Analysis of the Financial Crisis in the US Economy (2007-2009)

This report provides a comprehensive overview of the 2007 financial crisis, also known as the Great Recession, which significantly impacted the US economy. It begins by defining recession and then delves into the specifics of the crisis, highlighting its causes, including the subprime mortgage crisis, the reduction in interest rates, and the failure of corporate governance. The report further examines the macroeconomic consequences of the recession, such as its impact on international trade and the US's role as a global economic power. It also discusses the decisions made by the US government in response to the crisis, including interventions by the Federal Reserve, the Securities and Exchange Commission, and the Treasury. The report utilizes various sources to provide a well-rounded understanding of the economic downturn and the measures taken to mitigate its effects.

Running Head: FINANCIAL CRISIS 0
Financial Crisis in US
Student’s details:

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Contents
INRODUCTION.............................................................................................................................................2
Definition of Recession................................................................................................................................2
Great Recession of 2007..............................................................................................................................2
Causes of the Recession..............................................................................................................................3
Subprime Mortgage.................................................................................................................................4
Reduction in Rate of Interests..................................................................................................................4
Failure of Corporate Governance.............................................................................................................4
Macro-economic Consequences of Recession.............................................................................................5
International trade....................................................................................................................................5
US as Hegemony.....................................................................................................................................5
Decisions made by US government (Post- Recession)................................................................................6

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INRODUCTION
The following report gives information about the “great recession” faced by US in the
year 2007 and it lasted till the year 2009. It is regarded as one of the most severe economic crisis
faced after the great depression of 1930’s. The report further explains the causes behind the
financial crisis which brought the US economy to such a shattering stage (History, 2017). There
were various measures taken by the US government to cure the situation some of them are
discussed below. The report also highlights macro- economic factors which led to the financial
crisis and depicts the actual situation faced by US while it was going through the crisis ( Arestis
& Karakitsos, 2010).
Definition of Recession
Recession can be referred to the decline in economic growth rate of a company but since
US has faced the economic recession of 2007 the international monetary fund has changed the
parameters for recession (Dinatale, 2009).
As per IMF “Global Recession” can be referred to an economic situation where the gross
domestic product falls accompanied by fall in employment ratio , investments, trade , industrial
production, oil consumption etc. These are some of the macroeconomic indicators which help in
determining whether an economy is facing financial crisis or not ( Tozzo, 2018).
Great Recession of 2007
United States of America which is presently the leading economy of the world once faced
severe economic crisis. The year of 2007 turned out to be the darkest year for US economy. In
the following year the US economy broke out on an extreme level almost every sector of US

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economy was influenced by the Recession. The recession resulted in rapid increase in the
unemployment rate, less investments, poor education system and surging poverty. This recession
was unexpected and the complexity of its causes puzzled the economists and policymakers
(Baldwin, 2009).
Source: (Economics Help, 2017)
The above mentioned graph depicts a sharp fall in real GDP in the UK economy in 2008 and
2009. It was also the slowest recovery on record (Economics Help, 2017).
Causes of the Recession
Before facing recession there were various signs which stated that US will face a
financial crisis but it was not known that the crisis will turn into “Great Recession”. There are
many factors which led to recession in US some of them are discussed below:-

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Subprime Mortgage- One of the prime reason behind recession of 2007 was subprime
mortgage crisis; it was a period when the banks started granting home loans to the borrowers
with poor credit history. These home loans were considered as the loans with high risk. In the
mid-2000s the mortgage rates for home loans were less and the lenders reduced the level of
restrictions over the borrowers (Grigor, L, & Salikhov, 2009). This led to a sudden increase in
borrowings in North America and Western Europe, because of this various other banking
institutions granted loans at bulk rate in the avarice of getting huge profits but in the end these
decisions proved to be catastrophic.
When some of the famous banks in US declared them as bankrupt, other institutions
announced an idea that the interest rates will be reduced. The housing cost in the nation reduced
due to the surplus supply of new homes in the market.
Reduction in Rate of Interests– The failure of regulation of the financial policies in US
turned out to be the biggest threat to the economy accompanied by the reduction the rate of
interests. On 9th October 2007 the stock market reached its peak, breaking all the records of
history. This was possibly the last good news for US economy. After this within the duration of
next 18months the market loosed half of its value. People who have invested their long time
savings in the stock market faced a major loss of their assets (Dooley & Hutchison, 2009).
Apart from this the value of households and non-profitable assets of America declined by
20%. US economy faced a loss of about $55 trillion within duration of 24 months (Congdon,
2014).
Failure of Corporate Governance- The failure of corporate governance can be considered as
one of the major reasons behind the financial crisis faced in 2007 but various economists and

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policymakers have completely refused to agree on the statement as per them the failure of
corporate governance did not led to financial crisis rather the worldwide economic instability
caused recession of 2007 (Ferrantino & Larsen, 2009).
The failure of corporate governance is a model linked with the Anglo- American
corporate governance system which empowered the Chief Executive Officers of banks, they
were granted immense power and wealth which eventually gave birth to the “greed is good”
culture in banking institutions (Palley, 2011).
It can be observed that the malfunctioning of banking institutions executives
during the year 2007 was intensive. The CEO(s) and the managerial level people were granted
huge incentives and bonus, these banks used the savings of their customers without
acknowledging as they believed in the that is was “too-big-to-fail” but at the end the banks were
unable to cope up with the pressure and faced a breakdown (Koo, 2011).
Macro-economic Consequences of Recession
International trade- The recession of year 2007 not only affected the economy of
United States of America but it also affected the economic conditions of other nations as well.
US was involved in trade with various nations around the globe but because of recession the
import and export between these nations were completely discontinued. The US economy was
not in condition either to produce or to purchase. Therefore the breakdown in the international
trade gave birth to economic crisis in the related nations as well (Economy, 2010).
US as Hegemony- After the end of cold war between US and USSR, the world finally
received a hegemonic power which was United States of America but the economic crisis of

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2007 also marked a question over the title granted to US earlier. US being the richest and most
flourished economy worldwide faced such a phase, this news came as a macroeconomic
earthquake for the world economies (Chen, Filardo, He, & Zhu, 2016).
Decisions made by US government (Post- Recession)
Post-Recession various changes were made in the policies of United Nation. The Federal
Reserve, Securities and Exchange Commission (US) and Treasury in order to reduce the effects
of crisis jumped into the situation. The main aim was to stop the potential run on mutual funds
because of this the Treasury made an announcement in September that a new program of about
$50 billion to ensure that the investment cycle will get balanced, somehow these actions were
closely related to the steps taken by The Federal Deposit Insurance Corporation (FDIC) (Rich,
2013).
The restrictions made over financial group were removed for a certain period of time,
now they were eligible to share and float funds easily. The government of US made a temporary
exemption to section 23(A) and 23(B).
Apart from this, The Securities and Exchange Commission made an announcement that
the short selling of 799 financial stocks should not be performed. It was also stated that strict
actions will be taken against “naked short selling” (obr.uk, 2017).

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