Romer's Recession
Our current economic situation cannot be blamed on one specific event, person, or administration. Where we are now is the result of mismanagement and imperfect information in nearly every facet of the American economy. This repression/recession has been a long time coming, and it could have been easily prevented had we been a little more educated about what was going on.
Starting in 1982, the economy experienced huge growth that showed no signs of stopping. Washington benefited from this growth just as much as the rest of us, so policies were made that encouraged this unprecedented growth and prosperity. This merging of financial and government interests was our first step towards disaster. Government policies leaned further and further towards deregulation (see Clinton years). Newer, more complex financial instruments were created. China and India were developing into economic super powers, and fast. Their new wealth poured into the U.S., making capital even easier to get. People trusted Wall Street; they thought their money was safe in these complicated schemes. Banks gained more power and influence over the government. The line separating commercial and investment banks blurred, a move that hadn't been allowed since before the Great Depression. Aggressive lending practices gave people the ability to live far above their means.
One of the best examples of this was shown through the housing market. Banks gave people mortgages on houses they couldn’t afford, and then sold the debt away to other investors. Buying mortgage debt was considered a "safe" investment, because whenever someone couldn't pay their mortgage, they would just sell the house, which would have already increased in value. Investors wanted to buy more mortgage debt because it was a (seemingly) risk-free way to make a profit. Banks started giving sub-prime mortgages in order to meet the demand of the investors. When people began defaulting on their mortgages, banks put those houses up for sale. More people were defaulting, and more houses were on the market, so supply of houses shifted right, causing house prices to decrease. People who couldn't make their mortgage payments no longer had an easy out. They couldn't sell their house for a profit anymore because their house wasn't as valuable. Investors were left with worthless CDOs, banks were left with worthless houses, and homeowners lost their houses. The entire credit market froze.
The failure or near failure of America's major investment banks followed the credit freeze. These banks had been household names for decades, but without money coming in from mortgage payments, they didn't stand a chance. Lehman Brothers failed, while Fannie Mae and Freddie Mac had to be bailed out by the government. Americans had put their savings and their confidence into these institutions, and now they were failing. We lost confidence in the financial system as a whole, which only added to the economic woes. With less confidence came less spending and less investment. The stock market plummeted, decreasing confidence even further.
What I've said so far makes the average American seem like a victim of the greedy bankers and investors of Wall Street. While some of that is true, average Americans need to shoulder the blame as well. When everything was going great, people thought they could live above their means forever and get away with it. People making $30,000 a year were buying $700,000 houses, just because they could. Everyone thought that they could get out whenever they needed to and pass on the debt to someone else. Interest rates were extremely low, and money was cheap. Why not buy a new car/house/boat when you were practically being given the money to do so? Average Americans got greedy, Wall Street got greedy, even the government was greedy.
Right now, we are not in a great place economically. Consumer confidence has not been restored, unemployment is still increasing, and the stock market is iffy. Businesses keep closing down and housing prices remain low. Other nations no longer want to invest in the U.S. economy because they think we'll lose their money, and who can blame them?
Starting in 1982, the economy experienced huge growth that showed no signs of stopping. Washington benefited from this growth just as much as the rest of us, so policies were made that encouraged this unprecedented growth and prosperity. This merging of financial and government interests was our first step towards disaster. Government policies leaned further and further towards deregulation (see Clinton years). Newer, more complex financial instruments were created. China and India were developing into economic super powers, and fast. Their new wealth poured into the U.S., making capital even easier to get. People trusted Wall Street; they thought their money was safe in these complicated schemes. Banks gained more power and influence over the government. The line separating commercial and investment banks blurred, a move that hadn't been allowed since before the Great Depression. Aggressive lending practices gave people the ability to live far above their means.
One of the best examples of this was shown through the housing market. Banks gave people mortgages on houses they couldn’t afford, and then sold the debt away to other investors. Buying mortgage debt was considered a "safe" investment, because whenever someone couldn't pay their mortgage, they would just sell the house, which would have already increased in value. Investors wanted to buy more mortgage debt because it was a (seemingly) risk-free way to make a profit. Banks started giving sub-prime mortgages in order to meet the demand of the investors. When people began defaulting on their mortgages, banks put those houses up for sale. More people were defaulting, and more houses were on the market, so supply of houses shifted right, causing house prices to decrease. People who couldn't make their mortgage payments no longer had an easy out. They couldn't sell their house for a profit anymore because their house wasn't as valuable. Investors were left with worthless CDOs, banks were left with worthless houses, and homeowners lost their houses. The entire credit market froze.
The failure or near failure of America's major investment banks followed the credit freeze. These banks had been household names for decades, but without money coming in from mortgage payments, they didn't stand a chance. Lehman Brothers failed, while Fannie Mae and Freddie Mac had to be bailed out by the government. Americans had put their savings and their confidence into these institutions, and now they were failing. We lost confidence in the financial system as a whole, which only added to the economic woes. With less confidence came less spending and less investment. The stock market plummeted, decreasing confidence even further.
What I've said so far makes the average American seem like a victim of the greedy bankers and investors of Wall Street. While some of that is true, average Americans need to shoulder the blame as well. When everything was going great, people thought they could live above their means forever and get away with it. People making $30,000 a year were buying $700,000 houses, just because they could. Everyone thought that they could get out whenever they needed to and pass on the debt to someone else. Interest rates were extremely low, and money was cheap. Why not buy a new car/house/boat when you were practically being given the money to do so? Average Americans got greedy, Wall Street got greedy, even the government was greedy.
Right now, we are not in a great place economically. Consumer confidence has not been restored, unemployment is still increasing, and the stock market is iffy. Businesses keep closing down and housing prices remain low. Other nations no longer want to invest in the U.S. economy because they think we'll lose their money, and who can blame them?
Labels: Recession Causes
posted by Rob Wedge at
10:57 AM
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