Posted: September 1st, 2022

The Great Recession

The Great Recession
The great recession was a period of the global financial crisis that lasted between December of 2008 to June 2009. This harsh economic period devastated many sectors of the economy, including the world monetary market, the banking sector, and the real estate industry. The highest unemployment rates were recorded with increased mortgage foreclosures that saw millions of people lose their lifelong savings. The effects were more pronounced in the united state where it originated, with milder effects in other countries across the globe.
What caused the great recession?
1. The Subprime mortgage crisis
In the early 2000s, the housing industry in the United States was booming. In a quest to capitalize on the rising prices, many mortgage lenders became less restrictive on the type and people they gave loans. They began extending loans to individuals with poor credit histories. Many financial institutions seeking to get quick profits continued to acquire these risky mortgages as investments.
As a result, the federal reserve began raising their interest rates, hitting 5.25% in June 2006. This meant that people with adjustable-rate mortgages had to pay more than they initially planned. Many people were unable to repay their loans or sell their homes for a profit. What ensued was dozens of defaulted loans and increased foreclosures as interest rates plummeted. Eventually, the fall of the housing market occurred in December of 2008.
2. The Fall of the Banking System
After the fall of the housing market, banks retaliated and stopped lending loans to each other. To restore the situation, the government slashed interest rates in August of 2007. The U.S treasury also tried to intervene by creating a superfund that bought distressed subprime mortgages. This was aimed at restoring liquidity to banks. The Federal reserve system also created the Term Auction Facility that extended short term loans to banks with subprime mortgages. Unfortunately, the damage was done, and these moves were not enough.
3. Stock Market Crash
With defaulted loans and continued foreclosures, the stock market eventually crashed in September 2008. The falling of the housing industry and the stock market had thousands of American families losing up to 25% of their total wealth.
The end the great recession
The government enacted two programs seeking to provide relief to the deteriorating financial crisis. The Troubled Assets Relief Program (TARP) allowed the treasury to lend to the affected banks enabling them to invest in “preferred stock.” In return, these banks would give back 5% of their dividends to the banks, which later increased to 9% in 2009. The second program was the American Recovery and Reinvestment Act (ARRA) proposed by the acting president Barrack Obama. The ARRA was a colossal stimulus package that allotted $787 billion as foreclosure relief, tax cuts, spending on infrastructure, among other benefits.

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