16.1 Great Recession and Economic Recovery

The Great Recession, triggered by the housing market bubble and subprime mortgage crisis, was the worst economic downturn since the Great Depression. It led to massive job losses, foreclosures, and a decline in consumer spending, severely impacting low and middle-income households.

Obama's administration responded with economic stimulus packages and financial reforms like the Dodd-Frank Act. While these measures helped stabilize the economy, the recovery was slow. The auto industry bailout saved jobs, but income inequality widened and employment patterns shifted towards part-time and temporary work.

The Great Recession

Causes and consequences of Great Recession

Top images from around the web for Causes and consequences of Great Recession

• 

  Great Recession - Wikipedia View original

  Is this image relevant?

• 

  Great Recession - Wikipedia View original

  Is this image relevant?

• 

  Great Recession - Wikipedia View original

  Is this image relevant?

• 

  Great Recession - Wikipedia View original

  Is this image relevant?

• 

  Great Recession - Wikipedia View original

  Is this image relevant?

1 of 3

Top images from around the web for Causes and consequences of Great Recession

• 

  Great Recession - Wikipedia View original

  Is this image relevant?

• 

  Great Recession - Wikipedia View original

  Is this image relevant?

• 

  Great Recession - Wikipedia View original

  Is this image relevant?

• 

  Great Recession - Wikipedia View original

  Is this image relevant?

• 

  Great Recession - Wikipedia View original

  Is this image relevant?

1 of 3

• Causes of the Great Recession
  • Housing market bubble and subprime mortgage crisis
    • Loose lending practices and low interest rates enabled more people to buy homes, even those with poor credit (subprime borrowers)
    • Widespread use of mortgage-backed securities and derivatives spread the risk of subprime mortgages throughout the financial system
  • Excessive risk-taking by financial institutions fueled by a belief that housing prices would continue to rise indefinitely
  • Lack of proper regulation and oversight of the financial sector allowed risky practices to go unchecked (credit default swaps)
• Consequences of the Great Recession
  • Severe economic downturn and contraction of GDP, the worst since the Great Depression
  • Significant job losses and high unemployment rates
    • Over 8 million jobs lost between 2007 and 2009, leaving many struggling to find work
  • Decline in housing prices and wealth
    • Homeowners faced foreclosures and negative equity, meaning they owed more on their mortgages than their homes were worth
  • Increased poverty and income inequality, as the effects of the recession were felt most severely by low and middle-income households
  • Reduced consumer spending and confidence, as people lost jobs, homes, and savings, leading to a further slowdown in the economy

Effectiveness of Obama's economic policies

• Economic Stimulus Act of 2008 and American Recovery and Reinvestment Act of 2009
  • Provided tax rebates, extended unemployment benefits, and increased government spending to stimulate the economy
  • Aimed to boost consumer spending and create jobs, helping to prevent an even deeper recession
• Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
  • Increased regulation and oversight of the financial sector to prevent future crises
    • Created the Consumer Financial Protection Bureau (CFPB) to protect consumers from predatory lending practices
  • Introduced the Volcker Rule to limit speculative investments by banks, reducing the risk of another financial meltdown
  • Established the Financial Stability Oversight Council to monitor systemic risks and coordinate regulatory efforts
• Effectiveness of the stimulus package and financial reforms
  • Helped prevent a deeper recession and stabilize the economy, although the recovery was slower than many hoped
  • Gradual recovery in GDP growth and job creation, but it took years for employment to return to pre-recession levels
  • Criticized for not doing enough to address the underlying structural issues, such as income inequality and the decline of the middle class
  • Some argue that the reforms did not go far enough in preventing future financial crises, as banks remain "too big to fail"

The Auto Industry and Economic Recovery

Impact of auto industry bailout

• Auto industry crisis during the Great Recession
  • Declining sales and financial losses for major U.S. automakers (GM, Chrysler, and Ford) threatened their survival
  • GM and Chrysler faced potential bankruptcy, which would have had devastating effects on the economy
• Auto industry bailout (2008-2009)
  • U.S. government provided loans and financial assistance to GM and Chrysler
    • Totaling approximately $80 billion in taxpayer funds
  • Required restructuring and cost-cutting measures, such as renegotiating labor contracts and closing underperforming factories
• Impact of the auto industry bailout
  • Prevented the collapse of GM and Chrysler, two of the largest employers in the U.S.
    • Saved an estimated 1.5 million jobs in the auto industry and related sectors (parts suppliers)
  • Helped stabilize the economy in regions heavily dependent on the auto industry (Michigan)
  • Controversial due to the use of taxpayer funds and perceived government intervention in private business, but ultimately successful in preventing a deeper economic crisis

Long-term effects on economy and society

• Income inequality
  • Widening gap between the rich and the poor, as the benefits of the recovery were not evenly distributed
    • Top 1% of earners captured a larger share of income growth during the recovery, while the middle class struggled
  • Stagnant wages for middle and lower-income households, even as corporate profits and executive compensation soared
• Employment
  • Slow recovery in job growth and persistent underemployment, as many people could only find part-time or temporary work
  • Shift towards part-time and temporary jobs, as employers sought to reduce costs and increase flexibility
  • Structural changes in the labor market, such as automation and globalization, reduced the number of well-paying manufacturing jobs
• Consumer behavior
  • Increased savings and reduced spending, as households focused on paying down debt and rebuilding wealth lost during the recession
    • Households focused on paying down debt and rebuilding wealth, leading to a slower recovery in consumer spending
  • Shift in consumer preferences towards value-oriented and discount retailers (Walmart), as people sought to stretch their limited incomes
  • Growth of the sharing economy and online shopping, as consumers sought more affordable and convenient alternatives to traditional retail