The 2008 Recession Affected The Global Economy

First, we need to understand how the Great Recession occurred. It all started with President Ronald Reagan in the 1980s. Reagan was famous for his supply-side economic views (Amadeo 1). He used top-down economics meaning he used government intervention to give businesses tax breaks and subsidies to create economic growth. With this he also started a continuing phenomenon to deregulate Wall Street. He believed this would create vast economic growth and it did. But it created a bubble and it

When the stock market crashed and the worries regarding more economic decline, people from all classes stopped purchasing consumer products. Which lead to reduction in consumer products being made, this caused a reduction in the workforce. As people lost their jobs they were unable to pay for the items that were bought on credit. The unemployment rate rose and cause even less spending to assist to lesson the economic situation.

The recession of 2008, which we are only just starting to come out of, happened as a result of a few major factors. The primary factor was the deregulation of banks during the Bush administration. Another factor was that banks offered loans without looking into the financial stability of borrowers or businesses. Also, credit unions, savings and loans, and banks entered into competition with each other. The Security and Exchange Commission, S.E.C., reduced requirements so that banks could pile up debts.

Because of this downfall of the housing market, the U.S. economy fell along with other markets across the country. Homeowners had mortgages higher than what their homes were valued at, the decline in housing prices caused many people to default on their mortgages which caused the values of mortgage backed securities and CDO’s to collapse, leaving banks and their financial institutions holding those securities with a lower value of

The recession of 2008 is also called the ‘Great Recession’, said to have begun in December 2007, and took a turn for the worse in September 2008, and it was a severe economic problem expanded globally. This recession affected the world economy, and is said to have been the worst financial disaster since the Great Depression. The decline in the Dow Jones this time was -53.8%. Since the official start of the recession in December 2007, and through June 2010 there have been about 2.3 million homes foreclosed in the United States. In 2012, the state with the most foreclosures in January alone was California, with 51,584 houses being repossessed. Unemployment during this collapse was 8.5%, and continued to increase to about 10% as of 2010. People’s reaction to this recession was a huge decrease in spending and borrowing from banks, but an increase in saving.

The credit controls were mild but the effect was fairly dramatic. Consumer spending started falling rapidly. The voluntary limitation on total loan expansion had an effect. Banks were responding to loan limitation by rejecting certain types of loans so that they could reserve more of their loan funds for business customers. A sharp recession developed in 1980 because of Volcker’s tight money and Carter’s credit controls.

History helped to recognize the parallels between these eras and learn from them. The crisis of 2008 was not nearly as bad as the Great Depression, but like the Depression consumers lost trust in the market and were afraid to invest in the economy. The Housing Crash catastrophe, like the Great Depression contributed to the failure of banking institutions and led to high unemployment rates. Unlike the Great Depression, the crisis of 2008 was supported by more than a dozen economic stimulus packages provided by the federal government to jumpstart the economy. The federal government stepped in to bailout the banking institutions to avoid another Great Depression. It is important to look back on the history of these two national devastations and learn from their mistakes so we can be better prepared for future economic downfalls in the

Similarly, the Great Recession was due to consumer spending cutbacks and a drop in demand for the establishment of new housing. In the two decades previous to 2008, the American growth rate was very high. Their household needs also became very high, which made demand increase. Spending was at a high. However personal income was decreased. The consumers then had to borrow money from the banks. This gave the consumers debt. So, when the house prices rose, banks stopped loaning money to people and the people decreased their spending. This happened because the people were not able to pay the banks back. People also cut back on buying or making new houses, so household demand dropped. Many say that this decrease caused the Great Recession. Housing was one of the main subjects that many believe, caused the Great Recession. “Subprime” mortgage availability and low interest

The uncertainty of the financial industry and the nightmare of the housing bubble caused significant damage to the health of the economy. Businesses were unable to get loans, and employees were laid off. State governments suffered due to the high volume of debt and rising rates in unemployment forcing them to make major cuts to their budgets. All of this had a remarkable impact on the global economic climate as well that kept spreading, and many compared this recession to the Great

Farmers suffered when their crops lost value by nearly sixty percent. Unemployment rose in the United States with the lack of jobs in construction and manufacturing. The Great Depression left nearly fifteen million Americans unemployed by 1933. (source 1) The mining and logging industries, once needed for producing, found themselves bankrupt. This affected international trade with more than fifty

The economic meaning of a recession is that the gross Domestic Product (GDP) has declined for two or more consecutive quarters. Unemployment rises, housing falls, stocks fall and the economy is in trouble. Whenever the government sees that the economy is entering a recession it is important for it to act. The U.S acted in two ways during the Great recession of 2008 through fiscal and monetary policies. Renaud Fillieule identifies that “ Monetary and credit expansions have been the main tools used by the U.S. government and central bank to try and recover economically from the Great Recession of 2008” (Fillieule r, Pg. 99 2016). These Keynesian policies are debatable among economist, none the less they were implemented and put the U.S on the road to recovery.

The Recession of 2008 was caused by two major faults: the use of subprime lending and changes in banking culture leaning towards self interest within the banking industry.

Patrick wrote an article “The 2008 Financial Crisis-Causes and Effects” that explains a little about how the economy works and why the economy is where it is currently. “The American economy is built on credit” (Patrick). Now credit can be a good thing when it is used wisely, because that is how people start a business or buy a vehicle. Its sort of like trust, I guess is how I would put it. Meaning that when you go purchase something on a credit card or write a check, money is withdrawn from your account and now you have a deficit of sorts. So when you make your monthly payment on the item that you bought, you get ‘recognized’ in the banking world as being a responsible person for paying your debt. “Recent Market instability was caused by many factors, chief among them a dramatic change in the ability to create new lines of credit” (Patrick). New lines of credit include remortgaging your house and refinancing your

The Federal Reserve lower their fund rates by using open market operations. During the Great Recession, the lowing of federal fund rate leads to lower interest rates. However, the unemployment rate didn’t decrease, leaving the Federal Reserve to maintain their low federal fund rate. With the federal fund rate low, they purse other policies involving money to expand the economy. The fifth fact is that there was many spending programs. Government involvement will stimulate the economy when everyone is thinking of saving. The government spending in terms flow back to the consumer, and that will give them more disposable income; hence, will lead to more consummation from the consumer. The sixth fact is the tax cuts the government made. This is similar to the federal fund rate, with lower tax, there is more incentive for others to invest. The seventh fact is the automatic stabilizers can be important. There are two forms of fiscal stimulus, the first is the direct form and there is an automatous form. During the recession, people are losing their jobs and their income diminish. With no income, people will rely on the government for

The 2008 financial crisis can be traced back to two factor, sub-prime mortgages and debt. Traditionally, it was considered difficult to get a mortgage if you had bad credit or did not have a steady form of income. Lenders did not want to take the risk that you might default on the loan. In the 2000s, investors in the U.S. and abroad looking for a low risk, high return investment started putting their money at the U.S. housing market. The thinking behind this was they could get a better return from the interest rates home owners paid on mortgages, than they could by investing in things like treasury bonds, which were paying extremely low interest. The global investors did not want to buy just individual mortgages. Instead, they bought