The Great Recession, 2008

26.03.2015 |

Episode #10 of the course “World’s biggest financial crises”

The Great Recession resulted because of the real estate market, again in the United States. The Great Recession was triggered by the “burst of the housing bubble.” The housing market in the United States continued to go up to an unprecedented 8 trillion dollars until about 2007. When the bubble burst, it caused the mortgage-backed securities market to lose significant value.

Mortgage-backed securities are a complex financial tool that basically sells mortgages to other investors. These mortgages are packaged into large groups, and then the group as a whole becomes a financial instrument (the security). Mortgages were considered very safe, and they hardly ever declined, which made this financial instrument very appealing to investors. However, once people began to default on these mortgages, the value of the instruments plummeted, causing investors (including the federal government) to lose a large amount of money.

When the housing market declined, so did consumer spending, which in turn caused businesses to begin to fail. As businesses failed, employees lost their jobs and layoffs were frequent. In 2008 and 2009, 8.4 million jobs disappeared in the United States, which was 6.1% of all employment available. This is the most dramatic drop since the Great Depression. The United States is still trying to recover jobs lost during this period, and it seems like each economic crisis takes the country longer to get unemployment rates where they were before the crisis.

The impact on the average family in the United States is an overall decrease in wealth. While the effects were nowhere near as dramatic as the Great Depression, poverty has risen and income has dropped for most families. Modern estimates predict that making up all of the jobs that were lost could take another 4 or 5 years.

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