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In economics, a recession is a period of contraction of an economy, in which trade and industrial activity is reduced. Technically, a recession is defined as negative growth in real gross domestic product over two consecutive quarters, though other economic indicators can point to a downturn before GDP figures become available. The traditional definition using two consecutive quarters of negative GDP growth has been less important since the 2001 recession, as contributions from exports and inventories led to a positive quarter between two negative quarters, leading to confusion as to whether or not a recession was occurring. This discrepancy was once again confirmed in 2008, when during the second quarter of a recession growth was positive. In the United States, official determination of the length of recessions and expansions are identified by a non-profit, non-partisan entity, the National Bureau of Economic Research.
Despite the difference in terminology, there is no agreed qualitative difference between a recession and a depression. Some have argued that a full depression requires a deflationary spiral, something that doesn't usually happen in modern recessions. Recessions in the United States are usually measured against the Great Depression. In the post-World War II era, the 1958 recession was considered the worst since the Great Depression, and the claim was later replaced by the 1973-75 recession, the 1980-82 recession, the 1990-92 recession (despite it being less severe than both the 1973-75 and the 1980-82 recessions) and 2007-2009 recession respectively. To date, no modern recessions have come close to the severity of the Great Depression.
Recessions can be caused by a number of factors, but usually involve multiple systemic imbalances. The most common cause of recession in the United States is tight monetary policy on the part of the Federal Reserve. In the past, it was standard policy to raise interest rates as unemployment fell to counteract potential inflation. High interest rates would cause visible declines in economic activity, often leaving the economy in a weakened state and vulnerable to supply shocks or other economic events.
2008 recession in the USA
- For a more serious, and more accurate, account, see Great Recession
Reaganomics was just reworked Mellonomics, which caused the Great Depression. Combined with the economic policies of Phil Gramm, GWB's "what we want is for everybody to own their own homes" and the resulting explosion in sub prime loans, voila: 2007 economic collapse and Great Recession. Thanks to Republican obstructionism and shifting the blame to Obama, the "recovery" (the Economic Recovery Act, the auto bailout, too big to fail, and quantitative easing) has been limited.
The result has been likely the largest destruction of wealth in history, as well as the largest redistribution of wealth upwards. The wealthy have recovered their wealth, not so much everyone else.
An astounding real estate bubble (prices almost tripling from 1999-2007) led to predatory behavior by banks. Mortgage application forms, hitherto some 20 pages long, were reduced to "Question 1 - Are you breathing? Right, yer on" (OK, slight exaggeration.).
Previously, the loans would be financed by other banks (i.e., people who know what bullshit to expect from other banks), but Congress didn't like that so they removed regulations that prevented loans from being financed by the market at large; hedge funds, private investors, etc. Rather than buy the mortgages themselves, the mortgages were bundled into Collateralized Debt Obligations (CDO's), with each "tranche" rated differently. For example, 100 mortgages, 100 tranches. First mortgage payment goes to the first tranche, second to second, etc. If 99 pay out, the 99th tranche gets paid, but not the 100th. The tranches were each given a rating by the rating companies (who were paid by the banks to rate them; no conflict of interest there), but even in their incompetence they couldn't give the latest tranches a AAA rating. So tranches 91-100 would be bundled together with OTHER tranches 91-100 from another CDO, and once again there'd be 100 tranches. The rating companies then rated most of these as AAA, and the remaining could be repackaged AGAIN until everything was AAA. If you don't see a problem with this, congratulations on your new job as an S&P auditor! Note that "AAA", from the side, resembles a house of cards.
Insurance companies came up with the sweet idea of insuring these quite obviously dodgy loans by means of what they called "credit default swaps." In return for substantial premiums, they promised protection if mortgage-holders defaulted, basically. The entire financial structure of the nation ended up dependent on a bunch of feckless chavs living in houses they couldn't afford.
And, behold, they did default — massively. The investment management company Bear Sterns found its balance sheets not adding up, and actually increased its credit default business in a desperate bid to keep its head above water. In hindsight, disaster was totally predictable. But then that's what hindsight is all about, really. It was also predictable in foresight (we talked about the inherent problems in college), but no one listens to people in Ivory Towers anyway.