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The Great Recession was a severe decline in economic activity that began in 2007 and lasted for several years throughout the world economy. It is considered the most significant recession since the Great Depression of the 1930s. The term “Great Recession” refers to the US recession that lasted from December 2007 to June 2009 and the global recession of 2009.

Table of Contents

1. What Happens To Banks In A Recession
2. Survey: Recession Likely After Bank Failures
3. Prospects Of Avoiding Recession Fading — Harvard Gazette
4. What Is A Recession?
5. Wall Street Banks Warn Downturn Is Coming
6. Top Economics News December 2022: Us Banks Warn Of Recession
7. Panic Of 1907
8. Recession: What It Was And What Caused It
9. Money Safety In Banks During Recessions: What You Need To Know

What Happens To Banks In A Recession

The recession began as the US real estate market boomed and the value of mortgage-backed securities (MBS) and derivatives fell.

Survey: Recession Likely After Bank Failures

The term “Great Depression” refers to the “Great Depression” that began in the 1930s, when gross domestic product (GDP) fell by more than 10% and unemployment reached 25%.

Although there are no clear criteria for distinguishing between a recession and a severe recession, there is a consensus among economists that the recession of 2007–2009 was not a recession. During the Great Recession, US GDP shrank 0.3% in 2008 and 2.8% in 2009, and unemployment briefly reached 10%.

According to a 2011 report by the Financial Crisis Inquiry Commission, the Great Recession was preventable. The appointees, including six Democrats and four Republicans, cited several key factors they believe contributed to the recession.

First, the report found that the government failed to regulate the financial sector. These regulatory failures include the Federal Reserve’s failure to prevent banks from issuing mortgages to people identified as poor credit risks.

Prospects Of Avoiding Recession Fading — Harvard Gazette

Then too many financial firms take too much risk. The shadow banking system, which includes investment firms, competes with the deposit banking system, but is not subject to the same supervision or regulation. When the shadow banking system collapses, the collapse affects the flow of credit to consumers and businesses.

Other causes identified in the report are excessive borrowing by consumers and companies, along with lawmakers not fully understanding the failing financial system. This created an asset bubble, especially in the housing market, as low-interest mortgages were issued to qualified borrowers and then those who defaulted. The subsequent sale caused house prices to plummet and left many other homeowners in the lurch. This, in turn, has had a significant impact on the market for mortgage-backed securities (MBS) held by banks and other institutional investors, which enable lenders to make mortgage loans to risky borrowers.

In 2001, the bursting of the Dotcom bubble and the attack on the World Trade Center on September 11, 2001 affected the US economy. The US central bank responded by cutting interest rates to their lowest levels since Bretton Woods to stimulate the economy. The Federal Reserve kept interest rates low until mid-2004.

Low interest rates, combined with federal policies to encourage home ownership, helped boost the real estate and financial markets and boost mortgage lending overall. Financial innovations such as new and flexible mortgages have left many borrowers unable to borrow otherwise based on the hope that interest rates will stay low and house prices will rise.

What Is A Recession?

But between 2004 and 2006, the Federal Reserve raised interest rates to control inflation. As interest rates rise, the flow of new real estate loans through traditional banking channels slows. More seriously, interest rates on existing flexible mortgages and exotic loans have rebounded to higher rates than most borrowers (or caused lenders) expected. When monthly mortgage payments exceed borrowers’ ability to pay (and they can’t refinance to stop steady rate increases), many borrowers start selling. The boom in supply burst what became known as the real estate bubble.

During the U.S. real estate boom, financial institutions sold mortgage-backed securities and complex derivatives at unprecedented rates. When the real estate market crashed in 2007, the value of these securities plummeted. The credit market, which finances most real estate, caused house prices to fall sharply with the onset of the credit crisis in 2007. The excess solvency of banks and financial institutions culminated in March 2008 with the collapse of Bear Stearns.

It began later that year when Lehman Brothers, the country’s fourth largest investment bank, filed for bankruptcy in September 2008. Reading quickly spread to other economies around the world, especially in Europe. According to the US Bureau of Labor Statistics, more than 8.7 million jobs were lost and unemployment doubled in the US alone due to the Great Depression. Additionally, according to the US Treasury Department, US households lost an estimated $19 trillion in net worth as a result of the stock market crash. The official end date of the Great Recession was June 2009.

The Dodd-Frank Act of 2010 provided government oversight of failed financial institutions and the ability to protect consumers from predatory lending.

Wall Street Banks Warn Downturn Is Coming

The aggressive monetary policy adopted by the US Federal Reserve, along with other central banks around the world, is widely recognized as preventing further damage to the global economy. Some criticized the move, saying they prolonged the recession and set the stage for the next recession.

For example, the Federal Reserve lowered key interest rates to zero to stimulate liquidity and, in an unprecedented move, provided $7.7 trillion in emergency loans to banks under a policy known as quantitative easing (QE).

Along with the flood of liquidity, the US federal government launched a massive economic stimulus program in the form of $787 billion in spending under the American Recovery and Reinvestment Act. This monetary and fiscal policy reduces the immediate losses of large financial institutions and large corporations.

Not only has the government introduced a stimulus package, but a new fiscal agreement has also been created. In the 1990s, the United States repealed the Glass-Steagall Act, a Depression-era regulation that removed investment from retail banking to reduce systemic risk. Some economists say the move is fueling the crisis. This liquidation allowed some of the largest US banks to merge and create larger institutions, many of which later failed and had to be bailed out.

Top Economics News December 2022: Us Banks Warn Of Recession

In response, in 2010, the US Congress passed and then President Barack Obama signed the Dodd-Frank Act, which gave the government more power to regulate the financial sector, including greater oversight of failed financial institutions. It also creates consumer protection against predatory lending.

However, critics of Dodd-Frank have noted that financial industry actors and institutions that actively encouraged and profited from predatory lending and related practices during the housing and financial bubbles were heavily involved in the drafting and enforcement of the new law. implementation.

According to the Congressional Budget Office, the US federal government spent $787 billion to stimulate the economy during the Great Recession under the American Recovery and Reinvestment Act.

Following this policy, the economy gradually recovered. Real GDP contracted in the second quarter of 2009 and regained its pre-recession peak in the second quarter of 2011, three and a half years after the official recession began. After Wall Street was flooded with liquidity, financial markets rose.

Panic Of 1907

Having lost more than half of its value since its August 2007 peak, the Dow Jones Industrial Average (DJIA) began to recover in March 2009 and four years later, in March 2013, surpassed its 2007 peak.

The picture is less funny for workers and households. Unemployment was 5% at the end of 2007, peaked at 10% in October 2009, and did not return to 5% until 2015, eight years after the recession began. Real household income did not return to pre-recession levels until 2016.

Critics of the policy response and how it shaped the recovery argue that the wave of liquidity and deficit spending has favored politically connected financial institutions and big business at the expense of ordinary people. It can also slow recovery by tying up economic resources in industries and jobs that other businesses could use to expand and create jobs.

According to official Federal Reserve data, the Great Recession lasted eighteen months from December 2007 to June 2009.

Recession: What It Was And What Caused It

It is not official. Although the economy suffered and contracted in early 2020 following the onset of the global COVID-19 pandemic, stimulus efforts were effective in preventing a severe US economic recession. Some economists fear the recession will continue. expected from the end of 2022.

On October 9, 2007, the Dow Jones Industrial Average closed at a pre-recession high of 14,164.53. By March 5, 2009, the index had fallen more than 50% to 6,594.44.

September 29, 2008. The Dow Jones plunged nearly 778 points in one day. This was the largest point in history until the market fell at the start of the COVID-19 pandemic in March 2020.

The Great Recession took place from about 2007 to 2009 in the United States

Money Safety In Banks During Recessions: What You Need To Know

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