Economic Policy of The George W. Bush Administration - 2008 Economic Crisis and Recession

2008 Economic Crisis and Recession

Further information: Economic crisis of 2008 and Government_intervention_during_the_subprime_mortgage_crisis#United_States

The last year of Bush's second term was dominated by an economic recession. The National Bureau of Economic Research (NBER) marked December 2007, the month with the highest payroll employment numbers, as the high point of American economic production with output declining from then on to the present. GDP declined by an annualized -0.5% in the third quarter and -3.8% in the fourth quarter of 2008. The two consecutive quarters of negative economic growth met the "rule of thumb" definition of a recession, confirming the NBER's declaration of a recession.

Bush responded to the early signs of economic problems with lump-sum tax rebates and other stimulative measures in the Economic Stimulus Act of 2008. In March 2008, Bear Stearns, a major US investment bank heavily invested in subprime mortgage derivatives, began to go under. Rumors of low cash reserves dragged Bear's stock price down while lenders to Bear began to withdraw their cash. The Federal Reserve funneled an emergency loan to Bear through JP Morgan Chase. (As an investment bank, Bear could not borrow from the Fed but JP Morgan Chase, a commercial bank, could).

The Fed ended up brokering an agreement for the sale of Bear to JP Morgan Chase that took place at the end of March. In July, IndyMac went under and had to be placed in conservatorship. In the middle of the summer it seemed like recession might be avoided even though high gas prices threatened consumers and credit problems threatened investment markets, but the economy entered crisis in the fall. Fannie Mae and Freddie Mac were also put under conservatorship in early September.

A few days later, Lehman Brothers began to falter. Treasury Secretary Hank Paulson, who in July had publicly expressed concern that continuous bailouts would lead to moral hazard, decided to let Lehman fail. The fallout from Lehman's failure snowballed into market-wide panic. AIG, an insurance company, had sold credit default swaps insuring against Lehman's failure under the assumption that such a failure was extremely unlikely.

Without enough cash to pay out its Lehman-related debts, AIG went under and was nationalized. Credit markets locked up and catastrophe seemed all too likely. Paulson proposed providing liquidity to financial markets by having the government buy up debt related to bad mortgages with a Troubled Asset Relief Program. Congressional Democrats advocated an alternative policy of investing in financial companies directly. Congress passed the Emergency Economic Stabilization Act of 2008, which authorized both policies.

Throughout the crisis, Bush seemed to defer to Paulson and Federal Reserve Chairman Ben Bernanke. He kept a low public profile on the issue with his most significant role being a public television address where he announced that a bailout was necessary otherwise the United States "could experience a long and painful recession."