This discussion paper briefly discusses why the Great Recession is considered both “Great” and a “Recession.

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It then turns to the emerging consensus about its cause, its duration and the reasons so few predicted it. It
explores the impact of the Great Recession on how academic economists now think about the economy. This
discussion paper also aims to give better understanding about the great recession to its history, causes,
consequences, and policy responses. The paper emphasizes that the global economy was not at all stable, and
that the majority of the world's poor had not gained the full benefits of faster economic expansion. There were
complex and interlinked factors behind the emergence of the crisis in 2007, namely loose monetary policy, global
imbalances, misperception of risk and lax financial regulation. Beyond the aggregate picture of economic
collapse and rising unemployment, this paper stresses that the impact of the crisis is rather diverse, reflecting
differences in initial conditions, transmission channels and vulnerabilities of economies, along with the role of
government policy in mitigating the downturn. The global financial crisis of 2007 has cast its long shadow on the
economic fortunes of many countries, resulting in what has often been called the ‘Great Recession’. By the end
of this paper you will obtain all knowledge and learn things about the said topic. The Great Recession was a
worldwide economic crisis that caused havoc on the banking and real estate sectors as well as the world
financial markets. The crisis came largely as a surprise to many policymakers, multilateral agencies, academics
and investors. The crisis led to increases in home mortgage foreclosures worldwide and caused millions of
people to lose their life savings, their jobs and their homes. It’s generally considered to be the longest period of
economic decline since the Great Depression of the 1930s. Although its effects were definitely global in nature,
the Great Recession was most pronounced in the United States—where it originated as a result of the subprime
mortgage crisis—and in Western Europe. Six million households lost their homes as a result of a worldwide crisis
that began as a classic story of greed and deregulation. As a result, historically significant reforms and bailouts
were carried out and are still in effect today. Given the historical evidence, insufficient attention was paid to the
costs associated with low frequency, high impact events, particularly among the proponents of the ‘Great
Moderation’. This inadequate perception of risk stands in contrast to the fact that between 1970 and 2008, there
were: 124 systemic banking crises; 208 currency crises; 63 sovereign debt crises; 42 twin crises; 10 triple crises;
a global economic downturns about every ten years; and several price shocks (two oil shocks in the 1970s, the
food and energy price shock in 2007-2008 discussed below). Contemporary studies of the historical evidence
such as IMF (2009a) and Reinhart and Rogoff (2009) have shown that such financial crises typically induce a
sharp recession, which last approximately two years. Consumption, private investment and credit flows are also
slow to improve, which is driven by deleveraging of debts and risk perceptions. As a consequence, recovery is
slow with unemployment levels continuing to rise for a number of years after the economy has started to grow
again. Economic crises are not just a peculiarity of advanced economies. Indeed, developing countries have
been highly vulnerable to a plethora of banking, external debt, currency, and inflation crises during recent
decades. The debt crisis of the 1980s, the Asian financial crisis of the late 1990s and the more recent debt crisis
in Latin America in the 1990s and 2000s have all resulted in deep recessions. Many developing countries have
repeatedly suffered crises due to poor macroeconomic management and policy making. The 2007-2008 food and
energy price shocks appears to have pushed more than 100 million people in the developing world into transient
episodes of poverty.15 In comparison, the World Bank estimates that the Great Recession of 2008-2009 has
resulted in an increase in poverty of 64 million people (by 2010) (World Bank 2010). The food and oil crisis was
(and is), therefore, arguably a much greater concern for low and middle-income countries than the global
financial crisis that affected rich, highly globalized economies more severely. What Caused the Great
Recession? The Great Recession of 2008 was primarily caused by a combination of factors including the
housing market bubble, risky lending practices by financial institutions, complex financial derivatives, and
inadequate regulatory oversight. These factors led to a widespread collapse of housing prices, resulting in
mortgage defaults and significant losses in the financial sector. The crisis had far-reaching effects on the global
economy, triggering a severe recession. Banks and mortgage lenders became increasingly predatory with their
lending practices in the years leading up to the Great Recession. With fewer requirements in place to ensure
borrowers could repay them, obtaining a mortgage became simpler. There was a construction boom as more
individuals suddenly had access to purchasing power, and prices rose drastically. This new type of mortgage,
called subprime, was offered to borrowers with impaired credit records, insufficient incomes and suboptimal
credit scores. These mortgages typically featured low or no down payments and low initial monthly payments to
entice borrowers. These borrowers typically didn’t understand the complex features of their loans and the nature
of their interest rates. Most subprime mortgages, in addition to having balloon payment features and subpar
underwriting standards, were also adjustable rate mortgages (ARMs). From 2004 to 2006, the U.S. Federal
Reserve raised the federal funds rate from 1% to 5.25%, and the rates on subprime ARMs rose at the same time
as those low introductory payments were increasing. This sudden jump in monthly payment was more than many
borrowers were able to pay and a wave of foreclosures started. The Great Recession—sometimes referred to as
the 2008 Recession—in the United States and Western Europe has been linked to the so-called “subprime
mortgage crisis.” Subprime mortgages are home loans granted to borrowers with poor credit histories. Their
home loans are considered high-risk loans. With the housing boom in the United States in the early to mid-
2000s, mortgage lenders seeking to capitalize on rising home prices were less restrictive in terms of the types of
borrowers they approved for loans. And as housing prices continued to rise in North America and Western
Europe, other financial institutions acquired thousands of these risky mortgages in bulk (typically in the form of
mortgage-backed securities) as an investment, in hopes of a quick profit. These decisions, however, would soon
prove catastrophic. Subprime Crisis Although the U.S. housing market was still fairly robust at the time, the
writing was on the wall when subprime mortgage lender New Century Financial declared bankruptcy in April
2007. A couple of months earlier, in February, the Federal Home Loan Mortgage Corporation (Freddie Mac)
announced that it would no longer purchase risky subprime mortgages or mortgage-related securities. The
Subprime Mortgage Crisis during the housing market boom, banks were also securitizing subprime mortgages
by bundling hundreds or thousands of mortgages together and selling them to investors as mortgage-backed
securities (MBSs), a form of bonds consisting primarily of mortgage loans. Any investor looking to have relatively
safe investments in their portfolio would historically gravitate towards mortgages, as a low-risk, low-reward
option. Banks, hedge funds, pension funds and accredited investors bought these MBSs. They didn’t understand
that the new lending paradigm had shifted and these mortgages would experience unprecedented foreclosure
rates. Brian Colvert, certified financial planner (CFP) and chief executive officer of Bonfire Financial, says the
combination of risky subprime mortgage issuance coupled with lack of regulatory oversight set the table for the
financial crisis that followed. What he meant is that more people taking risk in issuance of lending money without
even properly thinking or had no enough knowledge what they are going into. “The use of complex financial
instruments such as credit default swaps, which allowed investors to take on large amounts of risk without fully
understanding the potential consequences, contributed to the crisis,” Culvert says. When homeowners began to
default on their mortgages, the mortgage backed securities market tanked, triggering massive losses for banks
and investment firms. At the same time, insurance companies that had sold these institutions CDSs were also on
the hook to cover billions of dollars in losses. With all those losses and hindrances during the great recession,
that downturn has an end and take its recovery. The End of the Great Recession In February 2009, under new
President Barack Obama, Congress passed the $789 billion American Recovery and Reinvestment Act, which
helped bring about an end to the economic recession. The stimulus package included $212 billion in tax cuts and
$311 billion in infrastructure, education and health care initiatives. The next day, Obama announced the
Homeowner Stability Initiative, a $75 billion program to help more than 7 million U.S. homeowners avoid
foreclosure. In March 2009, the Federal Housing Finance Agency announced the Home Affordable Refinance
Program (HARP), a program that helped credit-worthy homeowners that were underwater on their homes
refinance their mortgages and take advantage of lower interest rates. Nonetheless even with this big and too
good to be true plan still political leaders justified the decision, saying AIG was “too big to fail,” and that its
collapse would further destabilize the U.S. economy. Whether or not these initiatives brought about the end of
the Great Recession is a matter of debate. However, at least officially, the National Bureau of Economic
Research (NBER) determined that, based on key economic indicators (including unemployment rates and the
stock market), the downturn in the United State officially ended in June 2009. Although the Great Recession was
officially resolved in the United States in 2009, its impacts continued to be felt for many years afterward among
Americans and people in other nations. The Great Recession also ushered in a new period of financial regulation
in the United States and elsewhere. The Dodd-Frank Act, which was signed into law by President Obama in
2010, was designed to restore at least some of the U.S. government’s regulatory power over the financial
industry. Dodd-Frank enabled the federal government to assume control of banks deemed to be on the brink of
financial collapse and by implementing various consumer protections designed to safeguard investments and
prevent “predatory lending”—banks that provide high-interest loans to borrowers who likely will have difficulty
paying. After he was inaugurated, President Donald Trump and some members of Congress made several
efforts to gut key portions of the Dodd-Frank Act, which would remove some of the rules protecting Americans
from another recession. This paper just not discuss about the downside of the Great Recession but also the
great things that it bring such as how one should take action when everything is beyond our control. Also it is
important to keep in mind that this severe systemic failure occurred because of human error in a system made up
of people. Some people weren't sure what was going on. Some people purposefully ignored the issues, while
others acted unethically due to the enormous sums of money at stake. Let’s take this a lesson that in this world
right now, won’t let the history repeat itself. And even at the lowest point every country is facing with the help of
one another and thinking thoroughly in making decision there will be progression and not recession.