how did we get here
Economists believe that we are in the worst financial crisis since the Great Depression of the 1930s. Yikes. The International Labor Organization predicted at least 20 MILLION jobs lost by the end of 2009 alone. Trade is down, wages are down, and the stock market is all over the place. Obviously, we want out of it. But in order to figure out and work toward a solution, we need to first get to the roots of the problem.
There were hundreds of causes leading up to the recession, but let’s focus on the big ones. Natural disasters and events such as September 11th attacks moved Short Run Aggregate supply to the left, which put upward pressure on price levels and decreased output. This is turn decreased consumer confidence (which meant they spent less) and raised unemployment.
Increased borrowing (and therefore debt) of Americans caused AD to shift right, creating unsustainable output and price, so SRAS shifted left in the market’s attempt to self-attempt. This also causes an increase in inflation. The loss of consumer confidence in the financial system is a huge problem because it’s part of the vicious cycle that’s sending the economy into this downward spiral. Less consumption meant loss of jobs, and therefore even less consumption, and decreased price levels, leading to deflation.
One of the main and most obvious reasons for the current recession is the years of easily available credit to people, so that they were buying things (houses, cars, Margaritavilles,etc.) that in reality they couldn’t afford. This really goes back to the economic prosperity that began in the early 1980s and continued for 26ish years. Times seemed good, and people had confidence in the banking systems.
Following Sept. 11 and DotCom Bust, Fed Chairman Alan Greenspan kept interest rates low (at one percent from June 2003-2004), making it an attractive time to take out loans. So banks too were taking huge loans out (getting a little too leverage-happy), which got them into their own trouble later on. This time of apparent prosperity in the US was actually the years in which the economy became closer and closer to its breaking point.
Meanwhile, the Fed was raising the Federal Funds rate, therefore inverting the yield curve from about 2004-2007. This eventually led to a collapse of the US housing bubble, and ultimately a financial crisis, which meant everyone rushing to the banks to take their savings out. Not only did this leave the banks weakened or forced into bankruptcy, it also took money out of the system and under mattresses, which meant less money flowing in the economy (the opposite of what we need).
So now people were left with houses that they couldn’t afford to pay mortgages on, and really had no business buying in the first place. As many rushed to put their houses on the market at the same time, the price for housing fell as supply increased (remember most are in the same boat anyway), and millions of people are left jobless (or soon to be, anyway) and stuck with homes that they can’t afford.
Some believe that this all goes back to “sub-prime lending� of gov-sponsered banks such as Fannie Mae and Freddie Mac. In 1992, government resorted to deregulation of giants such as these, a measure that was delayed an only moderately successful. The government ended up bailing them out earlier this year, while many other banks failed without the people’s mortgages being paid to them.
This led to obviously decreased confidence in investment banks and in the financial system in general by both the American people, and international partners in exchange and trade (the dominoes continue to fall…). Decreased international confidence in our financial system means even less money flowing through our system.
Now, in 2008, we are seeing every-increasing levels of both unemployment and inflation. Some possible causes for this inflation are “excess money supply around the globe, monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets� (Reuters).
There are probably hundreds of causes leading up to this recession, some we should have foreseen, and some that we couldn’t have. But now that we recognize the roots of these issues, we should do whatever we can to reverse it, starting with increasing consumer confidence in America’s financial system.
There were hundreds of causes leading up to the recession, but let’s focus on the big ones. Natural disasters and events such as September 11th attacks moved Short Run Aggregate supply to the left, which put upward pressure on price levels and decreased output. This is turn decreased consumer confidence (which meant they spent less) and raised unemployment.
Increased borrowing (and therefore debt) of Americans caused AD to shift right, creating unsustainable output and price, so SRAS shifted left in the market’s attempt to self-attempt. This also causes an increase in inflation. The loss of consumer confidence in the financial system is a huge problem because it’s part of the vicious cycle that’s sending the economy into this downward spiral. Less consumption meant loss of jobs, and therefore even less consumption, and decreased price levels, leading to deflation.
One of the main and most obvious reasons for the current recession is the years of easily available credit to people, so that they were buying things (houses, cars, Margaritavilles,etc.) that in reality they couldn’t afford. This really goes back to the economic prosperity that began in the early 1980s and continued for 26ish years. Times seemed good, and people had confidence in the banking systems.
Following Sept. 11 and DotCom Bust, Fed Chairman Alan Greenspan kept interest rates low (at one percent from June 2003-2004), making it an attractive time to take out loans. So banks too were taking huge loans out (getting a little too leverage-happy), which got them into their own trouble later on. This time of apparent prosperity in the US was actually the years in which the economy became closer and closer to its breaking point.
Meanwhile, the Fed was raising the Federal Funds rate, therefore inverting the yield curve from about 2004-2007. This eventually led to a collapse of the US housing bubble, and ultimately a financial crisis, which meant everyone rushing to the banks to take their savings out. Not only did this leave the banks weakened or forced into bankruptcy, it also took money out of the system and under mattresses, which meant less money flowing in the economy (the opposite of what we need).
So now people were left with houses that they couldn’t afford to pay mortgages on, and really had no business buying in the first place. As many rushed to put their houses on the market at the same time, the price for housing fell as supply increased (remember most are in the same boat anyway), and millions of people are left jobless (or soon to be, anyway) and stuck with homes that they can’t afford.
Some believe that this all goes back to “sub-prime lending� of gov-sponsered banks such as Fannie Mae and Freddie Mac. In 1992, government resorted to deregulation of giants such as these, a measure that was delayed an only moderately successful. The government ended up bailing them out earlier this year, while many other banks failed without the people’s mortgages being paid to them.
This led to obviously decreased confidence in investment banks and in the financial system in general by both the American people, and international partners in exchange and trade (the dominoes continue to fall…). Decreased international confidence in our financial system means even less money flowing through our system.
Now, in 2008, we are seeing every-increasing levels of both unemployment and inflation. Some possible causes for this inflation are “excess money supply around the globe, monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets� (Reuters).
There are probably hundreds of causes leading up to this recession, some we should have foreseen, and some that we couldn’t have. But now that we recognize the roots of these issues, we should do whatever we can to reverse it, starting with increasing consumer confidence in America’s financial system.
posted by Emily K. at
9:52 PM
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