The Great Recession
The Great Recession occurred in America between the years of 2008 and 2009, and still affects the country to this day. It occurred because of a decline in GDP growth, or the gross domestic product. The gross domestic product is a rate which measures how fast the economy is growing. The slowdown was caused by many events and mistakes by American citizens and bankers.
Causes: The Domino Effect
It is hard to trace the Great Recession back to one single cause. The causes were more like a domino effect; one event led to another and another until the entire situation exploded in everybody's faces.
It all started back in the 1950s and '60s, after World War II, when baby boomers were gathering a lot of wealth into the middle class because of the expansion of technology. The expansion in technology led women and men to work more hours and companies to expand and give better paying jobs. This allowed baby boomers to buy more and move into better neighborhoods with larger houses which they received mortgages for. Over the course of time the expansion era went into the 70-80s and these homes built up value because of the real estate value went up since more people wanted homes, and equity built up because of long periods of time where people were paying their mortgages off steadily. During the 1970s and 1980s, with a few discrepancies, the housing bubble continued to expand because of more demand.
At the beginning of the 80s companies began investing more money into the stock market because they could make more money that way than in infrastructure. This meant companies stopped expanding, hiring people, and giving raises. In the early 2000s, seeing that the economy was slowing down, President George Bush gave everybody tax cuts so they would buy goods and stimulate the economy. Instead, the people invested in homes, which they could barely afford. Banks saw this, so banks lowered qualifications and give out subprime mortgages.
More people were getting loans, the economy started slowing down, companies were still investing in stocks instead of infrastructures, and housing demand was going up. Because the demand was rising, prices were going up as well at a fast rate and interest rates began going down. Companies began basing investments on bad mortgages, and they began losing money. As a result, they lied about the monetary numbers (amount of cash) they had until eventually they could not lie anymore. Since the stock market was based on how these companies were doing, the stock market began to fail. More and more people could not afford their mortgages, making banks lose money, and then they foreclosed. People could not afford to buy goods because their credit was ruined since they defaulted on their mortgages. Interest went up for everybody, because the bank wanted more money, and more and more people defaulted on their mortgages. Company investments in mortgages failed, which made more companies fail and debt increased. Slowly, the whole economy collapsed. Everybody ignored the situation until the situation could not be left alone for any longer.
At the beginning of the 80s companies began investing more money into the stock market because they could make more money that way than in infrastructure. This meant companies stopped expanding, hiring people, and giving raises. In the early 2000s, seeing that the economy was slowing down, President George Bush gave everybody tax cuts so they would buy goods and stimulate the economy. Instead, the people invested in homes, which they could barely afford. Banks saw this, so banks lowered qualifications and give out subprime mortgages.
More people were getting loans, the economy started slowing down, companies were still investing in stocks instead of infrastructures, and housing demand was going up. Because the demand was rising, prices were going up as well at a fast rate and interest rates began going down. Companies began basing investments on bad mortgages, and they began losing money. As a result, they lied about the monetary numbers (amount of cash) they had until eventually they could not lie anymore. Since the stock market was based on how these companies were doing, the stock market began to fail. More and more people could not afford their mortgages, making banks lose money, and then they foreclosed. People could not afford to buy goods because their credit was ruined since they defaulted on their mortgages. Interest went up for everybody, because the bank wanted more money, and more and more people defaulted on their mortgages. Company investments in mortgages failed, which made more companies fail and debt increased. Slowly, the whole economy collapsed. Everybody ignored the situation until the situation could not be left alone for any longer.
Effects of Recession on America
Like with the Great Depression, the difficult economic times affected Americans in very various ways:
- "almost 40% of households have been affected either by unemployment, negative home equity, arrears on their mortgage payments, or foreclosure."
- "25% of respondents aged 50-59 reported they had lost more than 35% of their retirement savings"
- "about 18% of workers will experience unemployment over a 12 month period"
- "Some younger workers who have suffered unemployment will not reach their expected level of lifetime earnings and will have reduced resources in retirement as well as during their working years."
The Recovery Plan
For a while, the recession was ignored by the federal government. They believed the circumstances would improve on their own, and that they could not do anything to fix the situation. Eventually, they saw that the economy was not getting better on their own so they decided to attempt to fix it using a few different policies:
- Troubled Asset Relief Program (TARP): this program bailed out banks and auto industries who went bankrupt in the because of the recession
- Increased money supply- the idea behind this was that if the government increased how much money was coming out of the treasury, then people would have more money and spend it on goods, in turn stimulating the economy
- Stimulus checks- this was free money from the government that was meant for buying goods in order to make the economy move a little
- Stress Tests- these were given to big banks to see if they could withstand the effects of future circumstances
What Is To Come?
Looking into the past, it would be easy to hypothesize that none of these policies will work at digging us out of financial turmoil. In the Great Depression, Franklin Roosevelt came up with even more policies in order to get the economy to start moving again. However, the event that really pulled them out of the depression was World War Two. Even now, people are still suffering from the recession. What will it take to pull America out of the slump? That is only answered by assumptions and guesses.