EC02013 “The Great Recession 2007-2009” Since 2007, the US economy has encountered hostile financial conditions. From the rate of unemployment which peaked at 10. 1 percent in 2009 (Center for Economic and Policy Research, 2010), to the housing crisis, slow economic growth, devalued US dollar, collapse of the financial industry and loss of confidence by investors, two administrations and the Federal Reserve reacted with various monetary policies. This paper will seek to outline the major events which led up to the recession in 2007, identify possible though debatable causes and actions taken by Presidents Bush and
Obama as well as the Federal Reserve to save the country from the financial catastrophe of the “Great Recession. ” December 2007 marked the official start of the second great depression in US history. This lasted until 2009. The formal designation was conferred by the National Bureau of Economic Research (NBER), a group of economists charged with the responsibility of dating the start of significant economic downturns. Prior to the proclamation, the country experienced a housing boom in 2007 which featured extensive purchases and sales of housing inventory.
Additionally, the exuberant market drove many to acquire mortgages which they ould not afford particularly, at adjustable rates. During that time, oil prices also climbed thus creating a volatile formula for the financial meltdown. One reason for the recession noted by the National Bureau of Economic Research was the extensive deterioration in the labor market; the precursor which started the depression. This subsequently escalated as employers eliminated 1. 2 million Jobs during the first ten months of 2008.
The group made this determination by assessing the personal income, retail and wholesale sales as well as industrial production and GDP which easured the recession. Numerous other causes have also been blamed for the “Great Recession of 2007-2009. ” One popular culprit was deregulation or the failure of the Federal Government to effectively regulate the financial sector. Critics have however challenged this theory and argue that the major players that were involved in the collapse were in fact heavily regulated but the regulators could not predict the doom that would befall the economy.
Another cause was also attributed to greed and dishonesty on Wall Street. This was a popular belief that motivated the wrath of the Obama administration and motivated groups such as the Occupy movement. In this instance, critics again challenge the plausibility of this theory by the fact that Wall Street was historically driven by greed which never led to such a severe consequence in the past. The “Great Recession” has also been blamed on the security provided to Wall Street by the government and its tendency to fuel a culture of belief that a bail out would always be extended as needed.
This perpetuated arrogance on Wall Street which encouraged the taking of irrational risks which ultimately led to the collapse. The most credible causes of the “Great Recession” which have received the most and inflation suppression policy. First, According to the National Review, American Spectator, prior to the recession, a significant number of mortgages were vulnerable to default. The Bush administration implemented policies which encouraged homeownership thereby, creating liberal mortgage standards.
One such policy though created under the Carter administration in 1977, was the Community Reinvestment Act. This required loans to be offered below 80% of the median income of their service areas and was widely used during the Bush and Obama dministrations. This meant that loans were granted to individuals who could not afford them based on their incomes. Another example was the Department of Housing and Urban Development’s (HUD) policy to lower underwriting standards to allow homeownership.
This also led to the approval loans to customers who were unable to afford them and ultimately contributed to the housing collapse. The second most plausible reason for the recession resulted from banking regulations concentrated on mortgage securities with a limited number of firms, implied government insurance on bad mortgages as well as the use of established ccounting guidelines which allowed banks to significantly reduce their capital positions (National Review, American Spectator).
These events occurred because Fannie Mae and Freddie Mack implied the backing of mortgages by the federal government thus, perpetuating a liberal culture of lending in the mortgage industry which later became explicit when the government bailed them out. Another rudimentary cause was the accounting method used by banks. In this regard, financial institutions were permitted to overleverage themselves because assets were calculated based on market value instead of real value. For instance, a $300,000 loan was valued at $500,000 since the market was inflated instead of the real value.
Additionally, the difference in value (or $200,000 in the following example), was loaned through other mortgages while remaining in legally defined capital ratio. When danger emerged and market value fell and bank assets were readjusted, banks were unable to lend because the real values were less and decreased from the inflated market values which led to the “housing bust period. ” Third, the extremely low interest rate policy was another contributing factor of the recession hich devalued the dollar and created easy credit while stimulating borrowing.
Though it has been argued that the low interest rate caused investors to focus on long term investments, the situation was compounded by the large influx of foreign investments (money), attracted by the devalued dollar, which the government could not control and caused the situation to worsen. According to Forbes, one of President Obama’s first strategies to counteract the effects of the depression was to finance “stimulus” packages in order to stimulate economic growth and recovery. This ssentially led to an increase in Federal borrowing, the national debt and federal deficit.
This attempt was also made by his predecessor, Bush who also implemented another version of economic stimulus which awarded sums to tax payers with the intent that the money would be reinvested into the economy and used to buy goods and services thereby stimulating the growth. Another monetary policy used to alleviate the effects of the recession, was the continuous reduction of the interest rate. Prior to 2007, the rate was increased to 5. 25% in 2006 and maintained at that cuts more than 6 times to a low of 2% in 2008 and 0% to 25% in 2008. When the desired effect was not achieved, the government announced more significant measures.
By December 16, 2008, the announcement came that the Federal Reserve would purchase large quantities of debt and mortgage securities with the aim of supporting the housing and mortgage industries. This was a deviation from the tendency to buy and sell short term Treasury Instruments and instead included agency and mortgage backed bonds issued by Fannie May and Freddie Mac which typically bought and resold mortgages from banks. In other words, Fannie and Freddie Mack would buy mortgages from banks and in turn sell them to investors. The government instead stepped in to absorb these mortgages.
The causes of the recession have been debated and attempts made by the government to relieve it were met with various degrees of success and failure. Today, four years later, the country continues to recover from the financial turmoil of the recession. Unemployment still lags, interest rates are still at a record low and growth slow but the housing market shows signs of an upturn. References. Isidore, Chris (2008) It’s official: Recession since Dec. 07. Retrieved at http:// money. cnn. com/2008/12/01 /news/economy/recession/ Ferrara, Peter (2012) The Worst Economic Recovery Since The Great Depression.
Retrieved from http://www. forbes. com/sites/peterferrara/2012/01112/the-worst- A Secular Conservative Blog (2011) The heathen republican. Retrieved from http:// heathenrepublican. blogspot. com/2011 /07/who-and-what-caused-great- recession. html Monetary policy during the recession of 2007-2009. (2009). Retrieved http:// understandingthemarket. comnp=64 Baker, Dean ( 2010) Center for economic and policy research. Retrieved from http:// www. cepr. net/index. php/op-eds-&-columns/op-eds-&-columns/the-path-of- unemployment-in-the-great-recession