A History of Recessions

A term not to be taken lightly.

The Great Recession was a sharp decline in the global economy that occurred between 2007-2009. This refers to both the U.S. recession at that time and the ensuing global financial crisis in 2009. During this period of time, the world saw a decrease in the global unemployment rate by 10% and a decline in the gross domestic product (GDP) by 5.1%. 

“The 2008 recession was driven by a housing crisis. There was too much lax lending for mortgages, especially subprime mortgages, and eventually, a lot of those loans were not any good; people were not able to pay it back. As a result, the financial system started to collapse,” said Tarim Wasim, a San Francisco Bay Area-based private equity investor and partner at Hellman & Friedman.

According to a report by the Financial Crisis Inquiry Commission in 2011, the Great Recession was avoidable. In the report, the commission noted the government’s failure to regulate the financial industry which included the Federal Reserve Board’s (Fed) inability to curb toxic mortgage lending. In addition, financial firms took on too much risk as the shadow banking system, a group of financial intermediaries that don’t go through as strict regulations as banks, rivaled the depository banking system (i.e. a bank you go to open a checking or savings account). So when “bad loans” were written by the bank and sold in the open market, the shadow banking system collapsed impacting the flow of credit to consumers and businesses. 

“Because there were lots of bad mortgages that were not getting paid back, and banks were gonna go out of business, that was the trigger to the 2008 recession,” Wasim said. 

An economic collapse as severe as this had not been seen since the Great Depression occurred in the 1930s. According to an article by The Investopedia Team, “there is a near consensus among economists that the downturn of the late-2000s, was not a depression.” 

The Great Depression was the worst economic turndown in the history of industrialization which began after the stock market crash in 1929 which wiped out millions of investors, caused a decline in consumer spending, investments, and industrial outputs, and caused an increase in global unemployment rates that reached a peak of 24.9% with a GDP decline of about 26.7%.