Escaping the Recession 2007 Is Creating Recession?
Principles of Macroeconomics
Mihaylo College of Business and Economics
California State University at Fullerton
December 2, 2010
The Economic Recession 2007 is the second worst recession in American history. It starts out within the housing market. Then, it expands and harms the other business sectors clearly. To illustrate, the U.S GDP failed by around 7%. Americans struggles who laid-off so unemployment rate shoot up to 9.7%. Many retirees lose their money due to the failure of many investment vehicles. The stock market performance declines because companies go bankrupt. Faced the threat of another ...view middle of the document...
In response to this crisis, many professional evaluation and commentary are generated in Section 6. Finally, Section 7 provides a conclusion of the Economic Recession 2007.
This most recent economic crisis also named the Housing Recession so one of the main its main causes is the dramatic fail of the housing bubble. Back in the 1938 and 1970, to protect the secondary mortgage market, the American Congress established Fannie Mae and Freddie Mac. These two federal financial institutes act like middle-man in the housing market. They basically buy the housing loans from banks or original lenders. Then, they secure these loans as mortgage backed securities and sell them out to other investors. These two are the only places are authorized to issue the guarantee MBS or Toxie, a specific type mortgage security. The invention of Toxie creates a blast in the housing exchange. At first, everybody is satisfied, home buyers, creditors, and investors. However, in the long-run, seeing the easy profit and not holding permanent responsibility for housing loans, bank and creditors continue giving out money riskily and irresponsible without careful viewing the income and financial condition. Therefore, many borrowers unsuccessfully pay back their debts. They forces to sell up their house so make the housing prices start to fail despite their increase before. This repetitious process occurs regularly in the market, so ends up with the final collapse of mortgage market in 2007. The wonderful Toxie becomes Toxic Toxie (Offee-Walt).
The investment institutions are also hurt by this recession. Without the ability to make payment, Toxie now is worthless. Therefore, those financial institutions like Bear Stearns, Lehman Brothers and investment bank, WaMu, who held these mortgage backed securities, are losing money. AIG issue insurance against MBS, called Credit Default Swaps also fails. As a result, Fannie Mae and Freddie Mac’s failure lead to the bankruptcy of many significant companies. These events really shock the whole economy not only the housing market. American people are panic and worry about their money. People stand in line to withdraw money from commercial banks which creates the bank run situation. Immediately, Ben Bernanke, the Federal Reserve Chair, decide to bail-out Bear Stearns on a Sunday. To explain the reason for this rush actions, he states: “if we do not do something…there will be no economy on Monday” because the credit market will be free by that time. However, the clearest effect of the Recession 2007 is shown in the stock market. The Bow Jones Industrial Average keeps falling unpredictably
3. Fiscal Policy
The US government had recognized this recession’s damages and acted right away by using many fiscal policies. Not until President Obama is in office, he and Congress applied a stimulus package of $787 billion. Now, it values more than $862 billion which contributes to a $1.4 trillion of federal budget deficit. This...