The 2008 Recession

The Great Recession was a shocking surprise to the American population when we realized the abrupt and sheer deterioration of housing prices and unemployment rates (Fieldhouse).

The onset of the Great Recession in 2008 ushered in an era of fiscal and economic crises worldwide. As the world’s economy suffered, so did its smaller subunits—including cities. In a time of economic hardship, city residents—virtually the sole financers of cities—move from the expensive downtown areas into more affordable suburbs, taking their property taxes with them. When coupled with raised taxes in order to supply the city budget, such a scenario forces a seemingly endless cycle: High taxes result in residents leaving the city, shrinking the tax base. In response to this, cities must raise taxes to meet their needs, in turn driving more residents out of the city. Once again, the tax base shrinks and the cycle continues (Harvard Law Review, 1997). As unique as these circumstances may seem, many cities experienced a very similar phenomenon in the late twentieth century.

In the 1930s the United States was hit by far the worst financial crisis that it has ever encountered, which was called The Great Depression, but the second worst was not that long ago. During the Financial Crisis of 2007-2009 the United States had a chain of banking failures and a tremendous growth of liability in the federal budget. However, the government had stepped in to prevent some of these failures and through this the concept of “Too Big To Fail” arose once again.

entered into a recession a year ago in December 2007. It took a year for the government to

The 2008 financial crisis led to a sharp increase in mortgage foreclosures primarily subprime leading to a collapse in several mortgage lenders. Recurrent foreclosures and the harms of subprime mortgages were caused by loose lending practices, housing bubble, low interest rates and extreme risk taking (Zandi, 2008). Additionally, expert analysis on the 2008 financial crisis assert that the cause was also due to erroneous monetary policy moves and poor housing policies. The federal government encouraged the expansion of risky mortgages to under-qualified borrowers. Congress pushed for the support of affordable housing through extended procurement of non-prime loans for applicants with low income (Zandi, 2008). The cutting down of interest rates to low levels to supplement for technology bubble of early twentieth century and the effects of Sept 11, a housing bubble was created. This move facilitated individuals with poor credit to obtain mortgages in high percentage when lenders created non-conventional mortgages by offering mortgages with extensive amortization periods, loans with interest and payment alternatives such as ARMs (Angelides et al, 2011). Ultimately, interest rates rose again and many subprime borrowers stopped paying for their mortgages when their interest rate were reset to higher monthly payments. This paper will discuss the impact of the financial crisis as a result of subprime mortgages.

Macroeconomics focuses on the behavior of the economy as a whole, and in the housing market the law of supply and demand is prominent. Between 2007 and 2009 the United States experienced such an economic downturn that is known as, “the Great Recession” (Investopedia, n.d.). One of the causes to this recession was the housing bubble burst in 2006, as home prices began to level off; homeowners began defaulting on their mortgage payments and in larger numbers in 2007 when the major collapse happened. This caused a decrease in demand for properties, creating an oversupply of houses and decreasing property prices across the United States. Not only did the demand for properties decease, so did the consumer spending. Retail spending dropped 8

In December 2007, caused by the housing bubble, what is known as the Great Recession began (“The Great Recession”). Prior to this, people kept buying houses with high risk loans, because their mortgage-backed securities were technically making profits when the house values increased; however, when the house values started to decrease, those securities became worthless, thus people were not able to pay for the house—many people had their house confiscated. As a result of this wealth loss, consumer spending decreased sharply and many banks collapsed. The U.S. government tried to combat this issue, but many of the fiscal policies they had created were controversial because of their interference in the economy. One debate sparked on whether the government should spend its money to stimulate the economy by cutting taxes and creating jobs. While it is argued that the government should have not played excessive role in the economy, implementing the American Recovery and Reinvestment Act was clearly the better option because it prevented the worst-case scenario of economic failure—one like the Great Depression—that could have occurred otherwise without it.

After the great depression back in the 1930’s, America would think they would never run into an economic scare again, until 80 years later when the next big economic disaster would strike. The 2008 economic collapse would not only be triggered and felt by America, but the entire globe as well. You would think that the United States would have a fail-safe plan on defending off another economic crash, but they didn’t and had shown weakness. The 2008 economic collapse is usually refereed to as the global financial crises or the great recession. With the allegation of collapse from large financial institutions, and the bailout of banks by the government, began the second great depression. Many believe that we are still stuck in this recession and have not completed anything to get out of this situation that’s affecting our nation. I believe that the economic crash in 2008 was the finale building block towards a more structural society, political system, and government in the United States of America.

The financial crisis 0f 2007-2008 is widely considered to be the worst financial crisis since the great depression. The effects of the financial crisis were cataclysmic it resulted in companies going under, others getting bailed out by the government and the stock market taking a nose-dive which led to a domino effect of recessions and bail outs around the world.

Since being founded, America became a capitalist society. Being a capitalist society obtains luxurious benefits and rather harsh consequences if gone bad. In a capitalist society people must buy products and spend money to keep the economy balanced, but once those people stop spending money, the economy goes off balance and the nation enters a recession. Once a recession drastically takes a downturn, the nation enters what is known as a depression. In 2008 America entered a recession and its consequences were severe enough for some people, such as President Barack Obama, to compare the recent crisis to the world’s darkest economic depression in history, the Great Depression. Although the Great Depression and the Great Recession of 2008 hold similarities and differences between the stock market and government spending, political issues, lifestyle changes, and wealth distribution, the Great Depression proved far more detrimental consequences than the Recession.

Today more than ever, there is a major and constant fear of an impending recession in our government’s economy. A recession is a downturn in the economy when output and employment are falling for at least a period of six months. (Krugman and Wells, 2006) This is due to a number of factors: people buying less, a decrease in factory production, growing unemployment, a slump in personal income, or an unhealthy stock market. (Harris, 2002) These factors including scarcity, choice, and opportunity cost are the reasons that an economy is considered in a recession and how something like this happens.