United States

The election to succeed Bush was between Sen. John McCain of Arizona, the Republican candidate, and Sen. Barack Obama of Illinois, who had triumphed over the favourite, Sen. Hillary Clinton of New York, in a long primary battle to win the Democratic nomination. At the height of the contest, the U.S. economy was thrown into turmoil by a financial crisis. From September 19 to October 10, the Dow Jones Average dropped 26 percent. At the same time, there was a severe contraction of liquidity in credit markets worldwide, caused in part by a debacle related to subprime mortgages. While the housing market boomed, individuals lacking the credit ratings necessary for conventional mortgages had been able to obtain subprime mortgages, most of which were adjustable-rate mortgages (ARM) at low, so-called teaser, interest rates that ballooned after a few years. The rates for many of those ARMs jumped at the same time that overbuilding undercut the housing market; foreclosures mounted, and investment banks that under recent deregulation had been allowed to overleverage their assets foundered, resulting in the bankruptcy or sale of several major financial institutions. The U.S. economic and political establishment reacted by passing (after an unsuccessful first attempt) the Emergency Economic Stabilization Act, which sought to prevent further collapse and to bail out the economy. In the process, the U.S. government provided loans to, and in some cases took an ownership stake in, financial institutions through the Troubled Asset Relief Program (TARP), which allocated $700 billion to the recovery effort.

The Barack Obama administration

First term

Election and inauguration

The crisis worked against McCain, whom many voters associated with the unpopular policies of the administration, and worked for the highly charismatic Obama, whose campaign from its outset had been based on the theme of sweeping political change. Obama defeated McCain, becoming the first African American elected to the presidency. He captured nearly 53 percent of the popular vote and 365 electoral votes—defending those states that had gone Democratic in the 2004 election, taking the lion’s share of battleground states, and winning several states that had been reliably Republican in recent presidential elections.

In the interim between the election and Obama’s inauguration as president on January 20, 2009, the Bush administration’s handling of the distribution of the first half of the TARP funds came under considerable criticism. There were accusations that it had infused too much money into large banks without placing adequate conditions on them, rather than purchasing “toxic” assets as it had promised. In the lead-up to the inauguration, Obama and his transition team, working with Bush, persuaded the Senate to release the last half of the TARP funds, promising that they would be targeted at relief for home owners and at stimulating the credit markets. Because authorization to block the release of the funds required assent by both houses of Congress, a vote by the House of Representatives was unnecessary. (See Emergency Economic Stabilization Act of 2008.)

Tackling the “Great Recession,” the “Party of No,” and the emergence of the Tea Party movement

The economic downturn, widely referred to as the “Great Recession” (which officially dated from December 2007 to June 2009 in the United States), included the most dismal two-quarter period for the U.S. economy in more than 60 years: GDP contracted by 8.9 percent in the fourth quarter of 2008 and by 6.7 percent in the first quarter of 2009. Efforts to stabilize the economy included extending $80 billion to automakers Chrysler and General Motors, with the government assuming ownership of 8 percent and 61 percent of each, respectively; the Federal Reserve pumping well over $1 trillion into the economy by purchasing Treasury bonds; and the passage of a $787 billion stimulus spending measure. In the third quarter of 2009, GDP finally turned positive, gaining 2.2 percent on an annualized basis. However, unemployment, which had stood at 7.2 percent at the beginning of the year, hovered around 10 percent in early 2010. Moreover, the stimulative policies had helped balloon the U.S. federal deficit to $1.42 trillion, earning widespread criticism from Republicans.

economic recessionStore closings, one of the consequences of an economic recession, 2009.© Carolyn Franks—Whitestar1955/Dreamstime.com