A report on Great Recession and Subprime mortgage crisis

World map showing real GDP growth rates for 2009; countries in brown were in a recession.
President George W. Bush discusses Education, Entrepreneurship & Home Ownership at the Indiana Black Expo in 2005
A bank run at a branch of the Northern Rock bank in Brighton, England, on September 14, 2007, amid speculation of problems, prior to its 2008 nationalisation.
Subprime mortgage lending jumped dramatically during the 2004–2006 period preceding the crisis (source: Financial Crisis Inquiry Commission Report, p. 70, Fig. 5.2)
U.S. residential and non-residential investment fell relative to GDP during the crisis
Federal funds rate history and recessions
U.S. households and financial businesses significantly increased borrowing (leverage) in the years leading up to the crisis
Factors contributing to housing bubble
US household debt relative to disposable income and GDP.
Domino effect as housing prices declined
U.S. Changes in Household Debt as a percentage of GDP for 1989–2016. Homeowners paying down debt for 2009–2012 was a headwind to the recovery. Economist Carmen Reinhart explained that this behavior tends to slow recoveries from financial crises relative to typical recessions.
Housing price appreciation in selected countries, 2002–2008
Housing price appreciation in selected countries, 2002–2008
U.S. households and financial businesses significantly increased borrowing (leverage) in the years leading up to the crisis.
Securitization markets were impaired during the crisis.
U.S. residential and non-residential investment fell relative to GDP during the crisis
Several major U.S. economic variables had recovered from the 2007–2009 Subprime mortgage crisis and Great Recession by the 2013–2014 time period.
Household debt relative to disposable income and GDP
U.S. Real GDP – Contributions to Percent Change by Component 2007–2009
Existing homes sales, inventory, and months supply, by quarter
Public Debt to GDP Ratio for Selected European Countries – 2008 to 2011. Source Data: Eurostat
Vicious cycles in the housing and financial markets
Relationship between fiscal tightening (austerity) in Eurozone countries with their GDP growth rate, 2008–2012
A mortgage brokerage in the US advertising subprime mortgages in July 2008
Slovenian anarchist anti-fascist protest due to the great recession.
Historically less than 2% of homebuyers lost their homes to foreclosure. But by 2009 over 40% of subprime adjustable rate mortgages were past due. (source: Financial Crisis Inquiry Report, p.217, figure 11.2)
Sydney's financial district at night. Throughout the Great Recession, the Australian economy remained resilient and stable.
Growth in mortgage loan fraud based upon US Department of the Treasury Suspicious Activity Report Analysis
The anti-austerity movement in Spain, May 2011
Number of U.S. residential properties subject to foreclosure actions by quarter (2007–2012)
Federal Reserve Holdings of Treasury and Mortgage-Backed Securities
Comparison of the growth of traditional banking and shadow banking
Bank bailouts in the United Kingdom and in the United States in proportion to their GDPs.
Borrowing under a securitization structure
IMF diagram of CDO and RMBS
Leverage ratios of investment banks increased significantly between 2003 and 2007.
MBS credit rating downgrades, by quarter
U.S. Subprime lending expanded dramatically 2004–2006.
Franklin Raines earned $90 million in salary and bonuses while he was head of Fannie Mae.
Federal funds rate and various mortgage rates
U.S. current account or trade deficit through 2012
Securitization markets were impaired during the crisis.
The TED spread (the difference between the interest rates on interbank loans and on the safer short-term U.S. government debt) – an indicator of credit risk – increased dramatically during September 2008.
Impacts from the crisis on key wealth measures
U.S. Real GDP – Contributions to percent change by component 2007–2009
Public debt to GDP ratio for selected European countries – 2008 to 2012. Source Data: Eurostat
Relationship between fiscal tightening (austerity) in Eurozone countries with their GDP growth rate, 2008–2012
This chart compares U.S. potential GDP under two CBO forecasts (one from 2007 and one from 2016) versus the actual real GDP. It is based on a similar diagram from economist Larry Summers from 2014.
U.S. savings and investment; savings less investment is the private sector financial surplus
Sectoral financial balances in US economy 1990–2017. By definition, the three balances must net to zero. Since 2009, the US foreign surplus (trade deficit) and private sector surplus have driven a government budget deficit.
Federal Reserve holdings of treasury (blue) and mortgage-backed securities (red)
Common equity to total assets ratios for major US banks
People queuing outside a Northern Rock bank branch in Birmingham, United Kingdom, on September 15, 2007, to withdraw their savings because of the subprime crisis.
U.S. Changes in Household Debt as a percentage of GDP for 1989–2016. Homeowners paying down debt for 2009–2012 was a headwind to the recovery. Economist Carmen Reinhart explained that this behavior tends to slow recoveries from financial crises relative to typical recessions.
U.S. federal government spending was held relatively level around $3.5 trillion from 2009-2014, which created a headwind to recovery, reducing real GDP growth by approximately 0.5% per quarter (annualized) on average between Q3 2010 and Q2 2014.
Several major U.S. economic variables had recovered from the 2007–2009 Subprime mortgage crisis and Great Recession by the 2013–2014 time period.
U.S. median family net worth peaked in 2007, declined due to the Great Recession until 2013, and only partially recovered by 2016.

Declines in residential investment preceded the Great Recession and were followed by reductions in household spending and then business investment.

- Subprime mortgage crisis

This 2007–2008 phase was called the subprime mortgage crisis.

- Great Recession
World map showing real GDP growth rates for 2009; countries in brown were in a recession.

9 related topics with Alpha

Overall
The TED spread (in red), an indicator of perceived risk in the general economy, increased significantly during the financial crisis, reflecting an increase in perceived credit risk. The TED spread spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008, reaching a record 4.65% on October 10, 2008.

Financial crisis of 2007–2008

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Severe worldwide economic crisis that occurred in the early 21st century.

Severe worldwide economic crisis that occurred in the early 21st century.

The TED spread (in red), an indicator of perceived risk in the general economy, increased significantly during the financial crisis, reflecting an increase in perceived credit risk. The TED spread spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008, reaching a record 4.65% on October 10, 2008.
World map showing real GDP growth rates for 2009 (countries in brown were in recession)
Share in GDP of U.S. financial sector since 1860
The New York City headquarters of Lehman Brothers
US inequality from 1913 to 2008.
People queuing outside a Northern Rock branch in the United Kingdom to withdraw their savings during the financial crisis.
Federal Funds Rate compared to U.S. Treasury interest rates
US subprime lending expanded dramatically 2004–2006
A graph showing the median and average sales prices of new homes sold in the United States between 1963 and 2016 (not adjusted for inflation)
US current account deficit.
Leverage ratios of investment banks increased significantly between 2003 and 2007.
Household debt relative to disposable income and GDP.
IMF Diagram of CDO and RMBS
Diagram of CMLTI 2006 – NC2
A protester on Wall Street in the wake of the AIG bonus payments controversy is interviewed by news media.
Securitization markets were impaired during the crisis
Global copper prices

Mortgage-backed securities (MBS) tied to American real estate, as well as a vast web of derivatives linked to those MBS, collapsed in value.

The crisis sparked the Great Recession which resulted in increases in unemployment and suicide and decreases in institutional trust and fertility, among other metrics.

Securitization markets were impaired during the crisis

Shadow banking system

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Term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulations.

Term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulations.

Securitization markets were impaired during the crisis

Shadow banking has grown in importance to rival traditional depository banking, and was a factor in the subprime mortgage crisis of 2007–2008 and the global recession that followed.

Repurchase agreement or "Repo" transaction components. In step one, the investor provides $80 cash and receives $100 in collateral, typically bonds. In step two, the borrower buys back the collateral, paying the investor their initial cash plus an interest amount. The "repo rate" is the interest rate received by the investor, in this case (88-80)/80 = 10%, while the "Haircut" is a ratio of the cash loan to collateral (100-80)/100 = 20%.

Repurchase agreement

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Form of short-term borrowing, mainly in government securities.

Form of short-term borrowing, mainly in government securities.

Repurchase agreement or "Repo" transaction components. In step one, the investor provides $80 cash and receives $100 in collateral, typically bonds. In step two, the borrower buys back the collateral, paying the investor their initial cash plus an interest amount. The "repo rate" is the interest rate received by the investor, in this case (88-80)/80 = 10%, while the "Haircut" is a ratio of the cash loan to collateral (100-80)/100 = 20%.
Composition of SOFR Rate
Secured Overnight Financing Rate or SOFR, a proxy for the overnight repo interest rate. During September 2019, the SOFR significantly increased, resulting in intervention by the U.S Federal Reserve.

In 2007–2008, a run on the repo market, in which funding for investment banks was either unavailable or at very high interest rates, was a key aspect of the subprime mortgage crisis that led to the Great Recession.

Bear Stearns

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Bear Stearns' former offices at 383 Madison Avenue

The Bear Stearns Companies, Inc. was a New York-based global investment bank, securities trading and brokerage firm that failed in 2008 as part of the global financial crisis and recession, and was subsequently sold to JPMorgan Chase.

The company's main business areas before its failure were capital markets, investment banking, wealth management, and global clearing services, and it was heavily involved in the subprime mortgage crisis.

Headquarters of AIG, an insurance company rescued by the United States government during the subprime mortgage crisis

Too big to fail

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Theory in banking and finance that asserts that certain corporations, particularly financial institutions, are so large and so interconnected that their failure would be disastrous to the greater economic system, and that they therefore must be supported by governments when they face potential failure.

Theory in banking and finance that asserts that certain corporations, particularly financial institutions, are so large and so interconnected that their failure would be disastrous to the greater economic system, and that they therefore must be supported by governments when they face potential failure.

Headquarters of AIG, an insurance company rescued by the United States government during the subprime mortgage crisis
Assets of largest U.S. banks per FY2012 Annual Reports
Percentage of banking assets held by largest five U.S. banks, 1997–2011
A man at Occupy Wall Street protesting institutions deemed too big to fail
The leverage ratio, measured as debt divided by equity, for investment bank Goldman Sachs from 2003–2012. The lower the ratio, the greater the ability of the firm to withstand losses.

He continued that: "Governments provide support to too-big-to-fail firms in a crisis not out of favoritism or particular concern for the management, owners, or creditors of the firm, but because they recognize that the consequences for the broader economy of allowing a disorderly failure greatly outweigh the costs of avoiding the failure in some way. Common means of avoiding failure include facilitating a merger, providing credit, or injecting government capital, all of which protect at least some creditors who otherwise would have suffered losses. ... If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved."

As of April 30, 2014, Serageldin remains the "only Wall Street executive prosecuted as a result of the financial crisis" that triggered the Great Recession.

Krugman in 2008

Paul Krugman

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American economist and public intellectual, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for The New York Times.

American economist and public intellectual, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for The New York Times.

Krugman in 2008
Paul Krugman, Roger Tsien, Martin Chalfie, Osamu Shimomura, Makoto Kobayashi and Toshihide Masukawa, Nobel Prize Laureates 2008, at a press conference at the Swedish Academy of Science in Stockholm.
Krugman giving a lecture at the German National Library in Frankfurt in 2008.
Graph illustrating Krugman's 'core-periphery' model. The horizontal axis represents costs of trade, while the vertical axis represents the share of either region in manufacturing. Solid lines denote stable equilibria, dashed lines denote unstable equilibria.
President George W. Bush poses for a photo with Nobel Prize winners Monday, Nov. 24, 2008, in the Oval Office. Joining President Bush from left are, Dr. Paul Krugman, Economics Prize Laureate; Dr. Martin Chalfie, Chemistry Prize Laureate; and Dr. Roger Tsien, Chemistry Prize Laureate.
Krugman at the 2010 Brooklyn Book Festival.

Krugman has since drawn parallels between Japan's 'lost decade' and the late 2000s recession, arguing that expansionary fiscal policy is necessary as the major industrialized economies are mired in a liquidity trap.

Krugman has repeatedly expressed his view that Greenspan and Phil Gramm are the two individuals most responsible for causing the subprime crisis.

Official portrait, 2003

George W. Bush

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American politician who served as the 43rd president of the United States from 2001 to 2009.

American politician who served as the 43rd president of the United States from 2001 to 2009.

Official portrait, 2003
George W. Bush with his parents, Barbara and George H. W. Bush, c. undefined 1947
Governor Bush (right) with father, former president George H. W. Bush, and wife, Laura, 1997
2000 electoral vote results
2004 electoral vote results
George W. Bush re-election campaign stop in Grand Rapids, Michigan.
Deficit and debt increases from 2001 to 2009. Gross debt has increased over $500billion each year since the 2003 fiscal year.
President Bush signing the No Child Left Behind Act into law, January 8, 2002
President Bush delivering a statement on energy, urging Congress to end offshore oil drill ban, June 18, 2008
President Bush discussing border security with Secretary of Homeland Security Michael Chertoff near El Paso, November 2005
President Bush with hurricane victims in Biloxi, September 2, 2005
President Bush announcing his nomination of Alberto Gonzales as the next U.S. Attorney General, November 10, 2004
Countries visited by President George W. Bush during his time in office
President Bush with Russian president Vladimir Putin in Shanghai, October 21, 2001. Russia had cooperated with the U.S. in the war on terror.
President Bush, beside firefighter Bob Beckwith, addressing rescue workers at the World Trade Center site
Countries with major military operations throughout the war on terror launched by Bush, including those launched after his presidency
President Bush and President Hamid Karzai of Afghanistan in Kabul, March 1, 2006
President Bush, with Naval Flight Officer Lieutenant Ryan Philips, after landing on the USS Abraham Lincoln prior to his Mission Accomplished speech, May 1, 2003
Gallup/USA Today Bush public opinion polling from February 2001 to January 2009
Protest against the Iraq War in New London, Connecticut on May 23, 2007
Countries with a U.S. military presence in 2007
Charlie Strong (left), Texas Longhorns head football coach, George W. Bush and Reverend Jesse Jackson hold up a Texas Longhorns football jersey at the LBJ Presidential Library in 2014
Bush eulogizing his father at the National Cathedral, December 5, 2018
George W. Bush and Laura at the inauguration of Joe Biden
George W. Bush Presidential Center, on the campus of Southern Methodist University
Bush on January 20, 2001 in Washington D.C., the day of his first inauguration as President of the United States.
Former President George W. Bush and his wife being escorted to a waiting helicopter by President Barack Obama and First Lady Michelle Obama on January 20, 2009.

By December, the U.S. entered the Great Recession, prompting the Bush administration to obtain congressional approval for multiple economic programs intended to preserve the country's financial system, including the Troubled Asset Relief Program.

In December 2007, the United States entered the longest post–World War II recession, caused by a housing market correction, a subprime mortgage crisis, soaring oil prices, and other factors.

Median US household income through 2019

Household income in the United States

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Economic standard that can be applied to one household, or aggregated across a large group such as a county, city, or the whole country.

Economic standard that can be applied to one household, or aggregated across a large group such as a county, city, or the whole country.

Median US household income through 2019
U.S. real median household income reached $63,688 in January 2019, an increase of $171 or 0.3% over one month (December 2018).
Median household income and taxes
U.S. economic growth is not translating into higher median family incomes. Real GDP per household has typically increased since the year 2000, while real median income per household was below 1999 levels until 2016, indicating a trend of greater income inequality.
Total compensation's share of GDP has declined by 4.5 percentage points from 1970 to 2016. This implies that the share attributed to capital increased in that period.
U.S. real wages (i.e. production) for ordinary (i.e. non-supervisory) workers remain slightly below their 1970s peak.
Median household income, by county, as of 2017.
This graph shows the income since 1970 of different racial and ethnic groups in the United States (in 2014 dollars).
Median annual household income in accordance with the householder's educational attainment. The data only includes households with a householder over the age of twenty-five.
U.S. family pre-tax income and net worth distribution for 2013 and 2016, from the Federal Reserve Survey of Consumer Finances.
Map of states by median household income in 2019.
Percentage of persons and households in each of the income groups shown.
The percent of households with six figure incomes and individuals with incomes in the top 10%, exceeding $77,500.

After falling somewhat due to the Great Recession in 2008 and 2009, inequality rose again during the economic recovery, a typical pattern historically.

The late-2000s recession began with the bursting of the U.S. housing bubble, which caused a problem in the dangerously exposed sub prime-mortgage market.

Fig. 1: Robert Shiller's plot of U.S. home prices, population, building costs, and bond yields, from Irrational Exuberance, 2nd ed. Shiller shows that inflation-adjusted U.S. home prices increased 0.4% per year from 1890 to 2004 and 0.7% per year from 1940 to 2004, whereas U.S. census data from 1940 to 2004 shows that the self-assessed value increased 2% per year.

2000s United States housing bubble

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Real estate bubble affecting over half of the U.S. states.

Real estate bubble affecting over half of the U.S. states.

Fig. 1: Robert Shiller's plot of U.S. home prices, population, building costs, and bond yields, from Irrational Exuberance, 2nd ed. Shiller shows that inflation-adjusted U.S. home prices increased 0.4% per year from 1890 to 2004 and 0.7% per year from 1940 to 2004, whereas U.S. census data from 1940 to 2004 shows that the self-assessed value increased 2% per year.
A graph showing the median and average sales prices of new homes sold in the United States between 1963 and 2010.
Inflation-adjusted housing prices in the United States by state, 1998–2006.
Bank run on the U.K.'s Northern Rock Bank by customers queuing to withdraw savings in a panic related to the U.S. subprime crisis.

It was the impetus for the subprime mortgage crisis.

Because of these remarks, as well as his encouragement of the use of adjustable-rate mortgages, Greenspan has been criticized for his role in the rise of the housing bubble and the subsequent problems in the mortgage industry that triggered the economic crisis of 2008.