The Great Recession: A Case Study

A nation’s economy plays a vital role in how a nation operates. The United States economy faces a large variety of problems in this paper; we will focus on 4 major economic problems, unemployment, inequality, federal debt, and the financial/credit market. All four issues are interconnected in some way with deep social and economic implications. These issues were emphasized during the Great Recession that hit the U.S. economy in 2007.In the following paper, we will look at each of the four topics individually as well as look at how each plays a significant role in one another’s overall impact on the U.S. economy as well as individuals in the United States. The United States plays a crucial role in the world economy, meaning that every issue and difficulty faced the United States economy has implications far outside the U.S., understanding how these issues relate to one another sheds insight into just how connected every area of the economy actually is.

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.

In 2008, USA experienced another tragic downfall when her market went down and unemployment rate charged up. Millions of workers lost their jobs; from the young, the old, the whites, Asians, Latinos, both men and women. Distress filled every household as prices rose and income fell. The whole country was in turmoil back then.

Everybody in the United Stated was affected by the recession that began in December of 2007 and spanned all the way to June 2009. Even though the recession is over, many people are still being affected by it and have still not been able to recover from the great recession. “The recent recession features the largest decline in output, consumption, and investment, and the largest increase in unemployment, of any post-war recession”. Many people lost their jobs due to the recession and some of them are still having a hard time finding jobs and getting back on their feet. Businesses

The Depression was a gruesome time where people had worked relentlessly to survive. Unemployment today is as severe as it was in the 1930s, the unemployment rate of today is nowhere near the unemployment of the Great Depression. A pair of economists with the Federal Reserve Bank of Dallas created report called “A Historical Look at the Labor Market During Recessions”. The report is a graph of the WWII Recession, showing that the unemployment rate of a few years ago has past the unemployment rate of the WWII Recession. In 2008 the authors wrote the Unemployment Rate, it’s a report that describes the recessions of the past to the years of 2006 to 2011. The most of the recessions are above or near the average, but the highest recession is the Great Depression.

Today the United States Americans more than ever; there is a constant fear of an awaiting recession due to the economy. The recession in the later 2000’s has been known as the greatest economic decline since the Great Depression. The United States of America, the banks and businesses are not able to succeed and are failing due to the market. Many people across America cannot afford their homes or bills due to the unemployment rate that seems to keep increasing. Many people blame this on the higher oil or gas prices, and the wars that the United States acts on. The recession has overall declined our economic activity in business profits, employment, and investment. This is all due to our falling market, and the rise of prices that so many Americans cannot afford.

In recent years, the economy in the United States has been in what most would see as a recession. American people differ in the way they react to a recession. Some, such as Michael Moore, feel it becomes a downward spiral as big business and it’s stockholders gain more money and power, and it’s workers gain less money and stability.

In the midst of the current economic downturn, dubbed the “Great Recession”, it is natural to look for one, singular entity or person to blame. Managers of large banks, professional investors and federal regulators have all been named as potential creators of the recession, with varying degrees of guilt. No matter who is to blame, the fallout from the mistakes that were made that led to the current crisis is clear. According to the Bureau of Labor Statistics, the current unemployment rate is 9.7%, with 9.3 million Americans out of work (Bureau of Labor Statistics). Compared to a normal economic rate of two or three percent, it is clear that the decisions of one group of people have had a profound affect on the lives of millions of

Strother made a special point throughout the class to ask this questions way to many times, but it stuck in everyone’s head and I’m sure it is in everyone’s nightmares. As the World Bank shows, in 2007 when the great recession hit, the unemployment rate in 2007 when the recession started it was at 5.0 percent, in June of 2009 it rose to 9.5 percent. As the inflation rate was at 2.08% in 2007 and by 2009 it was at 0.03%. During the great recession, the unemployment rate was by far the scariest number I ran across. With all those Americans out of work it lead to the United States to go into the one of the largest budget deficits ever. The United States hit the all time low with numerous amounts of money being spent by the government but no money being spent by the citizens, which was the beginning of the huge debt we are in now and trying to get out

In August 1929, the peak of the stock market boom, the unemployment rate in the United States was only about three percent. By the end of 1933, the unemployment rate was a staggering twenty-five percent. Over thirteen million people lost their jobs during these years. To put those figures into perspective, the unemployment rate during the recent Great Recession reached only ten percent at its peak in October 2009! Starting in 1930, consumers stopped purchasing goods as they had in the past. Either they didn’t have the money, or they were afraid to spend in fear that the money would be needed more urgently later. The decline in consumer spending further exacerbated the Great Depression because fewer people were buying things. Manufacturing companies did not need to produce as much as they had before, leading to a reduction in the work force. As people lost their jobs, they were unable to keep up with payments for items bought on credit before the financial crisis. The vicious cycle continued from

The United States is currently experiencing a slow recovery from the recession of 2008-09. The current unemployment rate is 7.7%, which is the lowest level since December of 2008 (BLS, 2012). However, this rate is believed to higher than the rate that would occur if the economy was operating at peak efficiency, and it is also believed that there are structural issues still underpinning this performance. For example, the number of Americans who have exited the work force as the result of prolonged unemployment is believed to be higher than usual. In addition, the Congressional Budget Office (CBO, 2012) notes that long-term unemployment of greater than 26 weeks is at a much higher rate than normal, which will have adverse long-run effects on the economy, since workers with long-term unemployment often find their career paths derailed.

The world’s financial system was almost brought down in 2008 by the collapse of Lehman Brothers that was a major international investment bank at that time. The government sponsored these banks’ bailouts that were funded by tax money in order to restore the industry. Before the crisis, banks were lending irresponsible mortgages to subprime borrowers who had poor credit histories. These mortgages were purchased by banks and packaged into low-risk securities known as collateralized debt obligations (CDOs). CDOs were divided into tranches by its default risk. The ratings of those risks were determined by rating agencies such as Moody’s and Standard & Poor’s. However, those agencies were paid by banks and created an environment in which agencies were being generous to ratings since banks were their major clients.

In December of 2007, the United States entered a recession that was ignited by the global financial crisis. A recession is a period of decline in economic activity. The Great Recession, as Americans referred to the recession of 2007, was the longest recession since the Great Depression (Homan & Matthews , 2008). With inflation occurring and the housing market in shambles, Americans struggled to live during this horrific period in U.S. history. Millions of Americans are out of work, and U.S. companies are hesitant to hire employees. Lawmakers change financial policies to provide recovery to the country. The financial bailout is used to aid banks and states to build infrastructure. The Federal Reserve is printing money at an all-time high

Rating agencies also had a strong motivation to compete for market share by catering to their clients. In 2000, Moody’s became an independent, publicly owned firm after being released by its parent company, Dun & Bradstreet. This placed even more pressure on Moody’s managers to increase revenues and improve their shareholder’s returns. (Lawrence, p. 456) From this point on, we begin to see the credit rating agencies drastically underestimate the risks of mortgage-backed securities in a selfish attempt to further their own bottom lines. The birth of structured finance came from new techniques of quantitative analysis used by Wall Street investment banks, and suddenly, Moody’s was not just evaluating corporate, municipal, state and federal government bonds. Structured finance consisted of combining income-producing assets—everything from conventional corporate bonds to credit card debt, home mortgages, franchise payments, and auto loans—into pools and selling shares in the pool to investors. (Lawrence, p. 456)

The incumbent credit raters had received severe criticism following the collapse in creditworthiness and prices of mortgage-and asset-backed securities during the financial crisis in 2008 and 2009. The three large rating agencies were accused of facilitating a vast bubble in these securities by issuing overly