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What caused the Recession?

December 22, 2008 by Tyrone
Filed under: Finance Concepts 

We are now living in one of the worst global financial crisis. This is proven by the fact that a lot of economies are going into recession and trillions of stock values were wiped out. Aside from these, a lot of companies have reduced their earnings with a lot of plant closures and job lay offs.

We often hear the word recession. We’ve watched news that Singapore, Germany, Japan, and New Zealand officially declared recession in their economies. But what is recession? And what caused it?

Recession, in economics, is defined as the contraction of an economy’s Gross Domestic Product for at least two consecutive quarters. That means the economy shrank.

We all know that the world’s largest economy is that of the United States. A lot of countries depend on them most especially countries which depend on export products. There’s this popular saying that “when United States sneezes, everybody catches a cold”. This is so true nowadays which is evident in the domino effect of the global financial crisis with a lot of economies caught colds.

What caused the recession? The problem started in the United States with the so-called Subprime Mortgage Crisis. The crisis was triggered by the rise in mortgage delinquencies leading to foreclosure of houses and ultimately a credit crunch leading to a freeze in liquidity.

Subprime Mortgage are mortgages given to high default risk credit borrowers. A lot of mortgages issued in US are called subprime which means that little or no downpayment was made by the borrowers to buy houses, cars, etc. Some credit were even given to low income families or with bad credit history. Because of the nature of these mortgages, a lot of borrowers defaulted on their loans which led to banks foreclosing securities of these loans including houses, cars, etc.

All these accumulated and led to the “credit squeeze”. There were no more cash available to other borrowers as all these cash were frozen to foreclosed houses with no willing buyers. The tightening of credit led to a slow down of the economy as there were no more loans available to other borrowers which they can probably use as capital in their businesses. Now, this led to a series of events:

Low Demand.  Because of the tightening of credit, there was a slow demand of products of these businesses.

Decrease of Profits. Because of low demand, then there was a decrease in profits for these businesses.

Plant Closures. Because of decrease of profits, then companies need to shut down some of their plants to reduce costs. There was also a notable increase in bankruptcy filings.

Job Lay Offs. Because of plant closures and bankruptcy filings, then companies laid off a lot of their employees and unemployment rate rose.

Stock Market Decline. All these series of events led to the rampant fear of stock investors dumping their stocks which led to tremendous wipe outs of stock values.

The United States and other countries are all doing their best to combat this financial crisis by using different strategies including the recent US$700 Billion bail out plan to increase liquidity in the economy. US Treasury is providing millions and billions of loans to ailing companies to sustain this financial crisis and prevent further recessionof other economies.

The current recession have caused some companies to succumb and declare bankruptcy. Two of these companies include Six Flags, the world’s largest theme park and CIT Group, the American commercial and finance company.

What about a more severe type of recession called depression? I did some study specifically on what caused “The Great Depression” in the 1930s.

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Comments

17 Comments on What caused the Recession?

  1. Tony Orlando on Mon, 22nd Dec 2008 11:01 pm

    2. You know, I have to tell you, I really enjoy this blog and the insight from everyone who participates. I find it to be refreshing and very informative. I wish there were more blogs like it. Anyway, I felt it was about time I posted, I

    [Reply]

  2. admin on Mon, 22nd Dec 2008 11:28 pm

    3. Thanks a lot for that inspiring comment Tony Orlando. Readers like you keep me motivated to write quality articles.

    [Reply]

  3. Carnival of Economics - February « Economics 101 on Mon, 9th Feb 2009 1:35 pm

    4. [...] Solee presents What caused the Recession? posted at Millionaire Acts, saying, “A simple explanation on what caused the recession of a [...]

  4. No credit for you on Mon, 20th Jul 2009 2:01 pm

    5. The credit industry as a whole is breaking America. Sign this and that before we can trust you’ll pay is ruining fair trade which is the common tread on how we survive. America needs to trust again to spend again. With government rewarding companies for poor management and poor choices, where does it stop?

    [Reply]

  5. Ben on Fri, 31st Jul 2009 9:02 pm

    6. This all started because we borrowed too much money. Now our government will fix this problem by borrowing too much money? We trust these fools in Washington too much!

    [Reply]

  6. | body detox diet on Sat, 1st Aug 2009 7:03 pm

    7. the economic recession has been pretty hard on us. there is a some good progress on the economy this year. i just hope that the economy will continue to recover in the following months and years.

    [Reply]

  7. Jacee on Sat, 15th Aug 2009 1:20 am

    8. i am hoping that the global economy would recover from this economic recession. life has been very hard with these massive job cuts.

    [Reply]

  8. Kenlee on Sat, 15th Aug 2009 6:19 am

    9. i can see some improvement in US economy. i just hope that we will be out of this economic recession soon.

    [Reply]

  9. kim @ Digital Trail Camera on Sun, 1st Nov 2009 1:02 am

    10. The sub-prime mortgage crisis has its roots clear back to Jimmy Carter with the Community Reinvestment Act- Carter wanted to get low income and poor people into their own homes.
    Clinton really got it going during his presidency, by having the justice dept impose penalties for banks that didn’t meet their quotas of sub prime lending. Barney Frank and Chris Dodd are another duo that really kept this horrible scheme going of forcing banks to give mortgages to people who had no chance of repaying them. Bush didn’t do enough to stop the madness either. Vote everyone out for this irresponsible behavior.

    [Reply]

  10. CIT Group Files for Bankruptcy | Daily World Buzz on Mon, 2nd Nov 2009 2:50 pm

    11. [...] is another case of a huge bankruptcy filing that originated from subprime mortgages which caused the global recession which for sure would have a domino effect to the rest of lenders and businesses who have lent funds [...]

  11. depannage mac paris on Sun, 22nd Nov 2009 10:43 pm

    12. i agree, that’s just another case

    [Reply]

  12. anton on Wed, 25th Nov 2009 7:14 pm

    13. I partly agree with this blog. The global financial crisis the result of a pro-rich fiscal policy of the US Federal Reserve Bank. The US federal reserve bank is not owned by the US government. The real owners are the private banks which are controlled by the Rockefellers, the rothschild family and other ultra rich families from Europe. These people controlled the US economy.

    [Reply]

  13. Chris on Thu, 26th Nov 2009 7:23 pm

    14. Good article. However, you could do to check your grammar - especially in relation to your use of words like: ‘these’, ‘this’, ‘they’ etc.

    [Reply]

  14. Best CD Rates on Mon, 21st Dec 2009 4:37 am

    15. You just earned yourself a lifetime reader with this post. Came across your site on a search and love it!

    [Reply]

  15. formation informatique dif on Sun, 3rd Jan 2010 12:55 am

    16. really nice and interesting blog, thanks for this informations

    [Reply]

  16. depannage informatique on Tue, 19th Jan 2010 8:32 pm

    17. agree with your, thanks for this topics

    [Reply]

  17. Peter Cooper Village, Stuyvesant Town Apartments Turned Over to Creditors on Wed, 27th Jan 2010 9:05 pm

    18. [...] Inc. decided to sell them in 2005, when real estate prices were soaring. This is just one of the causes of recession. To receive free updates from Showbiz Gossips, you may enter your e-mail below and confirm [...]

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