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144-588: The Great Recession was a period of market decline in economies around the world that occurred from late 2007 to mid-2009. The scale and timing of the recession varied from country to country (see map). At the time, the International Monetary Fund (IMF) concluded that it was the most severe economic and financial meltdown since the Great Depression . The causes of the Great Recession include

288-511: A pandemic ). There is no official definition of a recession, according to the IMF . In the United States , a recession is defined as "a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP , real income, employment, industrial production, and wholesale-retail sales." The European Union has adopted a similar definition. In

432-445: A recession is a business cycle contraction that occurs when there is a period of broad decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock ). This may be triggered by various events, such as a financial crisis , an external trade shock, an adverse supply shock , the bursting of an economic bubble , or a large-scale anthropogenic or natural disaster (e.g.

576-554: A Financial Stability Board report an increase of the SBS to about $ 67 trillion. It is unclear to what extent various measures of the shadow banking system include activities of regulated banks, such as bank borrowing in the repo market and the issuance of bank-sponsored asset-backed commercial paper. Banks by far are the largest issuers of commercial paper in the United States, for example. As of 2013 , academic research has suggested that

720-409: A balance sheet recession would be appropriate. However, Krugman argued that monetary policy could also affect savings behavior, as inflation or credible promises of future inflation (generating negative real interest rates) would encourage less savings. In other words, people would tend to spend more rather than save if they believe inflation is on the horizon. In more technical terms, Krugman argues that

864-442: A cash loan, through the mechanism of selling the security to a lender and agreeing to repurchase it at an agreed time in the future for an agreed price. Money market funds do not rely on short-term funding; rather, they are investment pools that provide short-term funding by investing in short-term debt instruments issued by banks, corporations, state and local governments, and other borrowers. The shadow banking sector operates across

1008-495: A combination of vulnerabilities that developed in the financial system, along with a series of triggering events that began with the bursting of the United States housing bubble in 2005–2012. When housing prices fell and homeowners began to abandon their mortgages, the value of mortgage-backed securities held by investment banks declined in 2007–2008, causing several to collapse or be bailed out in September 2008. This 2007–2008 phase

1152-416: A combined asset size of roughly $ 2.2 trillion. Assets financed overnight in triparty repo grew to $ 2.5 trillion. Assets held in hedge funds grew to roughly $ 1.8 trillion. The combined balance sheets of the then five major investment banks totaled $ 4 trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $ 6 trillion, and total assets of

1296-506: A comprehensive assessment of the depth and breadth of economic downturns, enabling policymakers to devise more effective strategies for economic stabilization and recovery. Recessions in the United Kingdom are generally defined as two consecutive quarters of negative economic growth, as measured by the seasonal adjusted quarter-on-quarter figures for real GDP . The Organisation for Economic Co-operation and Development (OECD) defines

1440-475: A corporation may be searching for funds to borrow. The shadow banking institution will channel funds from the investor(s) to the corporation, profiting either from fees or from the difference in interest rates between what it pays the investor(s) and what it receives from the borrower. Hervé Hannoun, Deputy General Manager of the Bank for International Settlements described the structure of this shadow banking system at

1584-478: A crisis of ideas in mainstream economics and within the economics profession, and call for a reshaping of both the economy, economic theory and the economics profession. They argue that such a reshaping should include new advances within feminist economics and ecological economics that take as their starting point the socially responsible, sensible and accountable subject in creating an economy and economic theories that fully acknowledge care for each other as well as

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1728-412: A decrease to $ 24 trillion. Globally, a study of the 11 largest national shadow banking systems found that they totaled $ 50 trillion in 2007, fell to $ 47 trillion in 2008, but by late 2011 had climbed to $ 51 trillion, just over their estimated size before the crisis. Overall, the worldwide SBS totaled about $ 60 (~$ 80.2 trillion in 2023) trillion as of late 2011. In November 2012 Bloomberg reported in

1872-463: A key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression , in which U.S. GDP fell by 46%. He argued that monetary policy

2016-498: A liquidity trap is expanding the money supply via quantitative easing or other techniques in which money is effectively printed to purchase assets, thereby creating inflationary expectations that cause savers to begin spending again. Government stimulus spending and mercantilist policies to stimulate exports and reduce imports are other techniques to stimulate demand. He estimated in March 2010 that developed countries representing 70% of

2160-488: A minimum, there's a little 'froth' [in the U.S. housing market]...it's hard not to see that there are a lot of local bubbles". The Economist , writing at the same time, went further, saying, "[T]he worldwide rise in house prices is the biggest bubble in history". Real estate bubbles are (by definition of the word "bubble") followed by a price decrease (also known as a housing price crash ) that can result in many owners holding negative equity (a mortgage debt higher than

2304-833: A recession as a period of at least two years during which the cumulative output gap reaches at least 2% of GDP, and the output gap is at least 1% for at least one year. Recession can be defined as decline of GDP per capita instead of decline of total GDP. A recession encompasses multiple attributes that often occur simultaneously and encompasses declines in component measures of economic activity, such as GDP, including consumption, investment, government spending, and net export activity. These summary measures are indicative of underlying drivers such as employment levels and skills, household savings rates, corporate investment decisions, interest rates, demographics, and government policies (Smith, 2018; Johnson & Thompson, 2020). By examining these factors comprehensively, economists gain insights into

2448-493: A recession including the availability heuristic , the money illusion , and normalcy bias . Excessive levels of indebtedness or the bursting of a real estate or financial asset price bubble can cause what is called a "balance sheet recession". This occurs when large numbers of consumers or corporations pay down debt (i.e., save) rather than spend or invest, which slows the economy. The term balance sheet derives from an accounting identity that holds that assets must always equal

2592-427: A recession. Economist Hyman Minsky also described a "paradox of deleveraging" as financial institutions that have too much leverage (debt relative to equity) cannot all de-leverage simultaneously without significant declines in the value of their assets. In April 2009, U.S. Federal Reserve Vice Chair Janet Yellen discussed these paradoxes: "Once this massive credit crunch hit, it didn't take long before we were in

2736-619: A recession. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year. A process of balance sheet deleveraging has spread to nearly every corner of the economy. Consumers are pulling back on purchases, especially durable goods, to build their savings. Businesses are cancelling planned investments and laying off workers to preserve cash. And financial institutions are shrinking assets to bolster capital and improve their chances of weathering

2880-455: A reliable recession predictor. The curve began re-steepening toward positive territory in June 2024, as it had at other points during that inversion; in every previous inversion they examined; Deutsche Bank analysts found the curve had re-steepened before a recession began. The following variables and indicators are used by economists, like e.g. Paul Krugman or Joseph Stiglitz , to try to predict

3024-570: A resolution preventing CFTC from regulating derivatives for another six months — when Born's term of office would expire. Ultimately, it was the collapse of a specific kind of derivative, the mortgage-backed security , that triggered the economic crisis of 2008. Paul Krugman wrote in 2009 that the run on the shadow banking system was the fundamental cause of the crisis. "As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realised that they were re-creating

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3168-415: A self-reinforcing downward cycle, bringing about or worsening a recession. Consumer confidence is one measure used to evaluate economic sentiment. The term animal spirits has been used to describe the psychological factors underlying economic activity. Keynes, in his The General Theory of Employment, Interest and Money , was the first economist to claim that such emotional mindsets significantly affect

3312-695: A sharp drop in international trade , rising unemployment and slumping commodity prices. Several economists predicted that recovery might not appear until 2011 and that the recession would be the worst since the Great Depression of the 1930s. Economist Paul Krugman once commented on this as seemingly the beginning of "a second Great Depression". Governments and central banks responded with fiscal policy and monetary policy initiatives to stimulate national economies and reduce financial system risks. The recession renewed interest in Keynesian economic ideas on how to combat recessionary conditions. Economists advise that

3456-536: A statistical analysis based on the deviation from the Zipf distribution of the sizes of the world's largest financial entities to infer that the size of the shadow banking system may have been over $ 100 (~$ 131 billion in 2023) trillion in 2012. There are concerns that more business may move into the shadow banking system as regulators seek to bolster the financial system by making bank rules stricter. Like regular banks, shadow banks provide credit and generally increase

3600-1293: A technical standpoint, these institutions are subject to market risk , credit risk and especially liquidity risk , since their liabilities are short term while their assets are more long term and illiquid. This creates a problem, as they are not depositary institutions and do not have direct or indirect access to the support of their central bank in its role as lender of last resort . Therefore, during periods of market illiquidity, they could go bankrupt if unable to refinance their short-term liabilities. They were also highly leveraged. This meant that disruptions in credit markets would make them subject to rapid deleveraging , meaning they would have to pay off their debts by selling their long-term assets. A sell off of assets could cause further price declines of those assets and further losses and selloffs. In contrast to investment banks, money market funds do not go bankrupt—they distribute their assets (which are mainly short-term) pro rata to shareholders if their net asset value falls below $ .9995 per share. Only two funds ever have failed to pay investors $ 1.00 per share. The Reserve Primary Fund paid $ .99 per share to its shareholders and another fund paid its shareholders $ .96 per share in 1994. The securitization markets frequently tapped by

3744-509: A tool for taking excessive risks. Examples of vulnerabilities in the public sector included: statutory gaps and conflicts between regulators; ineffective use of regulatory authority; and ineffective crisis management capabilities. Bernanke also discussed " Too big to fail " institutions, monetary policy, and trade deficits. There are several "narratives" attempting to place the causes of the recession into context, with overlapping elements. Five such narratives include: Underlying narratives #1–3

3888-410: Is a hypothesis that growing income inequality and wage stagnation encouraged families to increase their household debt to maintain their desired living standard, fueling the bubble. Further, this greater share of income flowing to the top increased the political power of business interests, who used that power to deregulate or limit regulation of the shadow banking system. Narrative #5 challenges

4032-511: Is not an official designation" and that instead, "The designation of a recession is the province of a committee of experts at the National Bureau of Economic Research". The European Union, akin to the NBER's methodology, has embraced a definition of recession that integrates GDP alongside a spectrum of macroeconomic indicators, including employment and various other metrics. This approach allows for

4176-598: Is prevalent. The recommendations for G20 leaders on regulating shadow banks were due to be finalised by the end of 2012. The United States and the European Union are already considering rules to increase regulation of areas like securitisation and money market funds, although the need for money market fund reforms has been questioned in the United States in light of reforms adopted by the Securities and Exchange Commission in 2010. The International Monetary Fund suggested that

4320-624: Is referred to as an economic depression , although some argue that their causes and cures can be different. As an informal shorthand, economists sometimes refer to different recession shapes , such as V-shaped , U-shaped , L-shaped and W-shaped recessions. The type and shape of recessions are distinctive. In the US, v-shaped, or short-and-sharp contractions followed by rapid and sustained recovery, occurred in 1954 and 1990–1991; U-shaped (prolonged slump) in 1974–1975, and W-shaped, or double-dip recessions in 1949 and 1980–1982. Japan's 1993–1994 recession

4464-471: Is regarded by some as pejorative, and the term " market-based finance " has been proposed as an alternative. Former US Federal Reserve Chair Ben Bernanke provided the following definition in November 2013: "Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions—but do so outside, or in ways only loosely linked to,

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4608-462: Is the timing. Subprime lending increased from around 10% of mortgage origination historically to about 20% only from 2004 to 2006, with housing prices peaking in 2006. Blaming affordable housing regulations established in the 1990s for a sudden spike in subprime origination is problematic at best. A more proximate government action to the sudden rise in subprime lending was the SEC relaxing lending standards for

4752-530: The (inverted) yield curve appear to be more useful to predict a recession ahead of time than other variables, no single variable has proven to be an always reliable predictor whether recessions will actually (soon) appear, let alone predicting their sharpness and severity in terms of duration. The longest and deepest Treasury yield curve inversion in history began in July 2022, as the Federal Reserve sharply increased

4896-609: The 2007–2008 financial crisis , investment banks financed mortgages through off-balance-sheet (OBS) securitizations (e.g., asset-backed commercial paper programs) and hedged risk through off-balance sheet credit default swaps . Before the 2008 financial crisis, major investment banks were subject to considerably less stringent regulation than depository banks. In 2008, investment banks Morgan Stanley and Goldman Sachs became bank holding companies , Merrill Lynch and Bear Stearns were acquired by bank holding companies, and Lehman Brothers declared bankruptcy , essentially bringing

5040-501: The American Enterprise Institute , which advocates for private enterprise and limited government, have asserted that private lenders were encouraged to relax lending standards by government affordable housing policies. They cite The Housing and Community Development Act of 1992, which initially required that 30 percent or more of Fannie's and Freddie's loan purchases be related to affordable housing. The legislation gave HUD

5184-739: The Bank for International Settlements (BIS), investment banks and commercial banks may conduct much of their business in the shadow banking system (SBS) although most are not classified as SBS institutions themselves. At least one financial regulatory expert has said that regulated banking organizations are the largest shadow banks. The core activities of investment banks are subject to regulation and monitoring by central banks and other government institutions – but it has been common practice for investment banks to conduct many of their transactions in ways that do not show up on their conventional balance sheet accounting and so are not visible to regulators or unsophisticated investors. For example, before

5328-465: The Bureau of Labor Statistics Julius Shiskin suggested that a rough translation of the bureau's qualitative definition of a recession into a quantitative one that almost anyone can use might run like this: Over the years, some commentators dropped most of Shiskin's "recession-spotting" criteria for the simplistic rule-of-thumb of a decline in real GNI for two consecutive quarters. In the United States ,

5472-478: The Commodity Futures Trading Commission , put forth a policy paper asking for feedback from regulators, lobbyists, and legislators on the question of whether derivatives should be reported, sold through a central facility, or whether capital requirements should be required of their buyers. Greenspan, Rubin, and Levitt pressured her to withdraw the paper and Greenspan persuaded Congress to pass

5616-614: The IMF criteria for being a global recession only in the single calendar year 2009. That IMF definition requires a decline in annual real world GDP per‑capita . Despite the fact that quarterly data are being used as recession definition criteria by all G20 members , representing 85% of the world GDP , the International Monetary Fund (IMF) has decided—in the absence of a complete data set—not to declare/measure global recessions according to quarterly GDP data. The seasonally adjusted PPP ‑weighted real GDP for

5760-551: The International Monetary Fund defines the two key functions of the shadow banking system as securitization – to create safe assets, and collateral intermediation – to help reduce counterparty risks and facilitate secured transactions. In the US, before the 2007–2008 financial crisis , the shadow banking system had overtaken the regular banking system in supplying loans to various types of borrower; including businesses, home and car buyers, students and credit users. As they are often less risk averse than regular banks, entities from

5904-417: The International Monetary Fund , showing that when the role of rehypothecation was considered, in the U.S. the SBS had grown to over $ 10 trillion, about twice as much as previous estimates. During 1998, the highly leveraged and unregulated hedge fund Long-Term Capital Management failed and was bailed out by several major banks at the request of the government, which was concerned about possible damage to

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6048-455: The United Kingdom and Canada , a recession is defined as negative economic growth for two consecutive quarters. Governments usually respond to recessions by adopting expansionary macroeconomic policies , such as increasing money supply and decreasing interest rates or increasing government spending and decreasing taxation . In a 1974 article by The New York Times , Commissioner of

6192-436: The capital markets to refinance their operations. When the housing market began to deteriorate and their ability to obtain funds from investors through investments such as mortgage-backed securities declined, these investment banks could not refinance themselves. Investor refusal or inability to provide funds via the short-term markets was a primary cause of the failure of Bear Stearns and Lehman Brothers during 2008. From

6336-450: The fed funds rate to combat the 2021–2023 inflation surge . Despite widespread predictions by economists and market analysts of an imminent recession, none had materialized by July 2024, economic growth remained steady, and a Reuters survey of economists that month found they expected the economy to continue growing for the next two years. An earlier survey of bond market strategists found a majority no longer believed an inverted curve to be

6480-452: The liquidity of the financial sector. Yet unlike their more regulated competitors, they lack access to central bank funding or safety nets such as deposit insurance and debt guarantees . In contrast to traditional banks, shadow banks do not take deposits. Instead, they rely on short-term funding provided either by asset-backed commercial paper or by the repo market, in which borrowers in substance offer collateral as security against

6624-710: The over-the-counter (OTC) derivatives market, which grew rapidly in the decade up to the 2007–2008 financial crisis , reaching over US$ 650 trillion in notional contracts traded. This rapid growth mainly arose from credit derivatives . In particular these included: The market in CDS, for example, was insignificant in 2004 but rose to over $ 60 trillion in a few years. Because credit default swaps were not regulated as insurance contracts, companies selling them were not required to maintain sufficient capital reserves to pay potential claims. Demands for settlement of hundreds of billions of dollars of credit default swaps contracts issued by AIG ,

6768-608: The private sector as it pays down its debt. For example, economist Richard Koo wrote that Japan's "Great Recession" that began in 1990 was a "balance sheet recession". It was triggered by a collapse in land and stock prices, which caused Japanese firms to have negative equity , meaning their assets were worth less than their liabilities. Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. Corporate investment,

6912-479: The subprime mortgage crisis and helping to transform it into a global credit crunch . The shadow banking system has been implicated as significantly contributing to the 2007–2008 financial crisis . In a June 2008 speech, U.S. Treasury Secretary Timothy Geithner, then President and CEO of the New York Federal Reserve Bank, placed significant blame for the freezing of credit markets on a "run" on

7056-638: The $ 1 trillion mark. Shadow institutions typically do not have banking licenses ; they do not take deposits as a depository bank would and therefore are not subject to the same regulations. Complex legal entities comprising the system include hedge funds , structured investment vehicles (SIV), special purpose entity conduits (SPE), money market funds , repurchase agreement (repo) markets and other non-bank financial institutions . Many shadow banking entities are sponsored by banks or are affiliated with banks through their subsidiaries or parent bank holding companies. The inclusion of money market funds in

7200-429: The 19th and early 20th centuries, the current banking panic is a wholesale panic, not a retail panic. In the earlier episodes, depositors ran to their banks and demanded cash in exchange for their checking accounts. Unable to meet those demands, the banking system became insolvent. The current panic involved financial firms "running" on other financial firms by not renewing sale and repurchase agreements (repo) or increasing

7344-416: The 19th century. Yet, over the past 30-plus years, we permitted the growth of a shadow banking system – opaque and laden with short term debt – that rivaled the size of the traditional banking system. Key components of the market – for example, the multitrillion-dollar repo lending market, off-balance-sheet entities, and the use of over-the-counter derivatives – were hidden from view, without

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7488-580: The American, European, and Chinese financial sectors, and in perceived tax havens worldwide. Shadow banks can be involved in the provision of long-term loans like mortgages, facilitating credit across the financial system by matching investors and borrowers individually or by becoming part of a chain involving numerous entities, some of which may be mainstream banks. Due in part to their specialized structure, shadow banks can sometimes provide credit more cost-efficiently than traditional banks. A headline study by

7632-641: The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions. The NBER, a private economic research organization, defines an economic recession as: "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP , real income , employment, industrial production , and wholesale - retail sales ". The NBER also explains that: "a recession begins when

7776-534: The FCIC Republican minority dissenting report also concluded that U.S. housing policies were not a robust explanation for a wider global housing bubble. The hypothesis that a primary cause of the crisis was U.S. government housing policy requiring banks to make risky loans has been widely disputed, with Paul Krugman referring to it as "imaginary history". One of the other challenges with blaming government regulations for essentially forcing banks to make risky loans

7920-462: The Federal Reserve has been widely discussed, the main point of controversy remains the lowering of the Federal funds rate to 1% for more than a year, which, according to Austrian theorists , injected huge amounts of "easy" credit-based money into the financial system and created an unsustainable economic boom. There is an argument that Greenspan's actions in the years 2002–2004 were actually motivated by

8064-414: The Federal Reserve. Further, American International Group (AIG) had insured mortgage-backed and other securities but was not required to maintain sufficient reserves to pay its obligations when debtors defaulted on these securities. AIG was contractually required to post additional collateral with many creditors and counter-parties, touching off controversy when over $ 100 billion of U.S. taxpayer money

8208-625: The G20‑;zone, however, is a good indicator for the world GDP, and it was measured to have suffered a direct quarter on quarter decline during the three quarters from Q3‑2008 until Q1‑2009, which more accurately mark when the recession took place at the global level. According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the recession began in December 2007 and ended in June 2009, and thus extended over eighteen months. The years leading up to

8352-738: The Summit on Financial Markets and the World Economy," dated November 15, 2008, leaders of the Group of 20 cited the following causes: During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in

8496-561: The Treasury. The Treasury had earned another $ 323B in interest on bailout loans, resulting in an $ 87B profit. Economic and political commentators have argued the Great Recession was also an important factor in the rise of populist sentiment that resulted in the election of right-wing populist President Trump in 2016, and left-wing populist Bernie Sanders ' candidacy for the Democratic nomination. Recession Heterodox In economics ,

8640-498: The US, from $ 106,591 to $ 68,839 between 2005 and 2011. The US Financial Crisis Inquiry Commission , composed of six Democratic and four Republican appointees, reported its majority findings in January 2011. It concluded that "the crisis was avoidable and was caused by: There were two Republican dissenting FCIC reports. One of them, signed by three Republican appointees, concluded that there were multiple causes. In his separate dissent to

8784-476: The United States, and 21% in Denmark. Household defaults, underwater mortgages (where the loan balance exceeds the house value), foreclosures, and fire sales are now endemic to a number of economies. Household deleveraging by paying off debts or defaulting on them has begun in some countries. It has been most pronounced in the United States, where about two-thirds of the debt reduction reflects defaults." The onset of

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8928-508: The academic definition, the recession ended in the United States in June or July 2009. Journalist Robert Kuttner has argued that 'The Great Recession' is a misnomer. According to Kuttner, "recessions are mild dips in the business cycle that are either self-correcting or soon cured by modest fiscal or monetary stimulus. Because of the continuing deflationary trap, it would be more accurate to call this decade's stagnant economy The Lesser Depression or The Great Deflation." The Great Recession met

9072-517: The annual conference of the South East Asian Central Banks Research and Training Centre (SEACEN). "With the development of the originate-to-distribute model, banks and other lenders are able to extend loans to borrowers and then to package those loans into ABSs , CDOs , asset-backed commercial paper (ABCP) and structured investment vehicles (SIVs). These packaged securities are then sliced into various tranches , with

9216-513: The appearance of superior performance during boom times by simply taking greater pro-cyclical risks. Money market funds have zero leverage and thus do not pose this risk feature of shadow banks. Shadow institutions like SIVs and conduits , typically sponsored and guaranteed by commercial banks, borrowed from investors in short-term, liquid markets (such as the money market and commercial paper markets), so that they would have to repay and borrow again from these investors at frequent intervals. On

9360-457: The bailout measures started under the Bush administration and continued during his administration as completed and mostly profitable as of December 2014. As of January 2018, bailout funds had been fully recovered by the government, when interest on loans is taken into consideration. A total of $ 626B was invested, loaned, or granted due to various bailout measures, while $ 390B had been returned to

9504-463: The bailouts. In 2008, TARP allocated $ 426.4 billion to various major financial institutions. However, the US collected $ 441.7 billion in return from these loans in 2010, recording a profit of $ 15.3 billion. Nonetheless, there was a political shift from the Democratic party. Examples include the rise of the Tea Party and the loss of Democratic majorities in subsequent elections. President Obama declared

9648-503: The boom but increasing losses during the crisis. New accounting guidance was planned to require them to put some of these assets back onto their books during 2009, with the effect of reducing their capital ratios. One news agency estimated the amount of assets to be transferred at between $ 500 billion and $ 1 trillion. This transfer was considered as part of the stress tests performed by the government during 2009. The shadow banking system also conducts an enormous amount of trading activity in

9792-608: The broader financial system. Structured investment vehicles (SIVs) first came to public attention at the time of the Enron scandal . Since then, their use has become widespread in the financial world. In the years leading up to the crisis, the top four U.S. depository banks moved an estimated $ 5.2 trillion in assets and liabilities off their balance sheets into special purpose vehicles (SPEs) or similar entities. This enabled them to bypass regulatory requirements for minimum capital adequacy ratios , thereby increasing leverage and profits during

9936-480: The complex dynamics that contribute to economic downturns and can formulate effective strategies for mitigating their impact (Anderson, 2019; Patel, 2017). Economist Richard C. Koo wrote that under ideal conditions, a country's economy should have the household sector as net savers and the corporate sector as net borrowers, with the government budget nearly balanced and net exports near zero. A severe (GDP down by 10%) or prolonged (three or four years) recession

10080-451: The crisis were characterized by an exorbitant rise in asset prices and associated boom in economic demand. Further, the U.S. shadow banking system (i.e., non-depository financial institutions such as investment banks) had grown to rival the depository system yet was not subject to the same regulatory oversight, making it vulnerable to a bank run . US mortgage-backed securities , which had risks that were hard to assess, were marketed around

10224-668: The crisis) and vulnerabilities (i.e., structural weaknesses in the financial system, regulation and supervision) that amplified the shocks. Examples of triggers included: losses on subprime mortgage securities that began in 2007 and a run on the shadow banking system that began in mid-2007, which adversely affected the functioning of money markets. Examples of vulnerabilities in the private sector included: financial institution dependence on unstable sources of short-term funding such as repurchase agreements or Repos; deficiencies in corporate risk management; excessive use of leverage (borrowing to invest); and inappropriate usage of derivatives as

10368-410: The current storm. Once again, Minsky understood this dynamic. He spoke of the paradox of deleveraging, in which precautions that may be smart for individuals and firms—and indeed essential to return the economy to a normal state—nevertheless magnify the distress of the economy as a whole." There are many reasons why recessions happen. One overall reason can be lack of demand due to sharp developments in

10512-439: The current value of the property). Several sources have noted the failure of the US government to supervise or even require transparency of the financial instruments known as derivatives . Derivatives such as credit default swaps (CDSs) were unregulated or barely regulated. Michael Lewis noted CDSs enabled speculators to stack bets on the same mortgage securities. This is analogous to allowing many persons to buy insurance on

10656-510: The decline in property values experienced during the subprime mortgage crisis. Further, reduced consumption due to higher household leverage can account for a significant decline in employment levels. Policies that help reduce mortgage debt or household leverage could therefore have stimulative effects (Smith & Johnson, 2012). A liquidity trap is a Keynesian theory that a situation can develop in which interest rates reach near zero ( zero interest-rate policy ) yet do not effectively stimulate

10800-429: The definition of shadow banking has been questioned in view of their relatively simple structure and the highly regulated and unleveraged nature of these entities, which are considered safer, more liquid, and more transparent than banks. Shadow banking institutions are typically intermediaries between investors and borrowers. For example, an institutional investor like a pension fund may be willing to lend money, while

10944-583: The development of money market funds in the 1970s – money market accounts function largely as bank deposits, but money market funds are not regulated as banks. The concept of hidden high priority debt dates back at least 400 years to Twyne's Case and the Statute of Bankrupts (1542) in the UK, and to Clow v. Woods in the U.S. These legal cases led to the development of modern fraudulent transfer law. The concept of credit growth by unregulated institutions, though not

11088-517: The downturn. In advanced economies, during the five years preceding 2007, the ratio of household debt to income rose by an average of 39 percentage points, to 138 percent. In Denmark, Iceland, Ireland, the Netherlands, and Norway, debt peaked at more than 200 percent of household income. A surge in household debt to historic highs also occurred in emerging economies such as Estonia, Hungary, Latvia, and Lithuania. The concurrent boom in both house prices and

11232-604: The economic crisis took most people by surprise. A 2009 paper identifies twelve economists and commentators who, between 2000 and 2006, predicted a recession based on the collapse of the then-booming housing market in the United States: Dean Baker , Wynne Godley , Fred Harrison , Michael Hudson , Eric Janszen , Med Jones Steve Keen , Jakob Brøchner Madsen , Jens Kjaer Sørensen, Kurt Richebächer , Nouriel Roubini , Peter Schiff , and Robert Shiller . By 2007, real estate bubbles were still under way in many parts of

11376-405: The economic headwinds that slowed the recovery: On the political front, widespread anger at banking bailouts and stimulus measures (begun by President George W. Bush and continued or expanded by President Obama ) with few consequences for banking leadership, were a factor in driving the country politically rightward starting in 2010. The Troubled Asset Relief Program (TARP) was the largest of

11520-423: The economy reaches a peak of activity and ends when the economy reaches its through." The NBER is considered the official arbiter of recession start and end dates for the United States. The Bureau of Economic Analysis , an independent federal agency that provides official macroeconomic and industry statistics, says "the often-cited identification of a recession with two consecutive quarters of negative GDP growth

11664-442: The economy. Economist Robert J. Shiller wrote that the term "refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people." Behavioral economics has also explained many psychological biases that may trigger

11808-475: The economy. In theory, near-zero interest rates should encourage firms and consumers to borrow and spend. However, if too many individuals or corporations focus on saving or paying down debt rather than spending, lower interest rates have less effect on investment and consumption behavior; increasing the money supply is like " pushing on a string ". Economist Paul Krugman described the U.S. 2009 recession and Japan's lost decade as liquidity traps. One remedy to

11952-515: The entire banking system were about $ 10 trillion." In 2016, Benoît Cœuré ( ECB executive board member ) stated that controlling shadow banking should be the focus to avoid a future financial crisis, since the banks' leverage had been lowered. S&P Global estimates that, at end-2022, shadow banking held about $ 63 trillion in financial assets in major global jurisdictions, representing 78% of global GDP, up from $ 28 trillion and 68% of global GDP in 2009. Shadow institutions are not subject to

12096-757: The entities in the shadow banking system by their counterparties. The rapid increase of the dependency of bank and non-bank financial institutions on the use of these off-balance sheet entities to fund investment strategies had made them critical to the credit markets underpinning the financial system as a whole, despite their existence in the shadows, outside of the regulatory controls governing commercial banking activity. Furthermore, these entities were vulnerable because they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would make them subject to rapid deleveraging, selling their long-term assets at depressed prices. Economist Paul Krugman described

12240-410: The exception of conforming mortgages, which could be sold to Fannie Mae and Freddie Mac . U.S. Treasury Secretary Timothy Geithner has stated that the "combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles." In January 2012, the global Financial Stability Board announced its intention to further regulate the shadow banking system, in

12384-470: The fall of Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market. There was the equivalent of a bank run on the shadow banking system , resulting in many large and well established investment banks and commercial banks in the United States and Europe suffering huge losses and even facing bankruptcy, resulting in massive public financial assistance (government bailouts). The global recession that followed resulted in

12528-455: The financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank." He referred to this lack of controls as "malign neglect." One former banking regulator has said that regulated banking organizations are the largest shadow banks and that shadow banking activities within

12672-558: The following are considered possible predictors: Manufacturing: Industrial Production: Chemical Activity: Transportation: Corporate Profits: Employment: Personal Income: Household Savings and Consumer Debt: Retail Sales, Consumer Confidence and Consumer Expenditures: Housing and non-residential construction: Credit Markets: Business Expectations: Margin of stock market traders: Asset Prices: Gross Domestic Product: Unorthodox Recession Indicators: Overview of recession indicators: Sahm Recession Indicator signals

12816-449: The following categories: Economic factors: Financial factors: External shocks Summary: Why recessions happen is a complex phenomena often resulting from a interplay of various factors. While these factors can individually contribute to a recession, the cumulative impact of several occurring simultaneously can significantly amplify the negative effect on the economy. Recessions are very challenging to predict. While some variables like

12960-447: The following recovery weaker. Robert Reich claims the amount of debt in the US economy can be traced to economic inequality , assuming that middle-class wages remained stagnant while wealth concentrated at the top, and households "pull equity from their homes and overload on debt to maintain living standards". The IMF reported in April 2012: "Household debt soared in the years leading up to

13104-488: The highly rated tranches going to the more risk-averse investors and the subordinate tranches going to the more adventurous investors." This sector was worth an estimated $ 60 trillion in 2010, compared to prior FSB estimates of $ 27 trillion in 2002. While the sector's assets declined during the 2007–2008 financial crisis , they have since returned to their pre-crisis peak except in the United States where they have declined substantially. A 2013 paper by Fiaschi et al. used

13248-467: The inflow of investment dollars required to fund the U.S. trade deficit was a major cause of the housing bubble and financial crisis: "The trade deficit, less than 1% of GDP in the early 1990s, hit 6% in 2006. That deficit was financed by inflows of foreign savings, in particular from East Asia and the Middle East. Much of that money went into dodgy mortgages to buy overvalued houses, and the financial crisis

13392-466: The interests of the real economy. The term "shadow banking system" is attributed to Paul McCulley of PIMCO , who coined it at Federal Reserve Bank of Kansas City 's Economic Symposium in Jackson Hole , Wyoming in 2007 where he defined it as "the whole alphabet soup of levered up non-bank investment conduits, vehicles, and structures." McCulley identified the birth of the shadow banking system with

13536-531: The kind of financial vulnerability that made the Great Depression possible – and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank." He referred to this lack of controls as "malign neglect". During 2008, three of

13680-444: The largest insurance company in the world, led to its financial collapse. Despite the prevalence and volume of this activity, it attracted little outside attention before 2007, and much of it was off the balance sheets of the contracting parties' affiliated banks. The uncertainty this created among counterparties contributed to the deterioration of credit conditions. Since then the shadow banking system has been blamed for aggravating

13824-568: The largest U.S. investment banks either went bankrupt ( Lehman Brothers ) or were sold at fire sale prices to other banks ( Bear Stearns and Merrill Lynch ). The investment banks were not subject to the more stringent regulations applied to depository banks. These failures exacerbated the instability in the global financial system. The remaining two investment banks, Morgan Stanley and Goldman Sachs , potentially facing failure, opted to become commercial banks, thereby subjecting themselves to more stringent regulation but receiving access to credit via

13968-522: The largest investment banks into the regulated depository sphere. The volume of transactions in the shadow banking system grew dramatically after the year 2000. Its growth was checked by the 2007–2008 financial crisis and for a short while it declined in size, both in the US and in the rest of the world. In 2007 the Financial Stability Board estimated the size of the SBS in the U.S. to be around $ 25 trillion , but by 2011 estimates indicated

14112-434: The levels projected by their associated agency credit ratings . Commercial mortgage-backed securities suffered from association and from a general decline in economic activity, and the entire complex nearly shut down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of funds. In February 2009, Ben Bernanke stated that securitization markets remained effectively shut, with

14256-579: The main headline is that all sorts of poor countries became kind of rich, making things like TVs and selling us oil. China, India, Abu Dhabi, Saudi Arabia made a lot of money and banked it." Describing the crisis in Europe, Paul Krugman wrote in February 2012 that: "What we're basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe." Another narrative about

14400-461: The majority and minority opinions of the FCIC, Commissioner Peter J. Wallison of the American Enterprise Institute (AEI) primarily blamed U.S. housing policy, including the actions of Fannie and Freddie , for the crisis. He wrote: "When the bubble began to deflate in mid-2007, the low quality and high risk loans engendered by government policies failed in unprecedented numbers." In its "Declaration of

14544-485: The meaning and scope of shadow banking are disputed in academic literature. In China, shadow banking activities are closely associated with commercial banks, involving trust loans, entrusted loans, undiscounted bank acceptance bills, financial products, and interbank business. These activities are often regulated by a weak level and a limited coverage of supervision compared to highly regulated on-balance sheet activities. According to Hervé Hannoun, deputy general manager of

14688-658: The need to take the U.S. economy out of the early 2000s recession caused by the bursting of the dot-com bubble : although by doing so he did not avert the crisis, but only postponed it. Another narrative focuses on high levels of private debt in the US economy. USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990. Faced with increasing mortgage payments as their adjustable rate mortgage payments increased, households began to default in record numbers, rendering mortgage-backed securities worthless. High private debt levels also impact growth by making recessions deeper and

14832-534: The obligation and defaulted; U.S. taxpayers paid over $ 100 billion to global financial institutions to honor AIG obligations, generating considerable outrage. A 2008 investigative article in The Washington Post found leading government officials at the time (Federal Reserve Board Chairman Alan Greenspan , Treasury Secretary Robert Rubin , and SEC Chairman Arthur Levitt ) vehemently opposed any regulation of derivatives. In 1998, Brooksley E. Born , head of

14976-484: The origin has been focused on the respective parts played by public monetary policy (notably in the US) and by the practices of private financial institutions. In the U.S., mortgage funding was unusually decentralised, opaque, and competitive, and it is believed that competition between lenders for revenue and market share contributed to declining underwriting standards and risky lending. While Alan Greenspan's role as Chairman of

15120-517: The other hand, they used the funds to lend to corporations or to invest in longer-term, less liquid (i.e. harder to sell) assets. In many cases, the long-term assets purchased were mortgage-backed securities , sometimes called "toxic assets" or "legacy assets" in the press. These assets declined significantly in value as housing prices declined and foreclosures increased during 2007–2009. In the case of investment banks, this reliance on short-term financing required them to return frequently to investors in

15264-528: The planet. Though no one knew they were in it at the time, the Great Recession had a significant economic and political impact on the United States. While the recession technically lasted from December 2007 – June 2009 (the nominal GDP trough), many important economic variables did not regain pre-recession (November or Q4 2007) levels until 2011–2016. For example, real GDP fell $ 650 billion (4.3%) and did not recover its $ 15 trillion pre-recession level until Q3 2011. Household net worth, which reflects

15408-470: The popular claim (narrative #4) that subprime borrowers with shoddy credit caused the crisis by buying homes they couldn't afford. This narrative is supported by new research showing that the biggest growth of mortgage debt during the U.S. housing boom came from those with good credit scores in the middle and top of the credit score distribution—and that these borrowers accounted for a disproportionate share of defaults. The Economist wrote in July 2012 that

15552-427: The possibility of a recession: Except for the above, there are no known completely reliable predictors. Analysis by Prakash Loungani of the International Monetary Fund found that only two of the sixty recessions around the world during the 1990s had been predicted by a consensus of economists one year earlier, while there were zero consensus predictions one year earlier for the 49 recessions during 2009. However,

15696-510: The power to set future requirements. These rose to 42 percent in 1995 and 50 percent in 2000, and by 2008 a 56 percent minimum was established. However, the Financial Crisis Inquiry Commission (FCIC) Democratic majority report concluded that Fannie & Freddie "were not a primary cause" of the crisis and that CRA was not a factor in the crisis. Further, since housing bubbles appeared in multiple countries in Europe as well,

15840-419: The prices of the inputs used in producing goods and services. Another main reason can be problems e.g. in financial markets. Because recessions have many likely explanations, it is demanding to predict them. Some variables might at first glance be the causes of recessions, but they could also be the results of a recession, which means they are endogenous to recessions. One can summarize the causes of recessions in

15984-484: The private sector savings curve is elastic even during a balance sheet recession (responsive to changes in real interest rates), disagreeing with Koo's view that it is inelastic (non-responsive to changes in real interest rates). A July 2012 survey of balance sheet recession research reported that consumer demand and employment are affected by household leverage levels. Both durable and non-durable goods consumption declined as households moved from low to high leverage with

16128-408: The protections we had constructed to prevent financial meltdowns. We had a 21st-century financial system with 19th-century safeguards. The Gramm–Leach–Bliley Act (1999), which reduced the regulation of banks by allowing commercial and investment banks to merge, has also been blamed for the crisis, by Nobel Prize –winning economist Joseph Stiglitz among others. Peter Wallison and Edward Pinto of

16272-400: The recession have been described as a symptom of another, deeper crisis by a number of economists. For example, Ravi Batra argues that growing inequality of financial capitalism produces speculative bubbles that burst and result in depression and major political changes . Feminist economists Ailsa McKay and Margunn Bjørnholt argue that the financial crisis and the response to it revealed

16416-487: The recovery was that both individuals and businesses paid down debts for several years, as opposed to borrowing and spending or investing as had historically been the case. This shift to a private sector surplus drove a sizable government deficit. However, the federal government held spending at about $ 3.5 trillion from fiscal years 2009–2014 (thereby decreasing it as a percent of GDP), a form of austerity . Then-Fed Chair Ben Bernanke explained during November 2012 several of

16560-460: The repo margin ("haircut"), forcing massive deleveraging, and resulting in the banking system being insolvent. The Financial Crisis Inquiry Commission reported in January 2011: In the early part of the 20th century, we erected a series of protections – the Federal Reserve as a lender of last resort , federal deposit insurance, ample regulations – to provide a bulwark against the panics that had regularly plagued America's banking system in

16704-411: The run on the shadow banking system as the "core of what happened" to cause the crisis. "As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible—and they should have responded by extending regulations and

16848-449: The same house. Speculators that bought CDS protection were betting significant mortgage security defaults would occur, while the sellers (such as AIG ) bet they would not. An unlimited amount could be wagered on the same housing-related securities, provided buyers and sellers of the CDS could be found. When massive defaults occurred on underlying mortgage securities, companies like AIG that were selling CDS were unable to perform their side of

16992-505: The same prudential regulations as depository banks, so that they do not have to keep as high financial reserves relative to their market exposure . Thus they can have a very high level of financial leverage, with a high ratio of debt relative to the liquid assets available to pay immediate claims. High leverage magnifies profits during boom periods and losses during downturns. This high leverage will also not be readily apparent to investors, and shadow institutions may therefore be able to create

17136-438: The service of money.... The characteristic peculiarity of these forms of credit is that they spring up without being subject to any central control, but once they have come into existence their convertibility into other forms of money must be possible if a collapse of credit is to be avoided. The full extent of the shadow banking system was not widely recognised until work was published in 2010 by Manmohan Singh and James Aitken of

17280-400: The shadow banking system started to close down in the spring of 2007, with the first failure of auction-rate offerings to attract bids. As excesses associated with the U.S. housing bubble became widely understood and borrower default rates rose, residential mortgage-backed securities (RMBS) deflated. Tranched collateralized debt obligations (CDOs) lost value as default rates increased beyond

17424-543: The shadow banking system will sometimes provide loans to borrowers who might otherwise be refused credit. Money market funds are considered more risk averse than regular banks and thus lack this risk characteristic. Leverage (the means by which banks multiply and spread risk) is considered to be a key risk feature of shadow banks, as well as traditional banks. Money market funds are completely unleveraged and thus do not have this risk characteristic. Shadow banking can threaten financial stability in countries where shadow banking

17568-454: The start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months. Shadow banking system Examples of NBFIs include hedge funds , insurance firms , pawn shops , cashier's check issuers, check cashing locations, payday lending , currency exchanges , and microloan organizations . The phrase "shadow banking"

17712-513: The stimulus measures such as quantitative easing (pumping money into the system) and holding down central bank wholesale lending interest rate should be withdrawn as soon as economies recover enough to "chart a path to sustainable growth ". The distribution of household incomes in the United States became more unequal during the post-2008 economic recovery . Income inequality in the United States grew from 2005 to 2012 in more than two thirds of metropolitan areas. Median household wealth fell 35% in

17856-649: The stock market meant that household debt relative to assets held broadly stable, which masked households' growing exposure to a sharp fall in asset prices. When house prices declined, ushering in the global financial crisis, many households saw their wealth shrink relative to their debt, and, with less income and more unemployment, found it harder to meet mortgage payments. By the end of 2011, real house prices had fallen from their peak by about 41% in Ireland, 29% in Iceland, 23% in Spain and

18000-556: The sum of liabilities plus equity. If asset prices fall below the value of the debt incurred to purchase them, then the equity must be negative, meaning the consumer or corporation is insolvent. Economist Paul Krugman wrote in 2014 that "the best working hypothesis seems to be that the financial crisis was only one manifestation of a broader problem of excessive debt—that it was a so-called "balance sheet recession". In Krugman's view, such crises require debt reduction strategies combined with higher government spending to offset declines from

18144-489: The system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions. Federal Reserve Chair Ben Bernanke testified in September 2010 before the FCIC regarding the causes of the crisis. He wrote that there were shocks or triggers (i.e., particular events that touched off

18288-466: The term "shadow banking system", dates at least to 1935, when Friedrich Hayek stated: There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do

18432-490: The top investment banks during an April 2004 meeting with bank leaders. These banks increased their risk-taking shortly thereafter, significantly increasing their purchases and securitization of lower-quality mortgages, thus encouraging additional subprime and Alt-A lending by mortgage companies. This action by its investment bank competitors also resulted in Fannie Mae and Freddie Mac taking on more risk. The financial crisis and

18576-399: The traditional system of regulated depository institutions. Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper [ABCP] conduits, money market funds , markets for repurchase agreements , investment banks , and mortgage companies" Shadow banking has grown in importance to rival traditional depository banking, and

18720-657: The true size of the shadow banking system may have been over $ 100 (~$ 131.00 in 2023) trillion in 2012. According to the Financial Stability Board the sector's size grew to $ 100 (~$ 124.00 in 2023) trillion in 2016. The shadow activities of traditional banks grew rapidly in China during 2002-2018, but the United States and Canada still top the Average Shadow Banking Index by far. In 2024, the amount US financial institutions have loaned to shadow banks surpassed

18864-561: The two policy priorities should be to reduce spillovers from the shadow banking system to the main banking system and to reduce procyclicality and systemic risk within the shadow banking system itself. The G20 leaders meeting in Russia in September 2013, will endorse the new Financial Stability Board (FSB) global regulations for the shadow banking systems which will come into effect by 2015. Many "shadow bank"-like institutions and vehicles have emerged in American and European markets, between

19008-512: The value of both stock markets and housing prices, fell $ 11.5 trillion (17.3%) and did not regain its pre-recession level of $ 66.4 trillion until Q3 2012. The number of persons with jobs (total non-farm payrolls) fell 8.6 million (6.2%) and did not regain the pre-recession level of 138.3 million until May 2014. The unemployment rate peaked at 10.0% in October 2009 and did not return to its pre-recession level of 4.7% until May 2016. A key dynamic slowing

19152-452: The word "recession" exist: one sense referring definitively to "a period of reduced economic activity" and ongoing hardship; and the more allegoric interpretation used in economics , which is defined operationally , referring specifically to the contraction phase of a business cycle , with two or more consecutive quarters of GDP contraction (negative GDP growth rate) and typically used to influence abrupt changes in monetary policy. Under

19296-421: The world's GDP were caught in a liquidity trap. Behavior that may be optimal for an individual (e.g., saving more during adverse economic conditions) can be detrimental if too many individuals pursue the same behavior, as ultimately, one person's consumption is another person's income. Too many consumers attempting to save (or pay down debt) simultaneously is called the paradox of thrift and can cause or deepen

19440-453: The world, as they offered higher yields than U.S. government bonds. Many of these securities were backed by subprime mortgages, which collapsed in value when the U.S. housing bubble burst during 2006 and homeowners began to default on their mortgage payments in large numbers starting in 2007. The emergence of subprime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and

19584-544: The world, especially in the United States , France, the United Kingdom , Spain , the Netherlands, Australia, the United Arab Emirates, New Zealand , Ireland , Poland , South Africa , Greece , Bulgaria , Croatia , Norway , Singapore , South Korea , Sweden , Finland , Argentina , the Baltic states , India , Romania , Ukraine and China . U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at

19728-575: The years 2000 and 2008, and have come to play an important role in providing credit across the global financial system . In a June 2008 speech, Timothy Geithner , then president and CEO of the Federal Reserve Bank of New York , described the growing importance of what he called the "non-bank financial system": "In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities , tender option bonds and variable rate demand notes , had

19872-489: Was U-shaped and its 8-out-of-9 quarters of contraction in 1997–1999 can be described as L-shaped. Korea , Hong Kong and South-east Asia experienced U-shaped recessions in 1997–1998, although Thailand 's eight consecutive quarters of decline should be termed L-shaped. Recessions have psychological and confidence aspects. For example, if companies expect economic activity to slow, they may reduce employment levels and save money rather than invest. Such expectations can create

20016-539: Was a factor in the subprime mortgage crisis of 2007–2008 and the global recession that followed . Paul McCulley of investment management firm PIMCO coined the term "shadow banking". Shadow banking is sometimes said to include entities such as hedge funds , money market funds , structured investment vehicles (SIV), "credit investment funds, exchange-traded funds , credit hedge funds , private equity funds , securities broker-dealers , credit insurance providers , securitization and finance companies." Still,

20160-717: Was able to accurately predict the advance of this recession, except for minor signals in the sudden rise of forecast probabilities, which were still well under 50%. The recession was not felt equally around the world; whereas most of the world's developed economies , particularly in North America, South America and Europe, fell into a severe, sustained recession, many more recently developing economies suffered far less impact, particularly China , India and Indonesia , whose economies grew substantially during this period. Similarly, Oceania suffered minimal impact , in part due to its proximity to Asian markets. Two interpretations of

20304-419: Was called the subprime mortgage crisis . The combination of banks being unable to provide funds to businesses, and homeowners paying down debt rather than borrowing and spending, resulted in the Great Recession that began in the U.S. officially in December 2007 and lasted until June 2009, thus extending over 19 months. As with most other recessions, it appears that no known formal theoretical or empirical model

20448-438: Was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy. Krugman discussed the balance sheet recession concept in 2010, agreeing with Koo's situation assessment and view that sustained deficit spending when faced with

20592-452: Was paid out to major global financial institutions on behalf of AIG. While this money was legally owed to the banks by AIG (under agreements made via credit default swaps purchased from AIG by the institutions), a number of Congressmen and media members expressed outrage that taxpayer money was used to bail out banks. Economist Gary Gorton wrote in May 2009 Unlike the historical banking panics of

20736-401: Was the result." In May 2008, NPR explained in their Peabody Award winning program " The Giant Pool of Money " that a vast inflow of savings from developing nations flowed into the mortgage market, driving the U.S. housing bubble. This pool of fixed income savings increased from around $ 35 trillion in 2000 to about $ 70 trillion by 2008. NPR explained this money came from various sources, "[b]ut

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