The causes, consequences and policy responses of the 2008-2009 recession

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Main Body..........................................................................................................................4

Cause of the Great Recession.........................................................................................4

Consequences of the Great Depression..........................................................................7

Policies response to 2008-2009 recession......................................................................9

Conclusion........................................................................................................................11

References.........................................................................................................................12
 Introduction

The United States witnessed a huge recession in its economy at the end of 2007. The

recession is an important phase of the business cycle. The recession is the phase in which the

economy experiences increased unemployment and a decrease in the real output of the

economy. The recession is the economic phase that follows the economic boom or peak

period in the economy. Once the economy reaches the boom, there will be higher output in

the economy and as a result, the economy will experience a market glut and leads to lower

output and increased unemployment. This leads to the recession and the economy will start to

fall in economic growth and development under the recession.

Some economists predicted that a healthy economy would help in achieving slow

growth, high growth, or no growth. To be a healthy economy, the economy needs to be

expanding and contracting in nature. An economy is said to be in a recession when the period

contracts for more than 6 months in a row or two consecutive quarters. As per the National

Bureau of Economic Research (NBER) (2010), a recession is a significant decline in the

activities related to the economy, which lasts for more than two months, which can be traced

by calculating the real income, real gross domestic product, industrial product, and

employment and wholesale-retail sales.

The recession faced by the US economy has led to an international financial crisis

resulting in the shattering of business operations and confidence of customers in various

countries such as China, the European Union, Japan, and other Asian countries. Many

countries of the World have faced this recession, which results in terming it as the ‘Great

Recession’. This recession has resulted in a financial meltdown not only in the US; but it

gradually affected every corner of the world. After the Second World War, the great

recession was witnessed as the worst downturn of the economy all over the world. According
to the economist, the rise of the great depression was due to the sudden bursting of the

housing bubble in the US. The rapid growth of inappropriate regulation on sub-prime

mortgages resulted in a housing bubble all over the US. This essay will discuss the various

cause, consequences, and the policy undertaken as the response to the 2008-2009 depression

("The Great Recession Of 2008: What Happened, And When?")

Main Body

Cause of the Great Recession

The US faced a huge threat and problems due to the great recession such as banks on the

edge of insolvency, fall in the stock market, stagnation in money market, high records levels

of public debt, and the falling value of the dollar. The global financial crisis was impacted by

the insights of risks, global imbalance, rate of interest, and regulation of the banking and

financial systems. Some of the reasons for the great depression are discussed below:

Housing crash

The housing market of the US plays an important role in determining the spending of the

consumers and the growth rate of the economy. There are various factors excluding consumer

incomes that cause the rise in the price of housing, which caused an overvaluation of the

assets. The housing sector was at boom which means, the price of housing was increasing

until 2006 after which the economy of the US experienced a price decrease. The spending of

the customers was impacted significantly as people could not re-mortgage to acquire extra

capital for spending which resulted due to the fall in the price of housing to correct the

imbalance in the economy ("The Great Recession Of 2008: What Happened, And When?").

.
 Subprime Mortgages Burst
The mortgage industry has the full authority to sell mortgages without taking into

consideration the amount paid back by the buyers due to the absence of any guideline of

subprime mortgages. According to a study conducted by Global research (), the estimated

value of US subprime mortgages in March 2007 was at $1.3 with an outstanding over 7.5

million first-lien subprime mortgages. It resulted due to the spike of the subprime mortgage at

20% off the origination of mortgages in the peak time of the US housing bubble. The figure

provided below shows the expansion of the subprime mortgage during the year 2004-2006.

The Community Reinvestment Act failed to cover the massive foreclosure caused due to the

huge majority of mortgages of the subprime that affected the independent and institutional

mortgage brokers. Hence, it indirectly caused the slow down of the growth rate and even

slow happening to a reduction in investments and consumer spending ("The Great Recession

Of 2008: What Happened, And When?").

Source: US Central Bureau, State of Nation’s Housing Report 2008

According to the economist, the monetary authorities of the US adjusted the rate of

interest at an unprecedented level which resulted in the booming of debt finance consumption

and in boosting the housing bubble. While some of the economists argued that the presence

of the low-interest rate for too long which even was at 1 percent in 2004 resulted in the

activation of the great depression. The monetary policy of the US economy was blamed as it

failed to tackle the overvaluation of the assets of the housing bubble and contributed to the

swift rise in the growth of subprime mortgages at the same time.

Credit Crunch

The defaults in the high subprime mortgages were the main reason behind the credit

crunch which resulted in a sudden shortage of funds and a decline in the available loans in the

markets. The rise in risky mortgage loans caused a loss for various commercial banks and

investment banks in the US markets. So, the banks were hesitant to lend money to any other

banks or individuals resulting in a scarcity of funds in the money market. The financial sector

had faced a shortage of liquidity which lead to difficulties and an increase in the expenses in

the process of borrowing which resulted in a lowering of the level of investment and

consumer spending ("The Great Recession Of 2008: What Happened, And When?").

National Debt and deficit in the budget

The national debt of the US was at 65% of its GDP for 2007 and its situation worsens

after the inclusion of the pension liabilities. The increase in the budget deficit caused the

government for no option for expansionary fiscal policy since the demographics were against

fiscal stability and the phase of the economic cycle deteriorated the deficit. The deficit had

created difficulties such as difficulties in attracting the flow of capital as the Asian investors
were aware of the deficit in the US economy which resulted in the devaluation of the dollar

due to the slowdown of the flow of capital. The fundamental imbalance between consumption

and domestic production can act as a constraint in the pathway of future growth of the US

economy.

Devaluation of Dollar

The basic theory of economics tells that a fall in the rate of exchange will result in

boosting up the level of exports and expansion of the export sector. On the other hand, the

depreciating value of the dollar results in the contribution to fall in the standards of living and

cost-push inflation. The consumers faced an increase in the price of the consumer goods

resulted due to the lowering of the spending capacities of individuals. The US also faced a

reduction in the level of competition in comparison to its trading partners after the decline in

the US dollar ("The Great Recession Of 2008: What Happened, And When?").

Consequences of the Great Depression

All the economies of the World faced a crisis due to the recession in the economy of the

US at the end of 2007. Countries, which are categories as middle income such as eastern and

central Europe and the Commonwealth of Independent States, were affected severely whereas

the countries having low income such as Ethiopia and Uganda witnessed growth in their

economies despite this downturn. The reason behind the less impact of the great depression

on the low income countries was due to the negative repercussion for poverty which leads to

a slower rate of growth of the economy. The open and smaller economies had been affected

strongly and the emerging economies of the various countries were able to survive due to the

assistance from government spending and domestic demand. The Indian and the China

economy were able to recover themselves faster after the great recession. The impacts of the

great recession were different in the different countries of the World. The results were
devastating in nature due to the contribution of the massive forces. The bank failed to pay

back their losses, the stock market failed and the homeowner failed to afford their payment of

the mortgage. The mortgage lenders made avoidable mistakes, the government of the US and

Banks, which resulted in a rise in the level of unemployment. ("What Was The Great

Recession? History, Causes And Consequences").

The United States

The labor market of the US was badly affected due to the great recession, even though

the government had adjusted the rate of inflation. The economy grew in Q3 of 2009 at 2.2,

Q4 of 2009 at 5.6%, and in Q1 of 2010 at 2.7% but the rate of unemployment remained at a

higher range. There was a rise in the rate of unemployment from 9.5% in June 2009 to

10.1% in 2009 October, which then fell back in June 2010 at 9.5%. The Beveridge curve

helped in understanding the discontinuation between supply and demand patterns of the

workforce which was seen in the statistical report such as layoff rate, hiring rate, and rate of

unemployment ("What Was The Great Recession? History, Causes And Consequences").

Source: Bureau Census Gov Labor statistic

for the high rate of unemployment. The increase in the extended benefits of unemployment

resulted in rising from 0.4% to 1.7% of the rate of unemployment. The higher rate of

unemployment can be a permanent issue as becomes people who are unemployed for a longer

time period are not enough productive and competitive in the job market. According to

Krugman, the issue related to high unemployment is that the upsurge in the level of

structural unemployment in the presence of weaker economic policy resulting in a rise in the

rate of inflation more than the rate of unemployment ("What Was The Great Recession?

History, Causes And Consequences").

The American economy was badly affected after this collapse of the economy. The

companies, which had securities with Subprime mortgages, faced a huge loss by the

unexpected rate of foreclosure. More than 12.5 million people in the US lost their homes and

become defaulted and the rate of unemployment rose to 8.1%. The car companies of the US

such as Chrysler and General Motors were declared bankrupt during that period. They had to

accept the proposal of partial government ownership to bailout programs. The level of

confidence of the customers reduced heavily which lead the people of America to restrain

their spending pattern in expectation of bad times. The health sector of America was also

badly affected due to this great recession of 2008-2009 ("What Was The Great Recession?

History, Causes And Consequences").

Policies response to 2008-2009 recession

The US economy in the years 2008-2009 witnessed the great recession which made

many changes in the economy. The policies undertaken in the US economy to handle the

great recession can be summarized as follows:

monetary policy in which the interest rate was reduced in the economy by the Fed, the

quantitative easing method was used and the deposit guarantee schemes and other

measures were introduced to protect the financial sector of the economy. The Federal

Reserve eased off the traditional rate of interest used as an instrument of monetary

policy by undertaking various policies to relax the condition of credit and support the

broader economy. The US economy after the onset of the great recession at the end

of 2007 started spreading the funding markets that exist within the banks by putting

pressure on the bank charges and rate of interest paid ("Networks Of Economic Policy

Expertise In Germany And The United States In The Wake Of The Great Recession")

2. The fiscal policy introduced measures such as the increased public spending

and mainly in public infrastructure and overall tax reductions, which were mainly

focused to increase the aggregate spending in the economy. Most of the countries that

are categories as OECD and non-OECD used economic stimulus package for

improving their national infrastructure. The infrastructure that was mainly focused on

were the railroads, airports, public transport, schools, childcare facilities and roads,

hospitals, energy networks, modern ICT infrastructure, and universities. The

government invested in infrastructural development to maintain sustainability and

resource preservation

3. The US economy practiced the policies such as export financing and tariff

reduction and the economy also gave importance to limiting the lay-offs in the
 economy due to recession, introducing the employment schemes and minimum

wages, etc.

Conclusion

In the era of globalization, countries all around the world are influenced by the

fluctuation of the world economy. The Great Recession has affected every economy of the

World in various ways such as shortage of money in the hands of people, fall in demand,

lower growth rate, and increase in the rate of unemployment. On the contrary, the recession

has helped in transforming the business outlook of the economies for the future. The

recession has lowered the process of growth but it has helped in generating new and

innovative ideas and policies for stimulating the economic growth of the economies of the

World.
 References

"Networks Of Economic Policy Expertise In Germany And The United States In The Wake

Of The Great Recession". Taylor & Francis, 2020,

https://www.tandfonline.com/doi/full/10.1080/13501763.2018.1518992.

"The Great Recession Of 2008: What Happened, And When?". The Balance, 2020,

https://www.thebalance.com/the-great-recession-of-2008-explanation-with-dates-

4056832.

"What Was The Great Recession? History, Causes And Consequences". Thestreet, 2020,

https://www.thestreet.com/politics/what-was-the-great-recession-14664025.

Stewart, Carolyn. "Census Of Population And Housing - Publications - U.S. Census

Bureau". Census.Gov, 2020, https://www.census.gov/prod/www/decennial.html.

U.S. National Central Bureau - Interpol | USAGov. (2020). Retrieved 10 December 2020,

from https://www.usa.gov/federal-agencies/u-s-national-central-bureau-interpol