CONCEPTS IN PRACTICE

The Great Recession

The Great Recession of 2007–2009 exposed many of the weaknesses of our financial system. The ease with

which banks could lower credit standards to allow ill-prepared consumers to purchase real estate and the

resulting speed with which the world economy plunged into recession is astounding.

Regulation to address the economic crisis was also swift. Fortunately, Ben Bernanke, chairman of the

Federal Reserve at the time, had throughout his career conducted extensive research into the causes of and

potential resolution of the Great Depression of the 1930s.2 He was uniquely qualified to lead the economic

response to the crisis. Some resulting laws moved to address the immediate needs and others to correct

the underlying causes of the recession.

One immediate fix was the Troubled Asset Relief Program (TARP). TARP authorized the Treasury to buy

illiquid assets in order to save the financial institutions so important to lubricating our economy. Politically

this was a tough decision, as it appeared that the government bailed out greedy bankers. In the end,

however, the program was justified because the economy immediately began a slow but steady recovery,

most financial institutions did not fail, and the Treasury recouped all of its investment used in the bailout.

However, individual homeowners suffered greatly.

The Dodd-Frank Act of 2008 attempted to address many of the underlying causes of the Great Recession by

reorganizing and toughening the regulatory framework, including tighter oversight of critically important

financial institutions. Dodd-Frank also created the Consumer Financial Protection Bureau (CFPB) to protect

consumers from harm caused by unscrupulous banking activities. Today, the hope is that financial

institutions will be stopped short of the gross negligence evident prior to 2007 and consumers won’t be left

out in the cold due to actions beyond their control.

Sources: History Channel. “Here’s What Caused the Great Recession.” YouTube. May 15, 2018.

https://www.youtube.com/watch?v=yM0uonkloXY. Accessed April 18, 2021; Randall D. Guynn, Davis Polk,

and Wardwell LLP, “The Financial Panic of 2008 and Financial Regulatory Reform.” Harvard Law School

Forum on Corporate Governance. November 20, 2010. https://corpgov.law.harvard.edu/2010/11/20/the-

financial-panic-of-2008-and-financial-regulatory-reform/. Accessed April 18, 2021; Sean Ross. “What Major

Laws Were Created for the Financial Sector Following the 2008 Crisis?” Investopedia. Updated March 31,

2020. https://www.investopedia.com/ask/answers/063015/what-are-major-laws-acts-regulating-financial-

institutions-were-created-response-2008-financial.asp. Accessed April 18, 2021.