higher losses.The resultant loss of income led to a sharp increase in foreclosures in the United States. Hundreds of thousands of Americans lost their homes between 2007 and 2010.

Additionally, since many Americans faced mounting financial losses, the socioeconomic hierarchy witnessed a significant rearrangement. Those who were once considered to be in the middle class were now living in poverty as a result of the Great Recession.

Attempting to Solve the Crisis

President Bush attempted to correct the economy by implementing several solutions. He approved of a $700 billion economic recovery package, known as the Emergency Economic Stabilization Act of 2008, to help stabilize the failing housing market and provide assistance to bankrupted financial institutions (only a portion of that money was actually spent). Bush then expanded regulation (which led to a government takeover) on Fannie Mae and Freddie Mac, both of which were federally endorsed mortgage organizations.

He also attempted to stimulate investment and consumer spending by providing tax breaks and rebate checks to ailing Americans, businesses and manufacturing.The Federal Reserve, under Chairman Ben Bernanke, and United States Treasury, under Secretary Henry Paulson, guaranteed billions of dollars worth of investments to protect consumers. The Securities and Exchange Commission heightened regulation on market investments and exchanges to prevent additional harmful speculation. Unfortunately, this was not enough as the economy continued to contract; Bush’s solutions struggled to expedite the recovery of the economy.

Lesson Summary

The Great Recession, or the most significant economic contraction since the Great Depression, began in December 2007 and did not end until 2009.

With access to new lines of credit available to consumers and investors, it did not take long for the economy to sink. Consumers received sub-prime loans; investors dumped large amounts of money into speculative markets, such as the housing industry.When the housing market collapsed, the United States economy severely contracted. Consumers ceased spending and investors scaled back on their investments into corporations and manufacturing. The result was a stagnant Gross Domestic Product, unemployment levels reaching 10% and severe financial losses for Americans. President George W.

Bush attempted to remedy the situation with a stimulus package, tax breaks and heightened regulation, but his solutions were not enough to fuel an inert economy.

Learning Outcomes

After this lesson is complete, you should be able to:

  • Recognize the significance of the Great Recession of 2007 in comparison to the Great Depression
  • Describe the economic climate that preceeded the Great Recession
  • Summarize the effects of the Great Recession
  • Explain how President Bush attempted to improve the economy before he left office in 2009

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