I Love the 2000s...Part 8

There have been trying times throughout our history and near the end of the 2000s, economically we entered one of the toughest times ever. The crisis has still continued to this day and could be another year before the burden of it starts to decrease.

#3 Great Recession/Economic Crisis

Since the end of 2007 until now and tomorrow, a recession has affected the United States as well as several countries in the world. The financial crisis that we are in the midst of has been compared at times to the Great Depression and some refer to it as “the Great Recession”. The recession was triggered by mistakes and irresponsibility in the banking system. This trigger would lead to the collapse of financial institutions, the stock market struggling, and bailouts to aid banks. This trickled down beyond jobs and the economy as mortgages and the housing market was also terribly affected. Key businesses bottomed up and economic spending and activity declined. Economies worldwide would feel some of these same problems and credit tightened up as trade declined as well. In response, money that in reality wasn’t really there had to be spent in terms of a stimulus and bailouts for companies in order to prevent even more problems to occur.

About a year before the crisis began to break out, the housing bubble was reaching its peak and there were high default rates on adjustable rate and subprime mortgages increasing. Once interest rates began to increase and housing prices decreased during 2006-2007; refinancing became a struggle. Defaults and foreclosures were becoming more common. The low interest rates were a facilitator for the problem as it created easier conditions to invest in housing with low credit rates. This combination of easy credit alongside an inflow of money created the housing bubble. As housing prices were down, the major global financial institutions that had borrowed and invested a lot reported significant losses. These institutions as well as certain banks then had to deal with debt burdens on top of loans without a financial cushion intact. This affected the ability of financial institutions to lend money and thus activity slowed down. Key financial institutions insisted that banks provide funds to encourage lending and restore a sense of normalcy. Additionally, to counteract some of the downward swing, there would be government assistance. U.S housing prices had decreased by 20% by September 2008 from where they were two years earlier and around the same time 9.2% of all U.S. mortgages were in foreclosure or delinquent. That number increased to 14.4% this past September. Major U.S. investment banks and government sponsored enterprises Fannie Mae or Freddie Mac then played a crucial role in the expansion of higher-risk lending. Some researchers and economists can trace these two to the root of the crisis and problem we are in the midst of now.

The crisis, though, would go beyond those companies and the mortgage area. U.S. and European banks from the beginning of 2007 to a few months ago had lost over $1 trillion from bad loans off of toxic assets. And this number is expected to continue to go up. Besides Freddie Mac and Fannie Mae being affected; Lehman Brothers, Merrill Lynch, AIG, Wachovia, Bank of America, and Washington Mutual were also seeing a lot of red and losses. It would be in the fall of 2008 that thinks truly hit the toughest stretch. The withdrawal from money markets was $144.5 billion one week compared to the prior week only having $7.1 billion. That big difference interrupted the possibility of corporations to replace their short-term debt. In response, the U.S. government extended insurance for money market accounts with temporary guarantees. This was shortly followed by the Treasury Secretary, Henry Paulson, holding a meeting with the Chair of the Fed, Ben Bernanke, in order to discuss a bailout that would total $700 billion. This was seen as the only solution to avoid a total economic and financial collapse. The Emergency Economic Stabilization Act was signed into a law on October 3, 2008. This act would implement Troubled Asset Relief Program (TARP).

This financial crisis started to become more global than just domestic. European bank failed, declines in various stock indexes, and large reductions in the market value of equities and commodities all occurred. With problems outside the U.S. in many areas, there was fear of a global economic collapse. One study released mid-2009 confirmed that the U.S. economy had spent and borrowed too much during the decade and the rest of the world was dependent upon the U.S. as a major consumer for the global demand. The economic crisis subsequently affected the U.S.’s contribution. Real gross domestic product (the output of goods and services produced) decreased at a rate of close to 6% at the end of 2008 and beginning of 2009. By October 2009, the U.S. unemployment rate increased to 10.2%; the worse in almost thirty years.

To respond to all these problems, the U.S. has carried through on two stimulus packages that have totaled close to $1 trillion during 2008 and 2009. These large fiscal stimulus packages work by borrowing and spending to offset the reduction in private sector demand. Additionally, President Obama along with key advisers introduced a series of regulatory proposals in June 2009. Amongst the proposals were consumer protection, executive pay, bank financial cushions, and expanded regulation of the shadow-banking system and derivatives.

It has been about two years since the crisis's beginnings occurred and it is hard to tell how long things will continue to be bad. Unemployment has not changed too much yet according to some reports jobs and the economy seemed to be poised to have some positive results in early 2010. However, it could take close to two years before we truly see big change and a positive turn. Bailouts and stimulus packages; despite the controversies; were necessary and are beginning to show their importance and I believe that in the next 2-5 years people will see their impact. Without a doubt, though, this was certainly a major event that shaped the 2000s.

Now what can outrank a near financial fallout and the crisis that ensued; well a historic election that took the national landscape by storm in 2008.