Question

This week's material focuses on the Business Cycle and resulting periods of economic prosperity (booms) and recessions (busts). Discuss your own or others' (people you know or have read about - if the latter, please cite your source or include your source in your post) experience with the Great Recession AND our economy's subsequent recovery. Share your thoughts on any aspect(s) you wish, including the impact on families, businesses, social programs (including educational funding or funding for any other program subsidized by the federal and/or state government), job wages/salaries, the future, etc.

Answer 1

The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles are generally measured using the rise and fall in the real gross domestic product (GDP) or the GDP adjusted for inflation.

The business cycle should not be confused with market cycles, which are measured using broad stock market indices. The business cycle is also different from the debt cycle, which refers to the rise and fall in household and government debt.

The Great Recession is a term that represents the sharp decline in economic activity during the late 2000s. This period is considered the most significant downturn since the Great Depression. The term Great Recession applies to both the U.S. recession, officially lasting from December 2007 to June 2009, and the ensuing global recession in 2009. The economic slump began when the U.S. housing market went from boom to bust, and large amounts of mortgage-backed securities (MBS's) and derivatives lost significant value.

• The Great Recession refers to the economic downturn from 2007 to 2009 after the bursting of the U.S. housing bubble and the global financial crisis.
• The Great Recession was the most severe economic recession in the United States since the Great Depression of the 1930s.
• In response to the Great Recession, unprecedented fiscal, monetary, and regulatory policy was unleashed by federal authorities, which some, but not all, credit with the subsequent recovery.

According to a 2011 report by the Financial Crisis Inquiry Commission, the Great Recession was avoidable. The appointees, which included six Democrats and four Republicans, cited several key contributing factors that they claimed led to the downturn.

First, the report identified failure on the part of the government to regulate the financial industry. This failure to regulate included the Fed’s inability to curb toxic mortgage lending.

Next, there were too many financial firms taking on too much risk. The shadow banking system, which included investment firms, grew to rival the depository banking system but was not under the same scrutiny or regulation. When the shadow banking system failed, the outcome affected the flow of credit to consumers and businesses.

Other causes identified in the report included excessive borrowing by consumers and corporations and lawmakers who were not able to fully understand the collapsing financial system.

In the wake of the 2001 recession and the World Trade Center attacks of 9/11/2001, the U.S. Federal Reserve pushed interest rates to the lowest levels seen up to that time in the post-Bretton Woods era in an attempt to maintain economic stability. The Fed held low interest rates through mid-2004. Combined with federal policy to encourage home ownership, these low interest rates helped spark a steep boom in real estate and financial markets. Financial innovations such as new types of subprime and adjustable mortgages allowed borrowers, who otherwise might not have qualified otherwise, to obtain generous home loans based on expectations that interest rates would remain low and home prices would continue to rise indefinitely.

However, from 2004 through 2006, the Federal Reserve steadily increased interest rates in an attempt to maintain stable rates of inflation in the economy. As market interest rates rose in response, the flow of new credit through traditional banking channels into real estate moderated. Perhaps more seriously, the rates on existing adjustable mortgages and even more exotic loans began to reset at much higher rates than many borrowers expected or were led to expect. The result was the bursting of what was later widely recognized to be a housing bubble.

During the American housing boom of the mid-2000s, financial institutions had begun marketing mortgage-backed securities and sophisticated derivative products at unprecedented levels. When the real estate market collapsed in 2007, these securities declined precipitously in value. The credit markets that had financed the housing bubble, quickly followed housing prices into a downturn as a credit crisis began unfolding in 2007. The solvency of over-leveraged banks and financial institutions came to a breaking point beginning with the collapse of Bear Stearns in March 2008.

The U.S. Federal government spent $787 billion in deficit spending in an effort to stimulate the economy during the Great Recession under the American Recovery and Reinvestment Act, according to the Congressional Budget Office.