When everyone thinks of a recession they think of the great 1930’s depression and the causes of it. However, just recently back in 2008 the United States also felt the effects of a recession that still lingers today. A recession is defined as a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).
With this definition we see that in half a year we could falter into a recession at any time. So what caused the recession of 2008? First we have to look at when it started and then trace back to before this to find what actually happened. In December of 2007 the United States was labeled to be in a recession. The causes of the recession were first seen in the housing market, stock market and government spending was a significant factor in the recession.
The whole recession could have been prevented if the government had proper oversight of banks before they would give improper loans to people who couldn’t afford the payments to repay them. The effects of the recession were huge from slowing down to even completely depleting someone’s retirement account. The recession caused a huge spike in unemployment and then later health concerns arose because there was improper medical coverage for people that had been laid off and were collecting unemployment. Also during the recession a strange thing happened certain classes of wealth were affected differently.
The recession had an impact in everyone’s life and we will see its effects for decades to come. The government needs to have better oversight and regulations of financial institutions to avoid this happening again. “The current recession is one of the longest downturns since the Great Depression of the 1930’s. The last two recessions (1990-1991 and 2001) lasted eight months each, and only two of the 10 previous post-Depression downturns lasted as long as a full year, according to the National Bureau of Economic Research (NBER),” said Chris Isidore.
The recession was also being affected from the start of the housing market because of three things. The first was the housing market and what happened and the spiral effect that it caused throughout the rest of the economy. The weak dollar compared to the rest of the world economy also had an effect on the recession when it came to government spending. The disparity between income classes also had an effect on the recession and it caused a big rift between the middle class into the wealthy and poor.
People can speculate when the recession started and what caused it. But it is widely accepted that the housing downturn, which started in 2006, is a primary cause of the broader economic malaise,” according to Isidore. The prices of houses were about fifty percent higher than their normal prices in May of 2006. During this time the prices of houses dropped dramatically from its peak levels that it reached earlier in the decade. Houses that peaked in price at 500,000 would soon only be worth 250,000. This had a significant impact on the amount of home buying and even home building that occurred around the time of the recession.
This also caused a sharp rise in mortgage foreclosures, which in turn resulted in losses of hundreds of billions of dollars among the nation’s leading banks and a tightening of credit,” said Isidore. The mortgages were out of control as they would give a mortgage loan of 350,000 to a family that couldn’t afford a 200,000 loan. There should have been a better system to regulate who would qualify for loans and how much they could afford. The fall in housing prices would cause a young family with a tight budget who have a house with negative equity in it.
This cause the family to spend more money on their mortgage that what the house was worth. The government should have been able to adjust these mortgages do to no fault of the owner to help lower the chances of a foreclosure. The tight budget and a possible chance of unemployment the family is at a higher risk of losing their house due to the negative equity since they were unable to refinance and falling farther into debt. The government should have allowed the owners to do a one-time no penalty refinance to allow them to be able to keep their home.
The housing market crash helped to start the recession and because of it a lack of jobs and security came soon after. With the lack of home equity a survey by NBER resulted in the finding that 4. 8% of families in the United States had gone through foreclosure by April 2010, (Hurd, 7). This is an astounding rate that has a negative impact for generations. IF a family went through foreclosure they may never have a chance to own a home again. This means they will continue to spend more money to rent a house but wouldn’t be allowed to buy the home because of their credit hit from the foreclosure.
The housing market was one the reasons of the recession. Government spending that created the weak dollars was another. The government has been known to spend money they don’t have. Look at the national deficit to see the facts. But when the nation has to borrow money from other countries to pay off loans to other countries all we are doing is weakening the dollar. But, the government is not the only one to blame for the weak dollar. From 2003 to 2007 the American people invested heavily in three thing, housing, energy, and commodities.
With the people spending their money in these areas they were showing signs that they didn’t trust the dollar. The people didn’t trust the dollar for one reason. “After falling by a typical 8% against major currencies from 2000 to 2003, the dollar dropped all the way down by 30% against these currencies by 2008,” according to Brian Domitrovic. If the government had oversight of banks and lowered their spending the US dollar would have been stronger and this would have helped the economy.
This was a real concern for the people. Another concern for the people was the differences in the wealth classes of the American people. The inequality from people has been a big impact and has caused a financial rift between the wealthy that can buy what they choose and have all the expensive things and the less wealthy that has to live on a budget but still would like to have the nice things. The United States is a country of status and wealth and this has made the country a big consumer if every product.
With this spending people are buying homes that they can’t afford and using the low interest rates that the Federal Reserve is giving them to stabilize the dollar. So how does the recession affect the people? One way it affect the people is unemployment. During the recession the unemployment rate peaked at ten percent in October of 2009 which rose from five percent in May of 2007. A good sign of a recession is unemployment because housing markets had decreased which led to builders being laid off. Also manufacturing of goods decreased.
This was a huge blow to labor workers in industries such as the car industry that suffered badly during the recession. However not all job markets decreased during the recession. The education and health care market increased jobs during this time. Unlike the influx in the job market of builders and manufacturers the education and health job market has increased for the past thirty years. With unemployment rising during the recession another crucial benefit was collapsing and that was everyone’s retirement funds. Retirement for people is what they look forward to when they get there first job.
As they go through the tough times of jobs they look forward to the times when they can sit on the beach and drink margaritas. However because of the recession in 2008 a lot of people are now wondering not when they will get to retire but if they will retire. This is due to two things. The first is that stocks dropped dramatically during this time. “The second effect on retirement is the worsening of the labor market, and particularly the difficulty of finding a job following unemployment in the older population, (Hurd, 16).
Retirement was a dream for many and now some may need to put off their dreams and start concentrating on their kids. While concentrating on their kids they also have to worry about their health. With the increase in unemployment and the effects of people losing money in the stock market health care had a significant impact on people as well. People were unable to afford good health insurance and also couldn’t pay their premiums. Because of that they had to avoid going to the doctor for minor things such as the cold.
This caused a lot of people to get even sicker and then ended up in the emergency room. This was costing people more money in the long run as then they would get bills for the use of the emergency room. The recession also had an effect on the emotional and behavioral health of people. With a look at their future and it being so grim people where suffering from depression at a higher rate during the recession than before. This was something that unless treated would cause people to continue to be unhappy and to seek others way to avoid the depression by either suicide or theft and robbery.
Drugs also became a key factor during this time as people were trying to avoid the realism of the recession so they were using illegal drugs to get away from their real lives. This pushed people into more and more serious drugs that ruined many people’s lives and also ruined their families by spending more money on the drugs that they didn’t have the money for. In Conclusion the recession had a significant impact on people and the economy for many years and will continue to have an effect on people for years to come.
The housing market was the first cause of the recession but wasn’t the only one. It probably was the most impactful one when the prices of houses dropped and people lost equity and the house builders lost quality jobs that they have had for a few years during the housing boom. Government spending also was a key factor to the recession of the recession in 2008. With the government borrowing money to pay debt owed to other countries it helped weaken the dollar and made American fear that the dollar value was going to collapse.
Also the inequality of the wealth classes had an impact as people tried to keep up with the wealthy in consumer choices that they couldn’t afford which put them in debt with credit cards and loans. These had effect on unemployment with the builders and manufacturers as their markets dropped but also had effect on the consumer as prices for product rose due to the demand going down for certain products like the car industry. To keep this type and duration of recession for happening again the American people need to take actions now and so does the government.
People need to live within their means and to only buy things needed and that they can afford. They don’t need to buy out of their means and try to live a life they can’t afford. The government also needs to do the same thing. We need to start paying down our debt and not to keep borrowing money from other countries and try to live within our country’s means. Also the American people need to watch the stock market and housing market for signs of future recessions and to work on implementations of rules and regulations that will keep us from falling into such an extreme recession again.