The Great Recession of 2008-2009 was a period of global economic contraction, precipitated by the financial crisis that swept Wall Street and the global financial system beginning in the Summer of 2007. While the causes of the crisis lay in the U.S. domestic economy, with the bursting of the U.S. housing bubble being the main trigger for financial panic, the interconnected nature of global finance meant that the crisis quickly spread around the world. In the following two years, many of the world's largest economies entered recession, with unemployment rates, delinquencies on loans, and bankruptcy rates all spiking. The crisis has had a number of lasting economic, political and social effects, including the Eurozone crisis of the 2010s, issues relating to political polarization and populism, as well as marking the emergence of China as a major player in the global economy.
The decades preceding the Great Recession had been a high-point for globalization, as barriers to trade and finance were lowered, in what has been called the era of the 'Washington Consensus'. This interdependency between economies meant that as the financial crisis spread from Wall Street to other countries, the advanced economies of the world experienced a remarkably synchronized recession. On the other hand, some emerging economies, which were less integrated into the U.S.-led system of global finance, managed to avoid recession and record high (albeit, less high than previous years) levels of growth. This divergence accelerated the growing importance of Asian economies in World GDP, although the United States' strong economic recovery after 2010 meant that it has managed to retain its place as the world's pre-eminent economic power.
Causes of the Great Recession
The Great Recession's primary cause was the collapse of the U.S. housing market in 2007 and the subsequent financial crisis, which saw the failure or near-bankruptcy of several systemically important financial institutions. The George W. Bush administration was, however, initially reluctant to interfere directly in the financial sector, preferring instead to help broker the sale of troubled companies, such as when investment bank Bear Stearns was sold to J.P. Morgan Chase in March 2008. When Lehman Brothers, one of Wall Street's largest banks and a key player in the financing of U.S. housing loans, was unable to find a buyer, it declared bankruptcy on September 15, 2008, causing panic across financial markets. When AIG came close to failure the next day, the U.S. government agreed to a bailout package, signaling that they would not allow further systemically important institutions to fail.
With the U.S. government and Federal Reserve stepping in to backstop the financial system by late-2008, the crisis moved from a phase of financial panic into a prolonged economic downturn. As credit markets were frozen, consumers and business could not access funds to make purchases or investments - when combined with a lack of consumer confidence, this meant that the U.S. economy began to contract rapidly. Across many other developed countries, whose financial sectors had also engaged in speculation on housing markets or other reckless lending practices, the crisis was also hitting their economies hard. Aggregate demand was also constrained by the rise of global oil prices since the early 2000s, which squeezed household finances at a time when spending was needed to stimulate economies.
The Great Recession in advanced economies
Many of the most economically advanced countries went into recession during 2008 and 2009. The United Kingdom, whose financial center in the City of London is tightly linked to Wall Street, was one of the most severely affected countries during the crisis. The UK experienced its first bank run in over 150 years, when on the September 14. 2007, Northern Rock, a bank that had dealt heavily in securitized mortgages, declared that it could not raise sufficient funds on short-term money markets to meet its obligations and had to seek emergency liquidity support from the central bank, the Bank of England. It would be another year before the UK government would have to step in to bail out Royal Bank of Scotland, HBOS, and Lloyds TSB, among others, in order to prevent the collapse of the British banking sector. The freezing of global credit markets meant that banks in wealthier countries across the globe struggled to meet their financing needs and had to turn to their governments for support.
Japan, which had experienced 'lost decades' since the 1990s due to low growth, was hit hard by the collapse in international trade during the recession. Many other countries were negatively affected by their exposure to larger economies which were in recession, even when their own financial crisis had been more muted than in the U.S. or UK. Canada, which did not experience a banking crisis in 2008, was nevertheless severely impacted by the downturn in the United States, due to it being their biggest export market. Among advanced economies, there were a couple of notable exceptions which escaped a recession during the period, notably Australia, which benefitted strongly from Chinese economic growth and from the boom in its mining industry. In Europe, many countries experienced deep recessions which were notable for high levels of youth unemployment. Some Eurozone countries would experience sovereign debt crises later in the 2010s, due to the bailouts and increased expenditures during the recession.
The Great Recession and emerging economies
The Great Recession had a different effect in many emerging economies to its effect on most advanced economies, who experienced a deep, synchronized recession in 2008-2009. China, India, and Indonesia all recorded strong growth rates throughout the crisis, while Brazil experienced a shallow recession in 2009, before rebounding with strong growth in 2010 and 2011. These countries in many cases benefitted from being less dependent on U.S. financial markets, having large domestic markets which could sustain demand, and from exporting fewer elastic products on the world market (meaning that they were less affected by the decline in global consumer demand). China's government engaged in a large stimulus spending program in 2008 and 2009, worth around 600 billion U.S. dollars, which likely contributed to sustaining their domestic economy, as well as regional growth in Asia. China's ability to sustain high levels of growth throughout the crisis led some commentators to point to the Great Recession as the moment at which the country emerged as a global economic power.
Following the Asian financial crisis of 1997, when a number of East and South-East Asian countries experienced runs on their currencies and stock market crashes, governments in the region became more skeptical of the benefits of global financial integration. For this reason, many of these countries began to build up foreign currency reserves and to limit flows of short-term capital, also known as 'hot money'. These proactive policies, designed to deal with periods of financial distress, have been credited with preventing the region from undergoing as serious a recession and financial crisis as was experienced in North America, Europe, and Japan. Russia, which had also experienced a deep financial crisis throughout the 1990s, did not fare as well. The crash in the value of Ural Crude Oil in Autumn 2008, Russia's main export, as well as heightened uncertainty in the aftermath of the invasion and war in Georgia, meant that the Russian economy entered a deep recession in 2008. South American, Middle Eastern and African countries generally were not as reliant on financial flows from the U.S. and Europe in this period, and therefore did not experience the same depth of crisis. Declining global commodity prices, particularly in food and fuels, did however negatively affect exporters in these regions.
The legacies of the recession and financial crisis
The decade that followed the Great Recession greatly contributed to political instability in many regions across the globe. The Eurozone crisis of the early 2010s, triggered by unsustainable lending by banks to the peripheral countries of the currency bloc, was a direct consequence of the Great Recession. The peripheral countries, namely Greece, Ireland, Italy, Portugal, and Spain, had in many cases experienced asset price bubbles during the early 2000s, which were burst by the financial crisis and recession. After dedicating huge sums of public funds to stabilize their financial systems, the interest rates for their government debt spiked and caused many to be unable to fund themselves, having to rely on the 'Troika' (ECB, EU Commission, and IMF) for bailouts. Consequently, these countries were forced to implement harsh austerity measures, which in Italy and Greece led to the election of populist governments who opposed the cuts to government spending. Populism, both in its left and right wing varieties, was a general trend in the 2010s, with examples of major populist movements in advanced economies including the election of Donald Trump in the U.S., the Brexit vote in the UK, various other Eurosceptic movements across France, Germany, and Italy (often considered the EU's leaders), and the rise of more authoritarian governments in Hungary and Poland. While other factors such as migration or identity politics certainly played a role, the legacy of the Great Recession is considered a foundational aspect in their emergence.
The global economy, which had been marked by a U.S.-led system of liberalized finance and trade since the end of the Cold War (1947-1991), experienced a shift towards more protectionism and state intervention in the aftermath of the crisis. China's model of 'state capitalism', whereby an element of private enterprise is allowed and companies are free to trade and compete globally, but where the state retains a coordinating role in the economy, became seen as an attractive model by many developing countries during the 2010s. This crisis of legitimacy for U.S.-led 'liberal' capitalism has contributed to the growing geopolitical rivalry between China and the U.S., as China aims to grow its global influence through programs such as its 'Belt and Road Initiative'. While some sectors such as manufacturing experienced stagnation following the recession, others benefitted from specific policy choices such as government stimulus packages or historically low interest rates. Some observers have suggested that the low returns in safe investments due to near-zero interest rates after 2009 drove speculation in growth stocks such as technology and social media companies.
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