The Central Problem Of Depression Prevention

2980 WordsDec 18, 201412 Pages
In 2003, Robert Lucas an esteemed professor at the university of Chicago and winner of the 1995 Nobel memorial prize in economics gave the presidential address at the annual meetings of the American Economics Association. “The central problem of depression-prevention”, he declared, “Has been solved for all practical purposes”. He asserted that macro-economics had not so much extinguished the cycle of recession but had some what tamed it, it was now time to focus on long-term economic growth. (Krugman:2008) On 15th September , 2008, Lehman brothers went under. In the following weeks, the Federal Reserve (FED) and the United States treasury nationalized Fannie Mae and Freddie Mac(the two largest mortgage companies) and they took over the…show more content…
What investors and officials believed to be the storm in entitreity was merely a false alarm, the catalyst for what would follow less than a decade later. Between April 1997 and June 2003, the Dot.com bubble was witnessed, where a series of investors contributed to technology services and internet start up companies in anticipation of a success which was not entirely delivered. (WWW.businessinsider.com) After the bubble had burst, the American and global economy appeared like it would endure a period of stability under the speculation of many senior economist, following 2001 however, the housing market and the American dream became the ‘New thing’ with a backdrop of securitization bonds and CDO’s. (USA Journal) The federal reserve and Robert Greenspan contributed to the craze, a response to the prior dot.com bust. The central bank kept short term interest rates low and created liquidity, it produced a credit fueled boom where the general consensus was that borrowing was the only way to live, in the UK for example, household debt as a percentage of post tax income was at an average 100 percent prior to 2000, by 2007 however, it had nearly reached 175 percent. Not only were people who could not previously afford mortgages taking part, but the middle class also began to accumulate housing assets, middle class households used the rising value of their homes to pay
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