The Great Recession: Causes, Impacts and Outcomes

1293 words (5 pages) Essay in Banking

18/05/20 Banking Reference this

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The Great Recession

●       What happened?

●       What was done?

●       The effect

●       The outcome

The Great Recession was a period of general economic decline observed in world markets during the late 2000s and early 2010s. The financial crisis was primarily caused by deregulation in the financial industry. That permitted banks to engage in hedge fund trading with derivatives. When the values of the derivatives crumbled, banks stopped lending to each other. That created the financial crisis that led to the Great Recession. The Recession caused a lot of trouble throughout the world. International trade was thrown off balance, lending standards arose causing large amounts of debts, and lots of regulations and rules were enforced so this wouldn’t happen again. The Great Recession spread all across the world but the impacts varied from country to country. The United States got hit very hard by the 2008 financial crash, but countries like Jamaica, Iceland and Latvia received the worst of it. Some Countries are just fully recovering now.

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The Dow opened the year of 2007 at 12,459.54. It rose despite growing concerns about the subprime mortgage crisis. Throughout the year home sales peaked. Mortgages were being given out to pretty much anyone with a brain. Though many people were buying homes the prices of the homes were increasing immensely.  In January 2007, new homes prices peaked at $254,400. Even though it might of seemed good that these prices were high, the people of america were not the ones paying for most of the homes that led to the increase. Banks would be paying for the loans since they had been giving out mortgages to people incapable of paying them back. The banks would try and use this to their advantage. They would pile up these mortgages into something called a CDO. Collateralized debt obligations, a financial tool that banks used to repackage individual loans into a product sold to investors on the secondary market. These packages consisted of auto loans, credit card debt, and a large amount of mostly mortgages. Banks called them mortgage-backed securities if the loans are mortgages. Banks would have these CDO’s rated triple A by ratings agencies, and then put them on the market as an investment for people to buy. Soon after CDO’s flooded the market, synthetic CDO’s joined too. Synthetic CDOs allowed wagers to be made on the success of CDO’s on the market. Banks and others started taking out insurance policies on these CDO’s, but the insurance company’s ran out of funds to pay everyone back. This is when the banks realized that they would have to absorb all of the losses “Banks panicked when they realized they would have to absorb the losses. They stopped lending to each other. They didn’t want other banks giving them worthless mortgages as collateral” (kimberly amadeo, the balance, the 2008 financial crisis). Banks refusing to help each other and allowing maybe one or two banks to go under was a major cause of the financial crash. Banks started to fall, and the government needed to step in.The Federal Reserve began pumping liquidity into the banking system via the Term Auction Facility. But that wasn’t totally enough. There was still a lot of damage done.

A lot had to be done to recover from the financial crash of 2008. Millions of people were put out of jobs, many banks seemed to be falling under. It looked like this was the end. Luckily the government stepped in. A total of 700 billion dollars was put out to help the banks and other organizations recover. This was part of the recovery act of 2009. The mortgage companies fannie mae and freddie mac, the main companies who led the subprime mortgage lending were bailed out 187 billion dollars by the united states treasury. Freddie and Fannie weren’t the only companies that were in need of a bail out. The Treasury used $245.1 billion to buy bank preferred stocks as a way to give them cash. Another $80.7 billion bailed out auto companies. It contributed $67.8 billion to the $182 billion bailout of insurance company AIG. Another $19.1 billion went to shore up credit markets. The bank repaid $23.6 billion, creating a $4.5 billion profit. The Homeowner Affordability and Stability Plan disbursed $27.9 billion to modify mortgages. Though all these companies were bailed, all of the innocent citizens who lost almost everything received almost no help.

The recession that began in December 2007 ended in June 2009 as the economy began growing again, but the unemployment rate did not fall to 5.0 percent, where it was at the start of the recession, until late 2015. Overall the economy has almost fully recovered. “A healthy economy will create around 150,000 jobs per year” (kimberly amadeo, the balance, how is the economy doing now).  In 2018 a total of 312,000 jobs were created, showing that our economy is growing. “Ideal GDP growth 2-3”. The Us GDP growth this year was around 3.4 percent which is ideal. Too high of a GPD can mean its over heating but a good amount of growth is good.The most important rate is the fed funds rate because it guides most other interest rates. “A healthy fed funds rate is 2.0 percent. The current fed funds rate is exactly 2.0 percent.” These low interest rates are good. Interest rates control how expensive it is to borrow for both businesses and consumers. When interest rates are low, you can borrow more cheaply and buy a bigger house, nicer car and more furniture, and who doesn’t want that.

Works Cited

  • Amadeo, Kimberly. “6 Facts That Tell You How the Economy Is Really Doing.” The Balance Small Business, The Balance, www.thebalance.com/how-is-the-economy-doing-3306046.
  • Amadeo, Kimberly. “What Caused the 2008 Financial Crisis and Could It Happen Again?” The Balance Small Business, The Balance, www.thebalance.com/2008-financial-crisis-3305679.
  • Amadeo, Kimberly. “What Was the Fannie Mae and Freddie Mac Bailout?” The Balance Small Business, The Balance, www.thebalance.com/what-was-the-fannie-mae-and-freddie-mac-bailout-3305658.
  • “The Great Recession.” State of Working America, stateofworkingamerica.org/great-recession/.

 

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