Great Recession Causes And Effects Essay

2239 words - 9 pages

In 2008, the U.S. Economy experienced a drop in the stock market so fast and unexpected that it has been called the “Great Recession” (Santucci, 2011) and the “Crash of 2008” (Crash of 2008, 2010). Many things contributed to the recession, but the main cause was sub-prime lending by banks. Basically banks were lending money to people to buy homes that they couldn't afford. Due to the sub-prime mortgages going belly-up, along with the spiraling effects of bank failures such as the automotive industry needing to borrow billions of dollars, the U.S. Economy experienced is worst economic situations since the Great Depression.
The causes of the recession date back many years, and as far back ...view middle of the document...

This is huge event due to the fact that the sub-prime mortgage backed securities market totaled over $1 trillion (Hassler, 2007). When these ratings came out, many of the banks were effected by this as they all had a lot invested in bonds backed by the mortgages, but no bank was effected more than Bear Sterns. When the downgrades came out, that almost caused Bear Stearns hedge funds to nearly collapse (Hassler, 2007). Basically what happened was that Standard and Poor and Moody's said that sub-prime mortgage backed bonds, or CDO's, were not a safe investment for investors. In July of 2007, another big blow came to the financial industry. Standard and Poor's downgraded another 612 securities backed by sub-prime mortgages (Crash of 2008, 2010). After Standard and Poor downgraded these securities is when things started to spiral out of control.
After July is when the 2nd stage of “The Crash” begins (Crash of 2008, 2010). In August of 2007, the banks start to show how bad their financial situations are. In Europe, 2 German banks were rescued from bankruptcy, and the European Central Bank announced that it would be lending out $94 billion Euros to the European banks (Crash of 2008, 2010) Here in the U.S. it wasn't much better. The American Home Mortgage announces bankruptcy (Crash of 2008, 2010). Also, Countrywide, the leading lender in mortgages, announces a large increase in defaulting mortgages, and a French based bank had to freeze several of its funds as it was unable to put a value on U.S. sub-prime mortgage based securities. Lastly, the Federal Reserve Board cuts the discount rate down to 5.75% and for the first time since the 1930's, the American Board of Realtors announced they expected housing prices to fall (Crash of 2008, 2010). All of this occurred within 30 days.
After the mayhem of August and the big worries of the banks and the financial system, things seem to quiet down for a while until December. In December, the Federal Reserve board makes a big announcement. “The Federal Reserve Board announces the creation of a Term Auction Facility (TAF) in which fixed amounts of term funds will be auctioned to depository institutions against a wide variety of collateral. The bank authorizes temporary reciprocal currency arrangements (swap lines) with the European Central Bank and the Swiss National Bank . The Federal Reserve states that it will provide up to $20 billion and $4 billion to the European Central Bank and the Swiss National Bank, respectively, for up to 6 months (Crash of 2008, 2010).” Basically what the Fed is doing is providing help to these two banks because they had been heavily effected by the economic downturn in the sub-prime mortgages.
At the start of 2008 there is a steady flow of major financial institutions showing signs of economic distress. In January, Countrywide is sold to BAC (Bank of America) after almost a 50% loss in their stock price (Crash of 2008, 2010). At the time, there was a lot of controversy about...

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