Economic History of The United States - Great Recession

Great Recession

Further information: Financial crisis (2007–present) and Automotive industry crisis of 2008–2010

In 2008 a perfect storm of economic disasters hit the country and indeed the entire world. The most serious began with the collapse of housing bubbles in California and Florida, and the collapse of housing prices and the construction industries. Millions of mortgages (averaging about $200,000 each) had been bundled into securities called collateralized debt obligations that were resold worldwide. Many banks and hedge funds had borrowed hundreds of billions of dollars to buy these securities, which were now "toxic" because their value was unknown and no one wanted to buy them.

A series of the largest banks in the U.S. and Europe collapsed; some went bankrupt, such as Lehman Brothers with $690 billion in assets; others such as the leading insurance company AIG, the leading bank Citigroup, and the two largest mortgage companies were bailed out by the government. Congress voted $700 billion in bailout money, and the Treasury and Federal Reserve committed trillions of dollars to shoring up the financial system, but the measures did not reverse the declines. Banks drastically tightened their lending policies, despite infusions of federal money. The government for the first time took major ownership positions in the largest banks. The stock market plunged 40%, wiping out tens of trillions of dollars in wealth; housing prices fell 20% nationwide wiping out trillions more. By late 2008 distress was spreading beyond the financial and housing sectors, especially as the "Big Three" of the automobile industry (General Motors, Ford and Chrysler) were on the verge of bankruptcy, and the retail sector showed major weaknesses. Critics of the $700 billion Troubled Assets Relief Program (TARP) expressed anger that much of the TARP money that has been distributed to banks is seemingly unaccounted for, with banks being secretive on the issue.

President Barack Obama signed the American Recovery and Reinvestment Act of 2009 in February 2009; the bill provides $787 billion in stimulus through a combination of spending and tax cuts. The plan is largely based on the Keynesian theory that government spending should offset the fall in private spending during an economic downturn; otherwise the fall in private spending may perpetuate itself and productive resources, such as the labor hours of the unemployed, will be wasted. Critics claim that government spending cannot offset a fall in private spending because government must borrow money from the private sector in order to add money to it. However, most economists do not think such "crowding out" is an issue when interest rates are near zero and the economy is stagnant. Opponents of the stimulus also point to problems of possible future inflation and government debt caused by such a large expenditure.