Recession of 2008
The Recession of 2008 (also called the Recession of the late 2000's or the Great Recession) is a major worldwide economic downturn that began in 2008 and continued into 2010 and beyond. It was caused by the Financial Crisis of 2008; it is by far the worst recession since the Great Depression of the 1930s. The worldwide recession hit bottom in December 2009; however after five years there were few signs that the American economy started moving upward again. 5 million of the 8 million jobs lost did not return - despite an increase in population of 10 million over the same span of time covering President Barack Obama's first term.
Greece, Portugal and Ireland remain in serious trouble, while China and Brazil have rebounded and are growing rapidly. Concerning the United States economy, some proponents of free market capitalism declare that Federal Reserve Chairman Ben Bernanke and the United States Congress should not have bailed out failing firms and instead should have allowed free market capitalism to recover as it did in the depression of 1920 without government intervention (free market capitalists assert that government intervention can drag out recessions and depressions). A 2005 study found that government corporate bailouts are often done for mere political considerations and the economic resources allocated exhibit significantly worse economic performance than resources allocated using purely business considerations. Likewise in the U.S. the economy has stabilized but showed little signs of recovery during President Obama's first term, apart from the stock market going up. Serious weaknesses continued in housing, commercial real estate, banking, automobiles, and retail trade. Unemployment remained above 8% til October of 2012 with conditions especially poor in California, Michigan and South Carolina.
The crisis is worldwide, with major impact in Britain, Europe (that is the "European Union" or EU), Russia, Japan, the oil countries of the Middle East, and the developing world. The economy of the EU (Europe) shrank by 4% in 2009, with unemployment reaching 10%. Ireland, Iceland and parts of Eastern Europe are hardest hit. Britain was hit hard with its major banks in deep trouble. Recovery in Britain has been slow; its GDP fell 5.2% from 3Q 2008 to 3Q 2009.
Global trade declined sharply--by 13% from August 20008 to August 2009, hurting exporters such as Germany and Japan. China has avoided most of the troubles; it continued to grow at a phenomenal rate (8.9% annual rate in 2008-9). However its exports did shrink because of falling world demand, and its ability to fund global stimulus programs are being dampened by lower growth forecasts and shifting priorities to retain capital earnings for domestic development.
Global governments spent an astonishing $17 trillion to support the world economy in the form of bailouts, guarantees, and equity market purchases. That $17 trillion represents one quarter of global GDP, but only a fraction of that sum will actually be paid out. Global investment declined by 15% , and global GDP by shrank by nearly $4 trillion, or an amazing 6%. Global industrial production in the advanced economies dropped a 15%, causing unemployment to soar around the world, nearly doubling in the United States alone.
Fannie Mae Origins
The recession began in January 2008 in the financial sector as major banks in the U.S. and Europe got into serious trouble after a decade and a half of investing in bad mortgages. The crisis spread globally due to the fact that many banks, businesses, and pension funds worldwide had invested in these securitized debts. Trouble spread to the automobile industry, where General Motors and Chrysler went bankrupt in spring 2009, due to a decrease in US consumer demand. They remained solvent by a bailout involving a taxpayer buy out and bankruptcy reorganization was authorized by President Barack Obama and Congressional Democrats. Existing shareholders received 22 cents on the dollar for their investment, and the unions made no concessions.
Leftists have incorrectly attributed the cause of the recession to Bush Administration policies, calling it the "Bush Recession." However, many people recognize the loosening of credit guidelines in the Clinton era and government guarantees for subprime lending encouraged banks to make foolish loans which they considered had minimal risk to themselves. This, together with the threat of civil rights lawsuits under the Community Reinvestment Act were the mortgage lenders primary motivations.
In the U.S. GDP fell in the fourth quarter of 2008 (October-November-December), by 6.2% annual rate, with declines heaviest in business investment, exports, finance, autos, housing, construction, and retail sales. The steep decline continued; GDP in the first quarter of 2009 (January-February-March) fell at the annualized rate of 6.1%, much worse than expected. American business slashed capital investment at an annual rate of -38%. Investment in software and computer equipment declined by an annualized 33.8%, and investment in new buildings was down 44.2%. By Spring 2009, financial markets that spiralled out of control in late 2008 stabilized, and declines in retail sales and orders by manufacturers no longer posted record declines.
The stock market fell by 50% in 2008, wiping out trillions of dollars in assets. More trillions were lost as housing prices fell by 20%. Adding together the declines in housing and the stock market, the net worth of American households declined from $63.7 trillion in January 2008 to $51.5 trillion in January 2009, a decline of $11.2 trillion or 18%. That is, Americans owned $11 trillion less wealth, and adjusted by buying less and investing less. Meanwhile mortgages and credit-card debt together reached $13 trillion, or 123% of after-tax income, a huge jump since 1995, when it was 83% of income.
Bankruptcies among small businesses soared from 206 a day in Dec. 2007 to 357 a day in March 2009. In April, 2009, came the largest real estate bankruptcy in history, as General Growth, which owned and managed more than 200 malls, proved unable to handle its crushing $27 billion debt load. The debt was created by heavy borrowing in optimistic days to build new malls.
Wealth levels plunged worldwide. Stock markets in other major countries fell even faster than in the United States. Most companies worldwide reported reduced sales and sharply reduced profits, as banks refused to lend and consumers refused to spend, fearing the worst.
A series of emergency measures enacted by the Federal Reserve (on its own authority) and Congress after heavy prodding by presidents Bush and Obama resulted in trillions of dollars in loans, banking bailouts and guarantees, a half-trillion new stimulus spending and a third of a trillion in tax cuts, but by mid-March 2009 the outlook remained bleak as the economy continued downward. Therefore the Federal Reserve announced yet another trillion dollar plan on March 18, this one to buy $300 billion in Treasury bonds, and $750 billion in mortgage-backed securities. The idea was to keep mortgage rates low in the hope people will start buying houses again, but the problem was that the prices were falling, so that if a person bought a $500,000 house in 2009 it would be worth $400,000 a year later, despite the Fed's intervention.
In the first quarter of 2009 (January 1 to March 30), GDP fell sharply in major countries compared to the fourth quarter of 2008. In the US GDP was down 6.3%.
Major export countries saw their markets shrink. Exports from Japan were down 41% (quarter one 2009 versus 2008), Germany 32%, China 20% and U.S. 22%.
Major countries began experimenting again with Keynesian stimulus packages, including the US ($787 billion), Europe (EU, $634 billion), China ($586 billion), and Japan ($486 billion), but no positive results were reported Central banks (such as the Federal Reserve in the U.S.) cut interest rates to nearly zero for half a decade, but few businesses borrowed money to expand employment or meet current operating expenses.
By September 2012 when job growth still lagged by 4 million people, economists Garett Jones and Daniel Rothschild wrote,
This suggests just how hard it is for Keynesian job creation to work in a modern, expertise-based economy. The stimulus was implemented at a time when the Keynesian model had every chance of succeeding on its own terms. The high level of unemployment and the rapid deadline for spending created both the supply of workers and the demand for workers. If the job market results are so lackluster in this setting, economists should expect even weaker stimulative results during more modest recessions.
And the Wall Street Journal observed:
The lesson of such on-the-ground knowledge is that the stimulus was a lost opportunity. In practice it became a shotgun marriage between an economic theory justified by computer models and 40 years of liberal social priorities (clean energy, Medicaid expansions and the rest). This produced the 9.1% unemployment we now have.
Oil, metal and grain (rice, wheat, corn) prices, after hitting record levels in the summer of 2008, plunged. Crude oil went from $145 a barrel to $42.
Retail sales in the U.S. and worldwide went into a major slump, with the slowest Christmas shopping season in decades. American manufacturing contracted in November 2008 at the steepest rate in 26 years. The U.S. lost some 4 million jobs in 2008, the worst record since the end of World War II, Factory indexes in China, Britain, Europe, and Russia all fell to record lows.
In January 2009 the downturn worsened, as major companies and small firms announced round after round of layoffs and postponement of expansion plans. The financial sector worsened sharply in January, indicating the huge financial bailouts of 2008 were inadequate. The steep slide continued as unsold goods piled up. The GDP (gross domestic product) shrank at a -6.2% annual rate in the fourth quarter (last three months) of 2008, the sharpest contraction in 26 years.
Meanwhile, at the urging of the Obama Administration, Congress passed a $789 billion stimulus package, combining new spending and tax cuts, in the hopes of Keynesian revival by mid-2009. Republicans were nearly unanimous against the proposal, as their smaller package was voted down. Canada, although not as hard hit as the U.S., prepared its own stimulus package.
- see also Economic stimulus package
- The effectiveness of Stimulus: Job growth under President Obama's first term; Source: United States Department of Labor.
- U.S. Population growth during Obama's first four years in office. Source: U.S. Census Bureau.
- 3Q is the third quarter, or the months of July, August and September.
- One analyst in 2011 put the figure at $29 trillion. $29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient, James Felkerson, University of Missouri–Kansas City, December 2011.
- David Smick, "Now What Do We Do?" November 10, 2009 online
- Three of the four engines of economic growth -- consumer spending, business investment and exports -- declined sharply. Consumer spending fell at an annualized rate of 4.3%; business investment in equipment and software sank at an astonishing annual rate of 29%; exports of goods and services plunged 24%. Washington Post Feb. 28, 2009
- An "annualized rate" is four times the actual quarterly rate. Jack Healy, "U.S. Economy in 2nd Straight Quarter of Steep Decline," New York Times April 29, 2009
- see S. Mitra Kalita, "Americans See 18% of Wealth Vanish," Wall Street Journal Mar. 13, 2009
- These supposed "temporary", "emergency" spending measures by 2013 became permanent features of the federal budget, as the $1 trillion deficit to cover its continuing costs and an accumulating national debt. The Eternal Stimulus, Wall Street Journal, February 11, 2010.
- Obama's Permanent Emergency:'Temporary' spending becomes permanent, Wall Street Journal, May 23, 2012.
- Jobless Claims Jump in New Sign Recovery Is Sputtering, Wall Street Journal, August 20, 2010.
- United States Department of Labor, Bureau of Labor Statistics. Data extracted on: July 19, 2010 (4:31:11 PM).
- Why the Stimulus Failed, Wall Street Journal, September 8, 2011.
- West Texas Intermediate Crude (WTI) 2007-01-01 to 2013-02-01
- Total Non-Farm Payrolls, U.S. Dept. of Labor.
- Jack Healy And Louis Uchitelle, "Steep Slide in U.S. Economy as Unsold Goods Pile Up," New York Times Jan. 30, 2009