A styrofoam figure of a bull in front of the German stock index (DAX) board at the Frankfurt Stock Exchange, on September 16, 2008.

The Great Recession officially began in the United States in 2008. By the end of that year, twelve of the United States’ thirteen most important financial institutions, many of which did extensive business overseas, were on the brink of failure. Within five years, the crisis had fully contaminated the global economy, with nearly all of Europe’s major financial firms requiring bailouts.

The fact that the Great Recession was, at its root, a banking crisis, was particularly dangerous for the global economy because of how interconnected globalization has made the financial industry. The vast international operations of large banks produce both benefits and disadvantages: they provide vital channels through which capital spreads throughout the world, allowing the global economy to hum efficiently. However, those same channels can also spread a financial contagion like the one that metastasized in the United States in 2008 and turned domestic economic problems into a devastating, long term global crash. 

Banks’ Cross-Border Claims


To grasp how this happened, it is important to understand the massive influence the United States exerts on the global economy. The United States may be home to less than 5 percent of the world’s population, but it generates almost 25 percent of global gross domestic product (GDP).

GDP Ranking: Top 20 Countries, 2015

The United States is also the largest importer and second-largest exporter of goods in the world; in 2016, U.S. imports and exports were each worth over $2 trillion. Beyond the sheer size of the U.S. economy, some of the world’s largest financial institutions are American banks with global operations, making the economic health of the United States vital to international prosperity. In short, what happens in the U.S. economy does not stay here. 

So what did happen? 

Though the 2008 collapse of the investment bank Lehman Brothers is generally identified as the beginning of the Great Recession, conventional wisdom identifies subprime mortgages as its root cause. In the 1990s, following a period of financial deregulation, U.S. banks searching for higher profits began giving mortgages to subprime borrowers, or people with a higher risk of default (default meaning failure to pay back the loan). To lend this money to borrowers, mortgage issuers themselves borrowed money from investors. Once issued, these mortgages were often securitized, or packaged together and sold as investments to various parties, which expected to earn profits as the mortgages were repaid. When people became increasingly unable to pay back their mortgages, banks began to run short of the money needed to repay their investors.


By 2008, the pattern snowballed, creating an economic crisis that rippled through the intricate web connecting banks and other financial institutions around the world: banks that trade with, borrow from, and lend to one another every day.

Path of the Great Recession
VIDEO 0:35

This profound and global financial interconnectedness is precisely why the crisis spread so fast and far. Over the past several decades, the financial industry has globalized and become more concentrated; even after the crisis, this infrastructure remains largely intact. Reasons include deregulation (e.g., the 1999 repeal of the Glass-Steagall Act, which had separated commercial and investment banking operations in the United States) and the creation of new financial tools such as securitization. 

During this period, the operations of various institutions (hedge funds, commercial banks, investment banks, brokerages, pension funds, insurance companies, and others) gradually became more intertwined. Banks would loan to one another, linking directly, or institutions would invest in a common asset, linking indirectly. This interdependence was inherently risky, because a problem in one institution quickly spread to its linked institutions. At the same time, functional distinctions between different types of institutions also became blurred. 

That said, about twenty large complex financial institutions with vast operations—think JPMorgan Chase or Deutsche Bank—dominate global finance. In fact, a study by the International Monetary Fund (IMF) found that just eighteen institutions were responsible for over half of the losses reported by banks and insurance companies around the world during the economic crisis.


In the United States, the government responded to the crisis with bank bailouts, tax cuts to stimulate spending, and direct government spending to boost the economy. In Europe, many governments pursued austerity, or deep cuts to social spending. As Greece, Iceland, Ireland, Portugal, and Spain became infected by the global financial crisis, the European Union and the IMF bailed these countries out, often with the condition that the countries cut spending. Proponents of austerity argued that it was necessary to decrease debt; opponents maintained that it did nothing to resolve the crisis while deepening the public’s misery. 

The wide scope of the crisis also forced an international response. In 2008 and 2009, leaders from the twenty largest economies (known as the Group of Twenty [G20]) met to discuss the crisis, agreeing to lower interest rates, increase government spending, help countries in particular difficulty, pursue regulatory reforms, and keep international financial institutions like the IMF and World Bank well resourced. In addition, the U.S. Federal Reserve gave U.S. dollars to central banks abroad via a tool known as a swap line, so these banks had access to the principal currency used in international transactions.


In the United States, the worst of the crisis had officially subsided by 2016. Most banks and businesses bounced back fairly well, thanks to financial regulations and extensive government spending. However, many European countries still struggle with low growth, significant debt, and high unemployment, all lasting effects of the Great Recession.

Unemployment Rates

In general, places with more ties to the global economy, like European countries, felt the crisis more quickly and acutely than others. But during the financial crisis, GDP growth declined everywhere in the world; negative growth rates ranged from -2.49 percent to -20.80 percent.

GDP Growth

Although Asia did not experience negative growth rates, its exports dropped and the speed of the region’s economic growth slowed. Africa’s relative isolation from the global economy (and the increasing direction of its exports toward Asia rather than Europe) allowed many African countries to avoid the worst of the recession. However, Africa was not fully protected. Many African and South American countries, which depend on exports of commodities such as oil, felt the effects of the global recession through declines in commodities prices and global trade, driving home the fact that globalization is not a choice in today’s world—it is an inescapable reality.

Back to Top image/svg+xml