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Great Recession

What was the Great Recession?

Also known as the global financial crisis of 2008, the Great Recession was a global economic crisis that is considered the largest since the Great Depression of 1930. The Great Recession affected financial markets, the industrial sector, and employment in many parts of the world, and it took place between 2007 and 2009.

Where did the Great Recession start?

The Great Recession originated in the United States due to the real estate bubble that had been created in the preceding years. The increase in property prices encouraged speculation from banks and lenders, who also granted loans to people with little economic solvency under the figure of mortgage-backed securities (MBS).

MBSs are complex financial instruments that bundle a set of individual mortgages and convert them into marketable securities. They allow financial institutions to diversify and transfer the risk associated with the mortgages they have granted while generating liquidity to make new investments or loans.

In 2006, housing prices began to fall, meaning that many homeowners had mortgages that exceeded the value of their homes. Borrowers began to default on mortgage payments, causing a large portion of the mortgages associated with the MBSs to become uncollectible. This generated significant losses for investors, some of whom went bankrupt.

Given the interconnectedness of global financial markets, the problem of liquidity and confidence quickly spread to banks around the world. This led to a decrease in credit and a contraction in economic activity.

What was the response to the Great Recession?

Coping with the Great Recession required significant international collaboration; governments around the world had to intervene to prevent the total collapse of the financial system. Coordinated efforts were carried out among leading economic actors at the global level through summits and international meetings aimed at addressing imbalances and coordinating policies.

Internally, countries implemented rescue measures and economic stimulus, which included:

  • Bailout and recapitalization of financial institutions (banks and insurers) to prevent their collapse. The bailouts were intended to restore confidence in the financial system and prevent an even bigger crisis.
  • Fiscal stimulus aimed at boosting demand and supporting economic activity. The programs included increases in public spending, tax cuts, and measures to boost investment and consumption.
  • An expansionary monetary policy that sought to promote access to credit, stimulate spending, and promote investment. Central banks, including the US Federal Reserve, cut interest rates to historically low levels. 

The crisis also shed light on existing deficiencies in financial regulations. As a preventive measure for future crises, reforms were implemented in many countries to strengthen regulatory frameworks, increase capital requirements for banks, and improve supervision of financial institutions.

Although international coordination was instrumental in stabilizing financial markets and driving gradual economic recovery after the Great Recession, it was not uniform. Some countries faced persistent challenges in terms of unemployment, public debt, and economic growth.

Which countries were the most affected by the Great Recession?

  1. The United States: it was the epicenter of the financial crisis. The country saw falling housing prices, the collapse of important financial institutions, and a significant economic contraction.
  2. Spain: it was one of the countries most affected due to its exposure to the real estate bubble. The construction sector contracted sharply, and there was a considerable increase in unemployment levels.
  3. The United Kingdom: the collapse of top banks and the decrease in available credit caused an economic contraction and an increase in unemployment.
  4. Ireland: like Spain, it suffered the bursting of the real estate bubble and the collapse of the construction sector. Irish banks required government assistance to prevent their collapse.
  5. Iceland: the banking sector collapsed, and the country was forced to seek financial assistance from the International Monetary Fund (IMF) and other countries to cope with the situation.

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