Christopher it? And, are we completely recovered from

Christopher Smith

John Hoback

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Macroeconomics

1 December 2017

The Great Recession

When I was a child, my Grandparents told me the hardships of
living during the Great Depression of the 1930’s. My Grandmother and her mother
came to this country in the middle of the Depression from Sicily. She would
tell me of having to sell chickens door to door to make money, so her Father
could scrape enough together to build a house in Easton for their family. They
made it through the Great Depression and the family thrived throughout the
recovery of the U.S. I almost got to see what it was like for them as an adult
when the world went through the Great Recession. The time of the late 2000’s
was the worst economic downfall since the Great Depression my grandmother lived
through. What were the causes of this? How did the US recover from it? And, are
we completely recovered from it today?

There were numerous factors that caused the Great Recession.
One of the first was the United States subprime mortgage crisis. The United States
subprime mortgage crisis was a nationwide banking emergency, occurring between
2007-2010 which was caused by a large decline in home prices after the collapse
of a housing bubble, leading to mortgage delinquencies and foreclosures and the
devaluation of housing related securities. Banks offered easy access to money
before the mortgage crisis emerged. Borrowers took out high-risk mortgages, and
they qualified for mortgages with little money or no documentation. Even people
with poor credit could qualify as subprime borrowers.

Unfortunately, the mortgage crisis began to intensify in
2007. Home prices stopped going up at a breakneck speed, and prices started
falling in 2006. Borrowers who bought a more expensive home than they could
afford eventually stopped making their mortgage payments. To make matters
worse, monthly payments increased on adjustable rate mortgages as interest
rates rose higher. Homeowners with unaffordable homes were left with few
choices. They could wait for the bank to foreclose, they could renegotiate
their loan in a workout program, or they could just walk away from the home and
default. Of course, many also tried to increase their income and cut expenses.
Some were able to bridge the gap, but others were already too far behind and
facing mortgage payments that simply weren’t sustainable. Traditionally, banks
could recover the amount they loaned at foreclosure. However, most home values
fell to such an extent that banks increasingly took large losses on defaulted
loans.

As more borrowers stopped making their mortgage payments,
foreclosures and the supply of homes for sale increased. This placed downward
pressure on housing prices, which further lowered homeowners’ equity. The
decline in mortgage payments also reduced the value of mortgage-backed
securities, which eroded the net worth and financial health of banks. This
vicious cycle was at the heart of the crisis.

By September 2008, average U.S. housing prices had declined
by over 20% from their mid-2006 peak. This major and unexpected decline in
house prices means that many borrowers have zero or negative equity in their
homes, meaning their homes were worth less than their mortgages. As of March
2008, an estimated 8.8 million borrowers – 10.8% of all homeowners – had
negative equity in their homes, a number that is believed to have risen to 12
million by November 2008. By September 2010, 23% of all U.S. homes were worth
less than the mortgage loan. U.S. home values dropped by 26 percent from their
peak in June 2006 to November 2010, more than the 25.9% drop between 1928 to
1933 when the Great Depression occurred.

The subprime mortgage crisis caused GDP to fall and
unemployment to rise across the U.S. Around 8.7 million jobs were lost by Americans
from February 2008 to February 2010, and GDP fell by 5.1%, making the Great
Recession the worst since the Great Depression of the 1930’s. Other countries
suffered similar fates with unemployment rising and GDP falling throughout the
world. Most of Europe had also fallen into a recession. Poland and Slovakia were
the only two members of the European Union to have avoided a GDP recession
during the years affected by the Great Recession. The following charts show
this info:

            As
the preceding charts show, the U.S. and the world were in a very bad place,
financially. People were spending less, unemployment was very high, and the
housing market was at an all time low. Many families, who a few years ago would
have qualified for a home loan, were now being turned away by the banks. To try
and reverse the damage done the U.S. enacted several new policies.  The Secretary of the United States Treasury,
Henry Paulson and President George W. Bush proposed legislation called the Emergency
Economic Stabilization Act of 2008. This bill allowed the government to
purchase up to $700 billion of “troubled mortgage-related assets”
from financial firms in hopes of improving confidence in the mortgage-backed
securities markets and the financial firms participating in it. The first half
of the bailout money was primarily used to buy preferred stock in banks instead
of troubled mortgage assets.

In January 2009, the Obama administration announced a
stimulus plan called the American Recovery and Reinvestment Act of 2009 to
revive the economy with the intention to create or save more than 3.6 million
jobs in two years. The cost of this initial recovery plan was estimated at $825
billion dollars (5.8% of GDP). The plan included $365.5 billion dollars to be
spent on major policy and reform of the health system, $275 billion to be
redistributed to households and firms, notably those investing in renewable
energy, 94 billion to be dedicated to social assistance for the unemployed and
families, $87 billion of direct assistance to states to help them finance
health expenditures of Medicaid, and finally $13 billion spent to improve
access to digital technologies. The administration also attributed of $13.4
billion dollars aid to automobile manufacturers General Motors and Chrysler,
but this plan is not included in the stimulus plan.

The Federal Reserve also tried to help recovery after the
Great Recession. In an effort to increase available funds for commercial banks
and lower the fed funds rate, the U.S. Federal Reserve announced plans to
double its Term Auction Facility to $300 billion. Because there appeared to be
a shortage of U.S. dollars in Europe at that time, the Federal Reserve also
announced it would increase its swap facilities with foreign central banks from
$290 billion to $620 billion.

On November 25, 2008 the Fed announced it would buy $800
billion of debt and mortgage backed securities, in a fund separate from the $700
billion-dollar Troubled Asset Relief Program (TARP) that was originally passed
by Congress. According to the BBC, The Fed used the fund to buy $100 billion in
debt from Fannie Mae and Freddie Mac and $500 billion in Mortgage-backed
securities. The fund would also be used to loan $200 billion to the holders of
securities backed by various types of consumer loans, such as credit cards and
student loans, to help unfreeze the consumer debt market.

As of December 24, 2008, the Federal Reserve had used its
independent authority to spend $1.2 trillion on purchasing various financial
assets and making emergency loans to address the financial crisis, far beyond
the $700 billion authorized by Congress from the federal budget. This included
emergency loans to banks, credit card companies, and general businesses,
temporary swaps of treasury bills for mortgage-backed securities, the sale of
Bear Stearns, and the bailouts of American International Group (AIG), Fannie
Mae and Freddie Mac, and Citigroup.

It was estimated, roughly 11 million jobs were needed to
restore the unemployment rate to pre-recession levels. Today, that number
stands at an improved, but still staggering 7 million jobs needed, according to
estimates by both the Economic Policy Institute and the Brookings Institution.
Less than 40 percent of the employment shortfall caused by the Great Recession
has been closed.

Regrettably, recovery from this severe downturn remains
years away. The economy has added 198,000 jobs per month on average over the
last year, and just slightly less over the past two years. If this pace of
hiring is sustained, it will take nearly another five years to restore
pre-recession unemployment rates. The most publicly visible indicator of labor
market health is the national unemployment rate, which has witnessed a
precipitous but misleading drop in recent years. Unemployment averaged 4.6
percent in the year leading up to the Great Recession and then spiked to 10
percent in October 2009. Since then, unemployment has fallen back to 6.3
percent as of May, perhaps wrongly suggesting that roughly two-thirds of the
labor market downturn has abated.

Just like my family during the Great Depression, many
American families will have to work more hours and spend less money to make
ends meet. The house that my great grandparents built in Easton during the Great
Depression not only still stands, but my own family lives in it now. With my
daughter being the fifth generation of my family to call this house their home.
It has stood the test of time through the financial problems of the country. If
this country wants to recover completely from the Great Recession, it must be
strong and resilient just like my family was.

 

 

 

 
 
Works Cited
 Weinberg, John. “The Great Recession and its
Aftermath.” Federal Reserve History, 22 Nov. 2013, www.federalreservehistory.org/essays/great_recession_and_its_aftermath.
 “The Great
Stabilisation.” The Economist, The Economist Newspaper, 19 Dec. 2009, www.economist.com/node/15127608.
“Grasping at an understanding of the crisis.” The Economist,
The Economist Newspaper, 8 Jan. 2011, www.economist.com/blogs/freeexchange/2011/01/great_recession.
Fieldhouse, Andrew. “5 Years After the Great Recession, Our
Economy Still Far from Recovered.” The Huffington Post, TheHuffingtonPost.com,
26 June 2014, www.huffingtonpost.com/andrew-fieldhouse/five-years-after-the-grea_b_5530597.html.