The Great Recession

Recessions represent the downward phase of the business cycle. They currently occur about every nine years. See the U.S. GDP figure below for a chronology of four of the most recent recessions.[1] I realize that, to economists, this statement is blasphemy. They will tell you that nobody can predict when the next recession will occur. And to some extent, they have a point. No predictions are exact, and there is variability in every cycle. The fact that recessions are difficult to predict shouldn’t keep us from trying to anticipate their arrival. If you know a recession is coming, you can prepare for the storm, much as people prepare for a hurricane in the Southeast or a tornado in the Midwest.

GDP and Recessions from 1980-2016

U.S. GDP from 1980 – 2016, including recession periods (shaded)

The Great Recession of 2007–2009 occurred because of the catastrophic failure or near-failure of several financial institutions, including Bear Stearns, Countrywide Financial, Washington Mutual, AIG, Lehman Brothers, Fannie Mae, and Freddie Mac. These epic disasters were brought on by the housing bubble crisis and derivatives. Prior recessions were also precipitated by other significant economic events. But whatever the cause, we should prepare, and the first step in that preparation is to understand the business cycle.

The Great Recession started a domino effect of layoffs, corporation restructurings, downsizing, and bankruptcies. At that time, almost half the employees in the country were in the financial services industry or real estate. At one point, it seemed like everybody was involved in real estate or the mortgage industry. Everyone seemed to be selling everyone else property or a better refinance rate. As banks failed and merged, a significant proportion of these employees soon became unemployed. And the many peripheral organizations and companies that supported these industries also lost their clientele and source funding to continue operations. This created a severe drag on the economy.

The Great Recession also affected businesses across the country, not just the banking and real estate businesses. The credit crunch impacted all firms. Another example of the stress the recession caused was the bailout of the automobile companies General Motors and Chrysler. The federal government provided loan guarantees and other financial aid to these manufacturers because they were threatened by overseas competition and the restrictions the credit crunch put on new and used car loans. They were also impacted when significant numbers of people put off these major purchases due to the instability in the economy. These and the other massive corporate failures are the reasons the Great Recession is one of the worst on record.

[1] US. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis;, September 5, 2016.