2008 Great Recession

2008 Great Recession
Name	2008 Great Recession
Caption	Global financial turmoil, 2008
Date	2007–2009
Location	Worldwide
Outcome	Global downturn, regulatory reform, sovereign debt crises

Contents

2008 Great Recession The 2008 Great Recession was a global downturn triggered by a collapse in credit markets, a housing bust, and failures in financial institutions that began in the United States and spread worldwide; the crisis precipitated sharp contractions in output, employment, and trade across North America, Europe, and Asia. Major actors such as Federal Reserve System, United States Department of the Treasury, International Monetary Fund, European Central Bank, and firms including Lehman Brothers, Bear Stearns, American International Group, and Goldman Sachs played prominent roles in the unfolding events and policy responses. Public figures like Ben Bernanke, Henry Paulson, Tim Geithner, Angela Merkel, and Gordon Brown were central to crisis management and subsequent reform debates.

Background and causes

The downturn had roots in prolonged expansion of credit and housing booms in the United States, United Kingdom, Spain, Ireland, and Australia, fueled by low interest rates set by the Federal Reserve System and influenced by global imbalances involving People's Republic of China, Germany, and Japan. Financial engineering by firms such as Merrill Lynch, Citigroup, J.P. Morgan Chase, and Deutsche Bank packaged mortgages into mortgage-backed securities and collateralized debt obligations sold to institutions including Fannie Mae, Freddie Mac, Monoline Financial Guarantee, and Pension Benefit Guaranty Corporation. Regulatory gaps across jurisdictions and agencies like the Securities and Exchange Commission, Office of the Comptroller of the Currency, Financial Services Authority, and Basel Committee on Banking Supervision allowed leverage and maturity transformation by entities such as Bear Stearns and shadow banks including Lehman Brothers affiliates. Rating agencies like Standard & Poor's, Moody's Investors Service, and Fitch Ratings assigned high grades to complex securities, while influential academics and policymakers such as Alan Greenspan, Raghuram Rajan, Joseph Stiglitz, and Paul Krugman debated causes including moral hazard, regulatory capture, and information asymmetry.

Market stress intensified after the failure of Bear Stearns and the collapse of Lehman Brothers in September 2008, which prompted emergency interventions by Federal Reserve System facilities including the Primary Dealer Credit Facility and central banks such as Bank of England, European Central Bank, Bank of Japan, and Swiss National Bank to provide liquidity. Credit spreads widened for institutions including AIG, ING Group, RBS, and Banco Santander, while interbank lending markets like LIBOR and instruments like repurchase agreements froze, affecting investors including BlackRock, Vanguard Group, PIMCO, and sovereign wealth funds from Norway, China Investment Corporation, and Abu Dhabi Investment Authority. Stock markets from New York Stock Exchange to Tokyo Stock Exchange and commodity markets for oil and copper saw large declines, while sovereign credit default swaps involving Greece, Iceland, and Portugal began to attract attention from hedge funds such as Bridgewater Associates.

The downturn transmitted through banking crises in United States, United Kingdom, Ireland, Iceland, Spain, and Greece, via collapses in housing markets and declines in consumption, investment, and international trade tracked by institutions like the Organisation for Economic Co-operation and Development and World Bank. Unemployment rose sharply in regions including the Rust Belt, Andalusia, Catalonia, and Lombardy, while declines in industrial production affected firms such as General Motors, Ford Motor Company, Volkswagen, and Toyota Motor Corporation. Balance-sheet losses at insurers like AIG and banks such as HSBC, Credit Suisse, and BNP Paribas caused deleveraging and fire sales of assets including mortgage-backed securities and assets held by funds managed by Lehman Brothers and LTCM-linked investors. Transmission channels included wholesale funding shortages, counterparty risk among institutions like Goldman Sachs and Morgan Stanley, and sovereign stress later evident in European sovereign debt crisis episodes involving Greece and Ireland.

Responses combined monetary, fiscal, and regulatory measures led by central banks and finance ministries such as Federal Reserve System, European Central Bank, Bank of England, Federal Reserve Bank of New York, United States Department of the Treasury, HM Treasury, and Bundesministerium der Finanzen. Major programs included the Troubled Asset Relief Program enacted by United States Congress, capital injections into banks like Citigroup and RBS, guarantees and bailouts of insurers including AIG, and nationalizations such as in Royal Bank of Scotland and Hypo Real Estate. Coordinated actions at meetings of leaders like G7, G20, and officials including George W. Bush and Barack Obama used fiscal stimulus packages inspired by economists like Christina Romer, Larry Summers, and Olivier Blanchard, while regulatory reforms advanced through proposals at Financial Stability Board, Dodd–Frank Wall Street Reform and Consumer Protection Act, and revisions to Basel II leading to Basel III negotiations.

The shock spread through trade, finance, and confidence channels to emerging markets including Brazil, India, China, South Africa, and Mexico', prompting capital flow reversals and policy responses by central banks such as Reserve Bank of India and finance ministries like Ministry of Finance (India). International institutions including International Monetary Fund, World Bank, Asian Development Bank, and Inter-American Development Bank provided lending and policy advice to countries such as Iceland, Latvia, Ukraine, and Hungary. Global summits of G20 leaders including Nicolas Sarkozy, Stephen Harper, Kevin Rudd, and Yukio Hatoyama coordinated stimulus, bank recapitalization standards, and regulatory initiatives to restore liquidity to markets for sovereigns, banks, and institutions such as European Investment Bank and Export–Import Bank of the United States.

Recovery trajectories diverged: countries like United States and Canada returned to growth earlier, while members of the Eurozone experienced protracted adjustments, sovereign debt crises, and austerity debates involving leaders such as Mario Monti and institutions like European Stability Mechanism. Long-term consequences included regulatory reforms embodied in Dodd–Frank Wall Street Reform and Consumer Protection Act and international standards via the Financial Stability Board and Basel III, shifts in fiscal policy orthodoxy debated by economists including Paul Krugman and Joseph Stiglitz, and political fallout contributing to movements associated with Occupy Wall Street, changes in public trust toward incumbents like Gordon Brown and George W. Bush, and electoral outcomes in countries such as United States, United Kingdom, and Greece. Financial sector consolidation saw firms such as J.P. Morgan Chase acquire assets from Bear Stearns and Washington Mutual, while central bank balance sheets expanded markedly at institutions including Federal Reserve System, European Central Bank, and Bank of England, shaping debates on macroprudential policy, income distribution, and globalization.