Analysis: Causes of Great Recession in USA, Economics for Managers

This report examines the causes of the Great Recession in the USA, focusing on the economic factors that contributed to the financial crisis of 2007-2008. The study analyzes the impact of the recession on the US economy, considering key indicators such as GDP, unemployment rates, and trading patterns. It identifies the housing market bubble, stock market crisis, credit defaults, and dumping from China as primary drivers of the recession. The report discusses the role of business cycles in understanding economic downturns and provides an overview of the recession's impact on the economy's performance. The analysis includes graphical representations of business cycles, stock market trends, and unemployment rates. Furthermore, it highlights the interconnectedness of various economic factors and their collective influence on the financial crisis and subsequent economic recovery.

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GREAT RECESSION IN USA: ITS CAUSES
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1GREAT RECESSION IN USA: ITS CAUSES
Executive summary
This particular study aims to focus on causes behind the global financial crisis that broke
during 2007 to 2008. Study mainly focuses US economy because US economy was largely
influenced due to financial crisis. Study also considered GDP, Unemployment and trading
pattern of USA to assess the effect of global financial crisis on the economy. The results found in
the study shows that elements like housing market bubble, stock price crash, credit default and
dumping from china are the main reasons behind financial crisis.

2GREAT RECESSION IN USA: ITS CAUSES
Table of Contents
Introduction......................................................................................................................................4
Discussion........................................................................................................................................4
Role of Business Cycle to understand the recession...................................................................5
Causes of Global financial crisis.................................................................................................7
House market bubble...............................................................................................................8
Stock market crisis...................................................................................................................9
Credit default.........................................................................................................................10
Dumping from China.............................................................................................................10
GDP and Global Financial Crisis..............................................................................................11
Unemployment and Global Financial Crisis..............................................................................12
Trading pattern and Global Financial crisis...............................................................................13
Conclusion.....................................................................................................................................14
References......................................................................................................................................16

3GREAT RECESSION IN USA: ITS CAUSES
Introduction
The period from 2007 to 2008 marked as the period of Financial Crisis and is considered
as first contraction of global economy after the period of Second World War (Aguiar, Hurst and
Karabarbounis, 2013). Many economies were affected by this Financial Crisis and sluggish
recovery was observed subsequently (Lo and Rogoff, 2015. This recession period was
observed to be different from prior recessions, since it marked simultaneous changes in the
stock market, labor market and housing market (Jenkins, 2012).
Along with other countries, USA was also affected due to this financial crisis. The degree
of loss for the economy was much higher, all the economic indicators of welfare was affected by
this crisis (Riumallo-Herl, 2014).Affected indicators of the economy in turn hindered the growth
of the economy which resulted in negative GDP rate of the economy (Del Negro , Giannoni and
Schorfheide, 2015).
The aim of this paper is to explore the main causes behind the great recession that
occurred in 2007-2008 in USA. Paper focused on the causes and their effect on economy.
Development indicators are considered in this paper and these includes- GDP, unemployment
and pattern of trade (Morse, 2014).
Discussion
Various methods can be used to understand the degree of loss incurred by USA economy,
business cycle is one such method that is used to interpret the phase through which the economy
passes over time.

4GREAT RECESSION IN USA: ITS CAUSES
Role of Business Cycle to understand the recession
In order to understand the cause of recession the main origin behind this cause is very
important to be considered. Business cycle shows the fall and rise of economic growth in an
economy. This cycle is mainly used for evaluating the performance of the economy and thus
helps in reaching optimal financial decisions for an economy. The reason behind occurrence of
recession is best understood by considering this business cycle. There are four phases present in
an business cycle and these incorporates-the first phase which shows expansion of economy, the
second phase which shows economy at its peak, the third phase is the situation of contraction in
an economy and finally the fourth phase shows the trough situation faced by an economy
(Gabisch and Lorenz, 2013). Business cycle stages are determined by National Bureau of
Economic Research using the quarterly GDP growth rates; it also uses economic indicators
which are employment, industrial output, real income and retail sales (Ball, 2014).
Figure 1: Business cycle

5GREAT RECESSION IN USA: ITS CAUSES
The graphical representation of business cycle shows the movement of the cycle more clearly. It
is represented below. The figure below shows the curve which explains the business cycle at its
four phases.
Figure 2: Four phases of business cycle
The above figure shows the economic activity over time. The economy starts from trough
or depression where the level of economic activity is at lowest level. With the recovery of
economic activity the economy moves to the expansion phase, the expansion cannot persist and
after reaching peak, contraction phase starts. The contraction phase when gathers momentum, we
have a depression. The downswing of the cycle continues till the lowest point reached from
where the economy starts. In this way cycle is completed (Gabisch and Lorenz, 2013)..
However, after remaining at the trough phase for some period of time the economy starts to
revive and starts a new cycle. Expansion in population and the development of capital produce
economic growth. A reduction in overall business activity can result in an economic contraction,
or recession (Ball, 2014).. A recession is a stage of economic contraction, where the gross
domestic product decreases. The main characteristics of recession are- expansion of
unemployment, slumping sales, increased business failures, lower level of income and increased
underemployment.
Real GDP
Time

6GREAT RECESSION IN USA: ITS CAUSES
Considering this business cycle recession in USA can be shown. In 2008, USA economy
contracted to 2.7 percent in the first quarter of 2008. In the second quarter the economy
rebounded to 2 percent again another contraction took place which resulted in 1.9 percent in the
third quarter however in the fourth quarter the economy reached to 8.2 percent. In 2009, USA
economy again contracted in the first quarter with 5.4 percent and for this unemployment rate
within economy increased. In the second quarter of 2009, USA economy reached the trough
phase with contracted GDP of 0.5 percent and unemployment rate again increased. However, the
expansion phase started in the third quarter of 2009 where the GDP increased to 1.3 percent. This
expansion mainly occurred due to spending amount received by the economy through American
recovery and Reinvestment act. But unemployment rate didn’t recovered it remained at an
increased level (Eaton, 2016).
Causes of Global financial crisis
A worldwide economic complexity experienced by markets and consumers is termed as
global financial crisis. A global financial crisis is a complicated business environment to achieve
something in because potential consumers tend to decrease their purchases of goods and services
until the economic situation improves.
The global financial crisis of 2007 to 2008 started to show its effects in the middle of
2007. During this period around the world stock markets have fallen, financial institutions
collapsed and nations have had to come up with packages that will rescue economy by bailing
out their financial systems. This crisis mainly affected the economy’s growth process and the
domains where it affected most are shown below.

7GREAT RECESSION IN USA: ITS CAUSES
House market bubble
USA housing bubble was a real estate bubble and it affected half of the economy. The
market for housing peaked in 2006(Leamer, E.E., 2007). . Later the market crashed in 2007 and
caused financial crisis. The reason behind this bubble was the Federal Reserve and banks that
provided loans at ease and reason behind providing loan was, this housing market was identified
as wealth generator. The problem mainly arised when some types of subprime loans failed to pay
back, and as a result of availability of loans to purchase house increased, on other hand the price
of houses decreased drastically. In 2007 credit market froze and the condition deteriorated.
Subprime credit stopped and federal fund rate for credits of other borrowings increased (Leamer,
E.E., 2007).
Figure 3: Price of houses
Source: (U.S Census)

8GREAT RECESSION IN USA: ITS CAUSES
The above figure shows the year 2005 to 2006 house prices was at its peak then gradually
it began to fall, and the main reason this fall was availability of loans from bank.
Stock market crisis
A sudden decline of stock prices across stock market is termed as stock market crisis.
Crisis mainly occurs due to extreme economic optimism, extended period of rising stock prices
and wide use of margin profit and leverage by market participants. Stock markets generally
behave according to log normal distribution(Bodie, 2013).
Failure of massive financial institutions in USA devolved into a global financial crisis.
The institutions in USA faced failure because to increased number of subprime loans and credit
defaulters.
Figure 5: Stock market prices
Source: (DJIA)

9GREAT RECESSION IN USA: ITS CAUSES
The figure above shows that US stock market peaked in 2007 and then it declined . This
fall in prices was a drastic one during this period.
Credit default
Credit default is a financial swap agreement that a seller of CDS will pay compensation
to the buyer in the event of a loan or other credit event (Bodie, 2013).
CDS contributed significantly to financial crisis in 2007; however the CDS market
worked well during this crisis. This was done by making the market for CDS fairly liquid.
Market also handled large defaults like Lehman brothers. Lehman brothers collapsed during the
financial crisis but however were protected by CDS (Quax, Kandhai and Sloot, 2013).
Dumping from China
Dumping is defined in the General Agreement on Tariffs and Trade and it mainly shows
product introduction of one country into the commerce of another country available at below
normal value of the products. China’s name comes first when dumping is considered (Dongkun,
2012).
Due to dumping from China, US firms incurred losses at a higher level and this resulted
in financial crisis in USA in 2007. Chinese industries dumped US industries at a high level. Steel
industry was mainly affected due to dumping.

10GREAT RECESSION IN USA: ITS CAUSES
Figure 6: Dumping
Source: (IIT policies)
The above figure shows the before and after case of anti dumping. After the imposition of
anti dumping policies share of production is stabilized.
GDP and Global Financial Crisis
GDP is considered to be a vital aspect of growth. For showing economic growth this
plays an important role. It mainly consists of the incoming part of economic activities
(Stockhammer, 2012). For showing the performance of a country over the years GDP acts as a
significant element.

11GREAT RECESSION IN USA: ITS CAUSES
2005 2006 2007 2008 2009
-4
-3
-2
-1
0
1
2
3
4
USA (GDP)
Figure 7: USA GDP
Source: (OECD)
The above figure shows the GDP of U.S over the years 2005 to 2009. This period is
chosen to show the effect of financial crisis in a clear manner. The figure shows that period of
financial crisis recorded negative growth in USA and all these was due to events that negatively
affected the economy(Del Negro , Giannoni and Schorfheide, 2015). The period after crisis also
recorded negative growth and this was due to sluggish recovery of the economy (Stockhammer,
2012).
Unemployment and Global Financial Crisis
Unemployment in a country mainly shows the amount of population looking for jobs.
This amount also reflects the degree of non availability of jobs for the active population.
Unemployment is mainly outcome of various events that occur within country. During the period
of financial crisis, USA labor force faced huge unemployment, even number of working
population reduced because of layoffs (Shimer, 2012).