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The recession that began in 2008 was largely born of the policies and programs that helped bring the 2001–2004 recession to a close. In a way, it was caused in part by consumers, many of whom were convinced by unscrupulous lenders that they would be able to make tremendous investments in the real estate market. The overwhelming number of homeowners whose debt eventually overcame them sent shockwaves through the financial system and eventually helped slow down the economy to a degree not seen since the Great Depression of the 1930s. At the earliest stages of the recession, an economic stimulus package was offered by Congress to prevent a worsening of the country's fiscal condition. At the tail end of the recession, another recovery package was offered to prevent a return to fiscal instability. This paper will review these two actions—the Economic Stimulus Act of 2008 and the American Reinvestment and Recovery Act of 2009—and their effectiveness in addressing the recession of 2008–2010.

The RFC was born out of frustration during the administration of President Herbert Hoover, who in 1931 had run out of options for slowing down the apparent meltdown of the U.S. banking industry. When efforts to get the private sector to initiate its own recovery program failed, Hoover reluctantly agreed to the creation of the RFC to make money available to banks so they could meet obligations rather than go into default. Modeled on the War Finance Corporation, which had made loans to businesses during World War I, the program was created in January, 1932, with a capitalization of approximately $2 billion to provide short-term loans to financial institutions that had the wherewithal to make repayments. The $2 billion was considered a revolving fund, continually available for new loans. The RFC began making loans almost immediately and experienced some modest success during its first year of operation. Hoover eventually agreed to let the RFC make capital loans for self-liquidating projects. Within a short time, institutions and businesses in nearly every state received some assistance. However, public distrust of the RFC’s activities and the widespread belief that its program was simply a maneuver to bail out the rich made the agency a political nightmare. Hoover agreed in late 1932 to close it down. Before he could do so, however, he was succeeded in office by Franklin D. Roosevelt.

After World War I, the numerous tax cuts during the 1920’s reduced the top marginal income-tax rate from 73 percent to 24 percent, and the federal government consistently maintained a budget surplus. With the outbreak of the Great Depression, however, the federal tax base shrank dramatically, resulting in large budget deficits. In reaction, President Herbert Hoover, who wrote in his memoirs that “stability required that we balance the budget,” asked Congress to increase taxes and reduce spending. The result was the Revenue Act of 1932, which was the largest peacetime increase of tax rates in U.S. history. Under the act, the highest brackets increased to 63 percent of net income. The act also doubled the estate taxes to a maximum rate of 45 percent, and it increased the corporate tax from 12 percent to 13.75 percent.