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Running Head: THE GREAT RECESSION OF 2008: CAUSES AND CONSEQUENCES 1

THE GREAT RECESSION OF 2008: CAUSES AND CONSEQUENCES
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The Great Recession of 2008: Causes and Consequences

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The Great Recession of 2008: Causes and Consequences

In 2007, there was financial crisis that resulted to economic fortunes to many countries, causing to what is normally referred to as ‘Great Recession’. The Great Recession started from bursting housing bubble of 8 trillion dollar, and it lasted from December 2007 to June 2009. Even though the great recession did not drag the world back to 1930s, the economic growth in many countries was contracted, and the rate of expansion was slowed all over the place. Apart from the financial ripple effects, it resulted to other effects like, governments fell in Latvia and Iceland, Chinese set aside pleas for more accepting human rights and currency assessment policies, European political union was placed in strain, and Japan anticipated only pathetic measures to battle climate (Verick & Islam, May 2010).

There exists blame going around on what caused the great recession. Politicians are some of the victims blamed. Banks and politicians required deregulation of the banking and investment industries. At the time of great depression in 1930s, directive called the Glass-Steagall Act was practiced separating banking from investment. During 1999, this act was cancelled by bankers, politicians and investment firms assuming that they were strong allow any more great depression happen another time. Before the great recession started, one prevaricate fund manager held a meeting with the Securities Exchange Commission (SEC), to enlighten what was currently happening with mortgages, and what was expected to occur, but the SEC disregarded these word of warnings.

Mortgage companies are other victims of great recession. Nationwide and a congregation of extra mortgage companies began distributing money for homes to citizens, in spite of their income or credit rating. Lending values were lowered more and more, until people with no jobs, no income, no assets and no credit rating were capable to acquire huge mortgages with no money down on evidence of income. These mortgages had low initial mystery rates and were Adjustable Rate Mortgages (ARM), and in a span of two years, they would retune to greatly a higher payment (Montana, September 2010).

The assumption was that, home prices rates would by no means go downward and continue upward. This resulted to people buying several houses. Mortgage companies never cared because, their aim was to sell the mortgages to avoid being in a hook these mortgages defaulted.

There was an alarm with the fall of 2008, as there were major problems like price of the houses continued falling, many people owed in excess of their homes were valued and foreclosures were increasing past predictions of models, and it became their worst situation. Banks began to have harsh liquidity and capital troubles as home values cut down and their mortgage support to CDOs value radically went down. Banks were exposed in jeopardy of running out of cash at any given time or day. People started withdrawing their money from the banks, and banks were urgently looking for mergers and buyers before they underwent bankrupt.

The great recession caused a lot of damage and it was the worst dreadful recession ever since the 1930s. The consequences of the great recession were: not less than 8 million jobs got lost, $13 trillion dollars of Americans wealth was lost, hundreds of bank breakdowns, the S&P 500 went down 57% from its peak in 2007, home values went down by 32% in several parts of the country, in March 2009, each share was $1 at Citigroup and $3 at Bank of America, 2.5 million homes were closed with millions others containing foreclosure fillings and in 2009, one in 45 households were in default (Crafts, February 2011).

By summer of 2009, the economy had come to an end of contracting. However, not only has the economy growth been unable to build enough jobs required to maintain level with the standard population growth, but it has not even been able to employ workers who lost their jobs during the great recession. During the post-World War II recession ahead of early 1990s, the economy took an average of 10 months before it created jobs that t had lost on the recession. After the early 1990s recession, it spent almost two years, and following the early 2000s recession, it spent 3 ½ years. Unluckily, the recuperation as of the Great Recession is following the sluggish prototype of these two other recoveries, although probably with a longer timeline.

16 months after the end of the great recession, which is in October 2010, the economy had 5.4% less jobs, compared to before the experience of recession. Meaning the Great Recession had caused the most horrible act of both worlds: unexpected severe loss of jobs, in combination with a tremendously lethargic recovery. As a result to loss of jobs, incomes in families have decreased. This has seen poverty rise, and children and adults have missed health insurance (Economic Policy Institute, n.d.).

In conclusion, although recovery has started, several risks are still in existence that could pull behind the economy improvements, and create a barrier to efforts of ensuring economy growth to go together with job creation. Major risks to the recuperation relate to the impulsive extraction of the stimulus packages, permanence and rising imbalances, and the difficult of setting the correct stage of regulation for the financial part, to stay away from various mistakes that were done resulting to the start of the disaster in 2007. The route to recovery will be protracted and doubtful, and at the end of the day, will determine whether China (and perhaps, India), can go on to control global growth.

References

Crafts, N. (2011). An historical perspective on the Great Recession. Retrieved from http://www.voxeu.org/article/great-recession-historical-perspective

Economic Policy Institute. (n.d.). The Great Recession. The State of Working America. Retrieved from

http://stateofworkingamerica.org/great-recession/

Montana, S. (2010). The causes of the Great recession of 2008-2009. What and who caused the Great Recession of 2008. What caused the Great Recession of 2008-2009? Retrieved from

http://economics-the-economy.knoji.com/what-caused-the-great-recession-of-20082009/

Verick, S., & Islam, I. (2010). The Great Recession of 2008-2009: Causes, Consequences and Policy Responses. Retrieved from

http://ftp.iza.org/dp4934