Question

ESSAY QUESTION> PLEASE BE VERY CONSTRUCTIVE

1.a) Explain the 2008-2009 recession.

b) what caused it, what happened with the housing market and banking system, and how did policy makers (the gov. and Fed) try to fix it/why was it hard to fix?

Answer 1

1.a) the global recession of 2009 or lesser depression or long recession are the most common names of the Great Recession. In December 2007 the economy degraded and further declined in September 2008. This was the very first time when all the countries were affected in some way or the other. Due to Financial Crisis of 2007-2008 the Great Recession was sparked. The great recession in the United States took place from December 2007 to June 2009; it started with the great downfall of the US labor markets and the resulting loss of wealth, which led to the sharp cutbacks in the general spending of the consumers (Messenger & Ghosheh, 2013). The drop in the consumption and the financial markets triggered the bubble bursting and led to collapsed business investments. The US labor market lost 8.4 million jobs and dry up of the consumer spending as well as the dramatic employment contraction. When the real estate declined, securities declined in value creating the solvency of over-leveraged banks and financial institutions in the United States (In Leab, 2014). Lehman Brothers bankruptcy forced the global economy to fell into the hands of the crisis.

ANSWER (b) The economy showed sign in the year 2006 when the prices of houses start to fall. Nobody realised that too many householders results in too many credit holders in the market. In turn bank also allowed people to go for 100% of the loan amount.

The Gramm-Rudman Act proved to be a nail in the coffin. It allowed banks to go for trading in deratives of profitable nature that they sold to investors. These mortgages were backed by securities, needed home loans as collateral.

Among major causes stock market also played its role. The sudden loss of investing activity created bearish market, draining capital out of business.

Order of durables started to fall in 2006 and by 2008 employment was also declining faster as compared to 2001 recession.

In October 2008, Troubled Asset Relief Program was created which helped to recapitalize the financial sector. The department of Treasury also guaranteed money market mutual funds, thereby stopping the institutional run that had begun in September 2008. To bring banks to the normal level, The federal deposits insurance corporation guaranteed senior bank debt, generating confidence to banks lending markets and bridging lending rates.

This recession was hard to control as it moved from manufacturing to financial sector. Slowly and gradually this event became global and one by one all nations became victims as US economy has a lot of influence on the worlds economy.