Though the 2008-2009 recession affected the global economy but it had drastically hit mainly the US and the European economies. So, without wasting any time, lets us now discuss the 3 major effects of the 2008-2009 recession on the US:
Changes in Ownership
Ownership of many companies, financial institutions were changed in 2008-2009 due to the recession. Some of the big changes are discussed below:
In March 2008, Bear Stearns, an investment bank gaint, collapsed due to facing financial trouble by investing in subprime mortgage loans. It was later acquired by JP Morgan Chase at a really low price.
In September 2008, Merrill Lynch, a leading Investment Management Company, due to heavy losses attributed by the subprime mortgage crisis was ultimately sale to Bank of America.
In the same month, US 4th largest Investment bank, Lehman Brothers, filed for bankruptcy. One has to note that it was the largest bankruptcy filing in US history. Due to the following reasons, Lehman Brothers have to take this step:
- The mass departure of most of the clients
- A profound decrease in the share price in the stock market
- Devaluations of the asset value by the credit agencies
- Great involvement in Subprime Mortgage Loans
- Having less liquid assets
Later, Barclays and Nomura Holding acquired different divisions and franchise in North America, Asia – Pacific region, Europe and the Middle East.
HBOS plc was a banking and insurance company based in the UK. In 2001, It was formed by the merger of Halifax plc and Bank of Scotland. After the demise of the Lehman Brothers, the share price of the HBOS plc were decreased drastically due to short selling in September 2008. Later, the HBOS plc was acquired by Lloyds Banking Group in January 2009.
In some companies, though the owners were not changed, they were either bailout, assets were acquired by others, put under conservatorship program, or just the management was changed due to 2008-2009 recession.
Fannie Mae and Freddie Mac both were the public Government Sponsored Enterprises (GSE), who together had either owned or guaranteed half of the US’s mortgage market. In September 2008, they both were put in the conservatorship program of the Federal Housing Finance Agency (FHFA).
In October 2008, the government approved the Troubled Asset Relief Program (TRAP). This helps the government with $700 billion of funds. The whole purpose was to help struggling companies by purchasing their assets.
In the next few months, the government used TRAP funds to acquire the assets or equity, some of them are as follows:
- Bank equity shares through the Capital Purchase Program.
- Purchase preferred shares of American International Group (AIG)
- Stock purchases and loan guarantees of Citigroup
- Financing and Capital injections to Automakers like General Motors and Chrysler
- Stock purchases of Bank of America
- Buying the Mortgage-related securities
Stock Market Crash
In September 2008, due to speculation of recession, the Stock Market crashes. This crash played a very important role in reducing the asset value of the companies equity. It even forced some companies to go for bankruptcy which eventually leads to the recession.
In the US, there are approximately 5,000 indices. However, S&P 500, NASDAQ Composite and Dow Jones Industrial Average (DJIA) are the three most popular indices among investors. These indices have categories companies based on different methods but can be commonly identified by the market capitalization.
S&P 500 is a US stock market index that indicates the stock performance of the 500 large public-owned companies in the country.
In March 2008, the S&P 500 hit a market low of 676.53, loses approximately 58% of its previous high in October 2007.
NASDAQ Composite is a stock market index of the similar securities listed on the NASDAQ stock exchange.
In March 2008, the NASDAQ Composite closes at 1268.64, loses approximately 55% of its previous high in October 2007.
DJIA is the US stock market index that points out the value of 30 large and public owned companies in the country.
On 29 September 2008, the DJIA had a drastic fell of 777.68 points with a close at 10,365.45 points. In March 2009, the DJIA hit a market low of 6,469.95, loses more than about 54% of its previous high in October 2007.
From the above one can note that due to recession, by March 2008, every major stock exchange lost its wealth by more than 50% from its previous high in October 2007.
Also Read: What leads to 2008-2009 Recession in the US?
Increase in Unemployment
One of the leading indicators of the recession is the increase in unemployment in the country during that period. Let us now discuss it in the context of the US during the 2008-2009 recession.
As we all know that the recession mainly began in December 2007 and Devil stayed till June 2009. As per the US Bureau of Labor Statistics (BLS), the national unemployment rate was hiked from 5.0% to 9.5% during this period. However, it was further increased to massive 10.0% in October 2009.
It tells us that the after-effects of the recession were far more tariffing than during the recession period.
Details of Unemployment:
During the recession period, construction and manufacturing both showed the highest percentage decline of 13.7% and 10.0% respectively. However, employment increased in education and health services during the same period.
The unemployment rate of Black or African American, Hispanics or Latinos had remained higher than the whites. On the basis of the gender, the men’s unemployment rate remained notably higher than the Women.
The unemployment rate of different states was quite different. During the recession, the unemployment rate of North Dakota, South Dakota and of Nebraska, were lower (about 5.2% or less). However, during the same period, the unemployment rate of Nevada, California, and Michigan was significantly higher (more than 10.0%).
Other Major Effects on the US Economy:
The recession also had a negative impact on the US real Gross Domestic Product (GDP), household net worth and the average expenditure per consumer unit.
During the recession period, the real GDP fell approximately 4.3%, the household net worth fell approximately 17.3% and the average expenditure per consumer unit where fell approximately 7.8%.
With all this, we can understand that the 2008-2009 recession hits the US economy quite badly and people had to go from really a very hard time.