Causes and Consequences of the Great Recession in the United States

This essay provides a comprehensive analysis of the causes and consequences of the Great Recession in the United States. It delves into key factors such as the housing market crash, fueled by subprime mortgages and low-interest rates, which led to a credit crunch and ultimately, a significant economic downturn. The essay also examines the role of budget deficits, national debt, and the devaluation of the dollar in exacerbating the crisis. Furthermore, it explores the far-reaching consequences of the recession, including high unemployment rates and its impact on various economies globally. The essay highlights the interconnectedness of financial markets and the ripple effects of economic instability, offering a detailed overview of this pivotal period in recent economic history.

Running Head: CAUSES OF THE GREAT RECESSION 1
Causes of Recession in the USA
Student’s Name
Institutional Affiliation

CAUSES OF THE GREAT RECESSION 2
What do you consider to be the main cause of recession in USA?
Introduction
At the close the financial year 2007, a major recession took place in the United States of America
(Bell, & Blanchflower, 2011). A healthy economy would undergo a forthcoming flavor of
sluggish growth and fast growth or maybe stagnation in accordance to. According to (Cetorelli,
and Goldberg, 2012.) economy is expected to exhibit expansion and contraction in alternation to
allow the economy to develop a healthy as possible. Behind the dominion of the of the
contracting period for an extended period, let's say more than six months consecutively or two
repeated quarters of a year, then the economy can be considered as a recession (Jenkins,
Brandolini, Micklewright, & Nolan, 2012). The national bureau of economic Research NBER
discovered recession and referred to it as an "a significant decline in economic activity spread
across the economy, lasting more than a few months, normally visible in the real gross domestic
product (GDP), real income, employment, industrial production and wholesale-retail sales."
Individuals often describe a recession as when the GPD rate of growth is negative for two
consecutive quarters or more though a recession can silently start before the quarterly GPD
(Gross Domestic Products) reports are out. Because of this, the National Bureau of Economic
Research used the other four metrics or determinants. In any case, the economic determinants
reduce, so will the Gross Domestic Products (Henning, & Kessler, 2012).
The recession that occurred in the United States of America in the past has led to a worldwide
financial crisis Shattering consumers and assurance of business in many countries (Jenkins,
Brandolini, Micklewright, & Nolan, 2012), for example, The European Union, China, Japan, in

CAUSES OF THE GREAT RECESSION 3
addition to the Asian nations. Because of these extensive negative impacts, the recession has
been given a name the Great Recession, and the recession has been the ground of the financial
collapse in the United States of America. In addition to the above, the breakdown has stretched
out very fast influencing nearly every place to the across the world as (Koo, 2011). The great
recession had risen to become the most hazardous economic slouch from the time the world
underwent the famous depression after the Second World War- World War II.
From the economist's point of view, the situation of the Great Recession was as a result of the
abrupt bursting of the House Bubble in the United States of America (Katz, L. 2010). They
ascertain that the house bubble bursting was prompted by the speedy growth of the shocking
control of the on subprime mortgages. The occurrence of the great economic collapse has
established and exhibited the exactness of the Greenspan's forecast. Greenspan is a name of the
former chairman of federal research of Federal Reserve predicting the United States has one-
third chances of or the probability of achieving a recession at the finish of the year 2007.
In an attempt to acquire proper insight of the Great Recession into details, roots or grounds and
the outcomes of the downturn in United States of America will be examined and assessed under
the following sections:
Causes of the Great Recession
Several challenges had evaded the United States of America at the time of recession not
excluding high levels of records of the debts, a future threat of recession, a plummeting dollar,
banks at the edge of the liquidation, a money market that is frozen and a collapsing stock market.
According to the author (Jenkins, Brandolini, Micklewright, & Nolan, 2012) issues such as

CAUSES OF THE GREAT RECESSION 4
global instability, the perception of risks, the rate of interests and also regulation of the financial
systems posed a lot of push forces towards global financial crisis.
Housing Crash.
One of the major factors of the expenditure of consumers and the extent of the economic growth
in the United States of America Housing market. Many factors influence the prices of houses
resulting to its rapid increase in the incomes of the consumers, and thus it became. Consequently,
it emerged to be the worldwide financial catastrophe lead to the extra valued assets (Cetorelli, N.
and Goldberg, 2012.). (Baldwin, 2009) Outlined that the house prices in the United States were
incremented very fast up to 2006 and afterward went through a decline in prices of the house. At
some moment, a house price declines to correct the economic instability; it housed a significant
influence on the consumers who were utilizing their expenditure in cases where individuals are
not in a position to reportage to attain an excess capital for use.
Sub-prime Mortgage Burst.
Not one control measure of subprime mortgages existed whereby the mortgage industries were
able to sell their mortgages without reflecting on the possibilities of the customers being in a
position to settle them within the specified period satisfying the requirements. In accordance to
(Baldwin, 2009). The value of the United States subprime mortgages was estimated to be $ 1.3
trillion at the start of March the year 20007, though more than 7.5 million first-lien mortgages
not yet settled still existed. The main reason behind this was that the subprime mortgage was
inclined to nearly 20% of the total mortgage originations all over the pinnacle of the United
States housing bubble. The great function of the subprime mortgages was caused by the massive

CAUSES OF THE GREAT RECESSION 5
foreclosures, and thus it highly affected the-the impartial mortgage brokers and institutions
which were not covered by the Community Reinvestment Act. Consequently, it was circuitously
impacted causing a slow growth and furthermore a collapse on the expenditure of the customers
in addition to their investments (Jenkins, Brandolini, Micklewright, & Nolan, 2012).
Low rate of interest
The monetary authorities of the United States had adjusted the rates of interest at an unmatched
level which led to a debt-financed consumption opulence, in turn, resulting in an increase in
housing bubble stated in accordance to the Economists (Jenkins, Brandolini, Micklewright, &
Nolan,2012). In the same way, several economists discussed that the rates of interest in the
United States stayed too low for a long very long time. It persisted at one percent in the year
2003 and 20004 consequently stimulating the great recession. According to Author (Taylor,
Proaño, de Carvalho, & Barbosa, 2012), the monetary policy of the United States of America has
not excelled in undertaking the additional valued assets bubble and at the same time took part in
the quick growth of the sub-marine mortgages.
Credit crunch
High prevarication of the sub-marine mortgages in the United States of America had resulted to
the credit crunch in the nation. Credit crunch refers to an unanticipated shortage of funds
resulting in a reduction in the loans available as discussed by the author (Eisner, & Pieper, 1984).
According to the author (Taylor, Proaño, de Carvalho, & Barbosa, 2012), most investment banks
and also commercial banks were frequently experiencing significant loss as result of many
perilous mortgage loans. Due to this rationale, several banks ( investment and the commercial
banks ) became very reluctant to issues loans to any customer in addition to any other bank

CAUSES OF THE GREAT RECESSION 6
experiencing a shortage of capital in the money market as (Eisner, & Pieper, 1984) argues. The
insufficiency of liquidity in the then industry of finance had resulted to the tendency of loaning
to be more complicated and costly that had caused a decrement in the expenditure of the
consumer an investment according to (Taylor, Proaño, de Carvalho, & Barbosa, 2012).
Budget deficit and national debt
In accordance to (Alesina, & Tabellini, 1990), 65 percent of the Gross Domestic Product (GDP)
for the year 2007 is where the debts for the United States of America government stood at and
after that even became worse when the liability for pension was included. Taking into
consideration the huge deficit, the government of the United States was left with a minimum
opportunity to the expansionary fiscal policy putting in mind the analysis of the population
carried out against the fiscal equilibrium and the level of economic cycle reduced the deficit as
(Henning, & Kessler, 2012) argued. The debt of the United States of America had led to
complexities in getting the capital flow as the Asian investors who were aware of the deficit of
the government of United States had decelerated the movement of capital to the united states and
participated in the devaluation of the dollar. Consequently, it exhibited that a basic instability
between the domestic production and consumption which had diverted to be a constraint fro the
growth of the economy in the future.
DEVALUATION OF DOLLAR
The fundamental economic theory outline that the reduction in the rates of exchange will
eventually help in increasing the level of exports and stimulate the in line with the exports in
accordance to (Eisner, & Pieper, 1984). The reduction in the value of the dollar has led to the
cost-push vacillation and decrement in the standards of living inferring an increase in the cost of

CAUSES OF THE GREAT RECESSION 7
the goods for consumers resulting in a minimal potential of expenditure of people as commented
on by (Alesina, & Tabellini, 1990). Reduction in the worth of a dollar had given an outcome of
less competitiveness of the United States compared to its trading member states in the market.
Consequences of the Great Recession upon
Upon the occurrence of the United States Great Recession in 2007, several economies globally
underwent a crisis. Various nations including Eastern and Central Europe and the middle-income
countries (overall the commonwealth independent countries) were profoundly impacted while in
the meantime countries such as Uganda and Ethiopia got an opportunity to develop enormously
despite the slum as expounded by (Henning, & Kessler, 2012).
The author (Bell, & Blanchflower, 2011) further outlines that although many low-income
countries dodged from the effects of the recession, these countries have undergone a sluggish
economic development due to the negative insinuations of neediness. Commenting on the
strength of economy, (Alesina, & Tabellini, 1990) argues that the tinier and more unrestricted the
economy, the more strength the hit from the great recession at the same time the larger growing
economy of a nation the more chances of enduring via the support attained from the spending
and the domestic wants. According to (Jenkins, Brandolini, Micklewright, & Nolan,2012), he
recognizes that India and China could get over the effects faster than the other nations.
As outlined above, the recession caused various challenges in different states and nations, the
analytical evaluation of the consequences of the great recession in the United states of America
has been presented:
As per (Katz, 2010, April) the United States labor market experienced the impacts of the great
recession. Even though the US government adjusted the rate of vaccination causing growth to the

CAUSES OF THE GREAT RECESSION 8
national economy, in the year 20009 during the 3rd quarter at a percentage of 2.2%, during the
fourth quarter in the same year 5.6%, in the year 2010 the first quarter, it went back to 2,7%. The
rate of joblessness stayed at its peak. The unemployment rate had incremented in the June 2009
when it was at 9.5% to 10.1 percent in October 2009. By June 2010, the rate of joblessness
reduced to 9.5 percent according to ( Hurd, & Rohwedder, 2010). (Bell, & Blanchflower, 2011).
The comparison between the demand and supply of workers was exhibited in the statistics as the
rate of hiring, and the Beveridge can display the speed of the fate of dismissal as the speed of
joblessness. With the current average of a job in May and April, the unemployed were expected
to rise to some 10.5 million replacing the 5 million as earlier on anticipated.
As (Katz, 2010, April) describes, most financial analysts argued that the policies of the
unemployment benefits should be answerable for the unusually high rates of joblessness.
(Taylor, Proaño, de Carvalho, & Barbosa, 2012) Approaximated that the regular unemployment
benefits may have supplemented between 0.5 percent and 1.8 percent of the rate of joblessness.
There is the ardent possibility of the high rates of unemployment to be permanent as many
people who have spent out of work for a good period have turned to be less productive and less
spirited. The high unemployment rates are bound to increase the level of structural
unemployment in a case a weak policy is in place. Inflation will ultimately increment the upper
limits of the rates of unemployment than ever before.
Conclusion several factors led to the occurrence of the vast recession in the United States of
America either directly or indirectly as expert analysts and economists have discussed placing
different reasons on some causes. These reasons include the investment between 2001 a time of
increase in the global pool of fixed income securities from $36 trillion to $80 trillion by 2007.
The huge pool of money increased because of the increase in savings from fast-growth

CAUSES OF THE GREAT RECESSION 9
developing countries got their way into the markets (Brunnermeier, 2009). The real-estate
bubbles, the trade imbalance which occurred internationally and also negligent lending
standards. In addition to that, the United States Government lending policies and household
debts. The great recession has caused massive impact to the whole world of the economy like the
shortage of capital, depreciating the growth rate of the economy in addition to the high rates of
unemployment and even reduction in demands. On the other, the recession remained as a
positive influence on the economy too. It aided in the transformation business perspective or
even a nation in the future. Although the slump has depreciated the process of growth of the
economy, it has enhanced the generation of approaches stimulation the growth of the economy of
the world while the market equilibrium to enhance competitiveness across the economical world
(Palley, 2011).

CAUSES OF THE GREAT RECESSION
10
References
Brunnermeier, M.K., 2009. Deciphering the liquidity and credit crunch 2007–2008. The Journal
of economic perspectives, 23(1), pp.77-100.
Palley, T., 2011. America’s flawed paradigm: macroeconomic causes of the financial crisis and
great recession. Empirica, 38(1), pp.3-17.
Hurd, M.D. and Rohwedder, S., 2010. Effects of the financial crisis and great recession on
American households (No. w16407). National Bureau of Economic Research.
Cetorelli, N. and Goldberg, L.S., 2012. Liquidity management of US global banks: Internal
capital markets in the great recession. Journal of International Economics, 88(2), pp.299-311.
Baldwin, R. E. (Ed.). 2009. The great trade collapse: Causes, consequences and prospects. Cepr.
Eichengreen, B., & O’rourke, K. H. (2009). A tale of two depressions. VoxEU. org, 1.
Bell, D. N., & Blanchflower, D. G. 2011. Young people and the Great Recession. Oxford Review
of Economic Policy, 27(2), 241-267.
Koo, R. C. 2011. The Holy Grail of Macroeconomics: Lessons from Japan? s Great Recession.
John Wiley & Sons.
Jenkins, S. P., Brandolini, A., Micklewright, J., & Nolan, B. (Eds.). 2012. The great recession
and the distribution of household income. OUP Oxford.
Katz, L. 2010, April. Long-term unemployment in the Great Recession. In Testimony for the
Joint Economic Committee, US Congress, April (Vol. 29).

CAUSES OF THE GREAT RECESSION
11
Alesina, A., & Tabellini, G. 1990. A positive theory of fiscal deficits and government debt. The
Review of Economic Studies, 57(3), 403-414.
Eisner, R., & Pieper, P. J. 1984. A new view of the federal debt and budget deficits. The
American Economic Review, 74(1), 11-29.
Taylor, L., Proaño, C. R., de Carvalho, L., & Barbosa, N. (2012). Fiscal deficits, economic
growth and government debt in the USA. Cambridge Journal of Economics, 36(1), 189-204.
Henning, C. R., & Kessler, M. 2012. Fiscal federalism: US history for architects of Europe's
fiscal union