What does the Fed's rate hike mean for you? Learn why the Fed is raising interest rates and how it impacts you here.

The 2008 Great Recession Explained

The Great Recession of 2007-2009 was the longest and the worst slowdown in the post-war era.

Written by Jacqueline DeMarco / July 1, 2022

Quick Bites

  • The 2008 Great Recession, prompted by overzealous mortgage lenders, upended the housing market and devastated the economy.
  • Subprime mortgage lending practices–the providing of loans to high-risk individuals–drove the downturn, spurring prices to records only to see them collapse.
  • The recession helped create new policies and regulations to prevent similar situations.

The Great Recession of 2007-2009 was the longest and worst economic decline of the post-war era. High-risk mortgages that got bundled and resold under the guise of stronger assets helped spark a downturn that collapsed institutions and heralded new regulations to attempt to stave off future problems.

Read on for further insight into what caused the 2008 Great Recession and how the U.S. government responded.

Inside this article

  1. What's a recession?
  2. The Great Recession
  3. What the heck happened?
  4. How did it end?
  5. FAQ

What's a recession?

A recession is a period of economic slowdown, lasting more than a few months, though generally less than a year. Recessions are often characterized by job losses, lower industrial production and a drop in real income.[1,2]

It may not be comforting, but it’s good to know that recessions are a normal part of life. You are more than likely going to experience at least one recession in your lifetime, so knowing how things work and why is a good thing. One of the most recent recessions, from the late 2000’s, was among the most dramatic. Let’s learn from a little history here.

How To Prepare for a Recession

How To Prepare for a Recession

Is a recession coming? Who knows. But it can't hurt to be ready for one.

Find out more

Tell me about the Great Recession

The Great Recession, the longest since World War II, began in December 2007 and ended in June 2009, which makes it the longest recession since World War II. It was long, it was substantial. Gross domestic product (GDP, or the value of the goods and services produced in a country) tumbled in the biggest decline in the post-war era and the unemployment rate, which was 5% in late 2007, doubled two years later.

Home prices fell about 30%, on average from 2006 to mid-2009, and the S&P 500 index fell 57% from 2007 to 2009.[3]

What the heck happened?

Let’s take a closer look at what happened during the 2008 Great Recession and what contributed to this period of economic decline.

Subprime mortgages

The housing market got hot in the 2000’s, in large part because lenders started providing mortgages to high-risk individuals who normally wouldn’t have been eligible. Those mortgages got bundled and repacked and sold with an upgrade: Investors who bought them weren’t fully aware of just how toxic those mortgages could become. They’re what we call subprime mortgages.

People who couldn't afford the mortgages started defaulting, and lenders started closing or filing for bankruptcy. Interest rates rose making mortgages even more expensive and more people were unable to afford their homes. Housing prices that had spiked suddenly tanked.

Bank bailouts

The decline in home prices helped to spark the financial crisis of 2007-08. Financial market participants, like banks, suddenly faced considerable uncertainty about losses related to those subprime mortgage-related assets. The market panicked. In 2008, the investment bank Bear Stearns was acquired by JPMorgan Chase, with the help of the Federal Reserve, also known as the U.S. central bank. Later, one of the biggest investment banks, Lehman Brothers, filed for bankruptcy. The very next day, the Fed had to provide support to AIG, a large insurance and financial services company, to keep it afloat. Citigroup and Bank of America sought support from the Fed, the Treasury, and the Federal Deposit Insurance Corporation. This is what we now know as the bank bailouts.

On top of that, the Fed took additional action.

The Fed Fights Recessions by Dropping Rates—Unless Inflation’s Out of Control

The Fed Fights Recessions by Dropping Rates—Unless Inflation’s Out of Control

The Federal Reserve has eased past recessions by cutting interest rates, but right now it’s committed to raise rates to bring inflation under control.

Find out more

“The Fed slashed interest rates to zero and engaged in a number of policy rounds of quantitative easing, which essentially means creating more money, providing liquidity to financial markets and pushing money into the economy,” says Peter Earle, economist and research fellow at the American Institute for Economic Research.

The Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 came as a result of the Great Recession. It overhauled the federal consumer protection system, creating a Consumer Financial Protection Bureau charged with protecting consumers from unscrupulous practices by mortgage lenders, credit card companies and others in the financial world.[7]

How did it end?

It took a while.
The recovery from the Great Recession was the longest expansion in modern U.S. macroeconomic history, with both the longest positive job streak on record and an output expansion that lasted over a decade[8]. Wages grew as inflation stayed low.

The Fed had a central role in bouncing the economy back. At the start of the Great Recession, the Federal Reserve began cutting rates, dropping them to zero by December of 2008. It also used large scale asset purchases (quantitative easing, or the purchasing of assets or bonds to pump money into the economy) and promised to keep rates low for an extended period of time to boost the economy.

The recovery was among the slowest on the books.

“As consumer and business confidence returned and financial stability was established, the panic ended,” Earle says. “But although the U.S. economy and the various financial markets emerged from the Great Recession, it was a tepid recovery until 2016 or 2017.”

FAQ

What is the difference between recession and depression?

A depression is considered to be a much more intense version of a recession in scale and duration. When the economy is in a depression, high unemployment rates can continue for many years, and it can take a long time to recover. The goods news is that depressions are rare occurrences.

Recession vs. Depression vs. Inflation

Recession vs. Depression vs. Inflation

A recession occurs when the economy slows down. A depression is a way worse version of a recession. Inflation is when prices of gas to tea are rising.

Find out more
Article Sources
  1. “Preparing for the next recession: 9 things you need to know.” Capital Group. https://www.capitalgroup.com/advisor/insights/articles/guide-to-recessions.html
  2. “Business Cycle.” CFI, May. 7, 2022. https://corporatefinanceinstitute.com/resources/knowledge/economics/business-cycle/.
  3. “The Great Recession.” Federal Reserve History. https://www.federalreservehistory.org/essays/great-recession-of-200709
  4. “The Great Recession and Its Aftermath.” Federal Reserve History, Nov. 22, 2013. https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath
  5. “Here’s how much the 2008 bailouts really cost.” MIT Management Sloan School, Feb. 21, 2019. https://mitsloan.mit.edu/ideas-made-to-matter/heres-how-much-2008-bailouts-really-cost
  6. “Chart Book: The Legacy of the Great Recession.” Center on Budget and Policy Priorities, June. 6, 2019. https://www.cbpp.org/research/economy/the-legacy-of-the-great-recession
  7. “THE ROLE OF THE STATES UNDER THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT OF 2010.” National Consumer Law Center. December 2010. https://www.nclc.org/images/pdf/legislation/dodd-frank-role-of-the-states.pdf
  8. “THE RECOVERY FROM THE GREAT RECESSION: A LONG, EVOLVING EXPANSION.” NBER. February 2021. https://www.nber.org/system/files/working_papers/w28452/w28452.pdf

About the Author

Jacqueline DeMarco

Jacqueline DeMarco

Jacqueline has worked with more than two dozen financial brands, including LendingTree, Capital One, Bankrate, Student Loan Hero, and Northwestern Mutual, providing thoughtful content to give readers insight into complex topics that they likely didn’t learn in school.

Full bio

Related Content