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Supplements to this article include an annotated chronology of the main events of the recession; and accounts of the regional impact of the recession.

In their 2010 report, the Economic Advisors to the President referred the recent economic downturn as the Great Recession, suggesting a parallel with the Great Depression of the 1930s. Like the Great Depression - and unlike other recessions - it had a simultaneous impact on most of the world's economies. But in other respects it was unique. There had been no precedent for such extensive damage to the world's financial system, nor for the coordinated measures that were taken to avert what was feared to be its imminent collapse.

Although, according to the generally accepted definition of the term, the recession ended in most countries when economic growth resumed during 2009, its damaging effects upon the major economies are expected to persist beyond 2011, and its ultimate cost may amount to as much as a whole year's ouput of every country in the world.

The Great Recession has prompted a re-examination of beliefs concerning the functioning of markets comparable to that which followed the Great Depression.

Introduction

Explanations of the causes of the recession and accounts of contemporary debates concerning policy responses are available in the articles on the subprime mortgage crisis, the crash of 2008 and the recession of 2009, together with timelines linked to contemporary reports.

Overview

During the 1980s there was a widespread re-appraisal of the regulations that had been introduced in response to the financial instability that developed during the Great Depression. A consensus had already emerged that many regulations were economically harmful, as a result of which programmes of deregulation had been adopted. The reappraisal concluded that the financial regulations of the 1930s had become unnecessary because recently-developed monetary policy could be used to counter any further signs of instability. Ongoing programmes of banking deregulation that had prevented investment banks from engaging in branch banking, insurance or mortgage lending were dropped, and reserve requirements were relaxed or removed.

After the mid-1980s came a twenty-year period that has been termed the great moderation, during which recessions had been less frequent and less severe than in previous periods, and during which there been a great deal of successful financial innovation.

In the United States, that period was characterised by massive capital inflows and the large-scale availability of credit to households, and by 2007 personal savings rates dropped to 2 per cent of disposable income from their previous average of 9 per cent and there was a house price boom that has since been categorised as a bubble. The bursting of that bubble in 2007, and the downgrading by the credit rating agencies of large numbers of internationally-held financial assets created what came to be known as the subprime mortgage crisis, which led, in turn, to the financial crash of 2008 and the failure of several of the world's largest banks. The loss of investors' confidence caused by failure of the Lehman Brothers investment bank in September 2008, resulted in a credit crunch. The resulting fall in spending struck the major economies at a time when they were already suffering from the impact of a supply shock in which a surge in commodity prices was causing households to reduce their spending. Economic forecasters had been expecting a mild downturn: what actually happened was the global slump in ecomomic activity that has come to be known as the Great Recession.

Although the trigger that set the recession off had been the malfunction of a part of the United States housing market, it soon emerged that a more fundamental problem had been the fact that the financial innovations that had been richly rewarding traders in the world's financial markets, had also been threatening their collective survival. The crucial nature of that threat for the stability of the world economy arose from the fact that it had become dependent upon the services of a well-functioning international financial system.

What was generally considered to be the impending collapse of that system was averted towards the end of 2008 by governmental recapitalisation of the world's banks, backed up by guarantees of unlimited financial support. The consensus view among economists was that the combination of monetary and fiscal expansion that was then undertaken by policy-makers was nevertheless necessary to avoid a greatly intensified global recession, possibly on the scale of the Great Depression of the 1930s - although there was a body of opinion at the time that considered a fiscal stimulus to be unnecessar ineffective and potentially damaging. Before those policy actions could take effect, there were sharp reductions in the levels of activity in most of the world's developed economies, mainly because of the discovery by banks and households that they had been overestimating the value of their assets. That discovery prompted banks to reduce their lending, at first because of doubts about the reliability of the collateral offered by prospective borrowers and later, when those doubts receded, in order to avoid losing the confidence of their depositors by holding proportionately excessive amounts of debt. The practice of debt reduction (known as deleveraging) was also adopted by those households that had acquired historically high levels of indebtedness, many of whom were experiencing unaccustomed falls in the market value of their houses. The effect of deleveraging by banks and by households was, in different ways, to increase the severity of the developing recession.

By the spring of 2009, the recession had involved most of the world's developed and developing economies, and although the world's economic growth had resumed by end of 2009, pre-crisis growth rates were not restored except among emerging and developing economies. Growth among the developed economies was generally held back by the lasting damage that had been done to their financial sectors, and by the expenditure effects of reductions in household debt. Consequently there was continued underutilisation of productive capacity and unemployment continued to rise. Many governments had been forced to borrow money by issuing bonds, to offset the fiscal consequences of their automatic stabilisers, as a result of which there had been major increases in national debt. In late 2009 and early 2010, the bond markets added substantial risk premiums to the interest rates to be paid on the bond issues of several European governments to compensate for fears of default on their repayment.

By the third quarter of 2010 the effects of fiscal stimuluses had peaked in most of the developed economies. Despite the persistence of unused capacity, European governments were generally reluctant to provide further fiscal support for fear of adverse market reactions to the bond issues that would be required. In response to that fear, European governments reduced their public expenditure plans and increased taxation. The Goverment of the United States, on the other hand, intensified its policy of fiscal and monetary expansion. A eurozone crisis developed as financial assistance to the governments of Greece and Ireland failed to reassure bond market investors. .... (read more)