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The Great Recession

With the entire financial system hemorrhaging losses, and with every corner of the credit markets in disarray, loans to consumers, businesses, and even state and local governments became scarcer and more costly. Banks aggressively ratcheted up their lending standards; borrowers who normally were considered good credits and could readily get a loan, now could not. Not only was a subprime loan out of the question, but even prime borrowers were struggling to get credit.

Without credit, home sales buckled, and subprime borrowers who had hoped to refinance before their mortgage payments exploded higher could not do so. Foreclosure seemed the only option. Inventories of unsold homes surged and house prices collapsed.

Commercial property markets froze as tighter bank underwriting and problems in the commercial mortgage securities market undermined deals. Just a year earlier, transaction volumes and real estate prices had been at record highs. Now property deals could not be consummated, weighing on commercial real estate prices and impairing developers’ ability to finance new projects.

Even small and midsize companies in far-flung businesses completely unrelated to housing or mortgage finance found themselves in tough negotiations, with lenders demanding more stringent and costly terms. Financing investment and hiring was suddenly more difficult. Credit is the mother’s milk of a well-functioning economy, and with credit no longer flowing, the economy crumbled.

Previously stalwart stock investors, who had held on admirably through much of the turmoil in the credit markets, capitulated. Financial shares of commercial and investment banks, mortgage insurers, and financial guarantors collapsed. The financial system’s problems were daunting when the economy was still growing; with the economy in a full-blown downturn, they were overwhelming. The massive losses financial institutions had already recognized on their mortgage holdings were now wholly inadequate. Shares in nonfinancial companies were crushed as investors factored in the implications of a worldwide downturn on corporate earnings. Stock prices that were at all-time highs in late 2007 had been halved by early 2009.

The carnage in the financial system convinced businesses that they needed to batten down the hatches. It was quickly becoming a matter of survival, as sales and prices fell, cash got tight, and getting a loan became all but impossible. Unemployment, which had started 2007 at just over 4%, had nearly doubled to more than 8% by the start of 2009. It seemed headed to double digits. To preserve cash, many businesses also required employees who still had jobs to cut their hours and even their pay. Travel budgets were slashed and investment plans shelved. Despite businesses’ best efforts, corporate bankruptcies rose rapidly.

The massive job losses, cracked nest eggs, and financial turmoil were too much for households to bear; consumer confidence plunged to record lows. Christmas 2008 was about the worst Christmas for retailers in a quarter-century, and the automakers were suffering with sales they hadn’t seen since World War II. All this made businesses even more nervous, prompting more cutting. A self-reinforcing vicious cycle had set it. This was the worst economic downturn since the Great Depression. There wouldn’t be endless breadlines and the mass exodus of homeless families as in the 1930s, but the downturn was resulting in tremendous financial suffering. It was the Great Recession.

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