Economic Turmoil

“No one saw the recession coming.” (Garfield) Most Americans believe that no one really knew what we were headed for, though others believe it was caused by the greed that springs through the streets of Wall Street.
In 2006, The American economy had grown at its fastest pace in more than two years, in just the first quarter. Americans were consuming more, businesses were investing more, and the government was spending more. President Bush acknowledged the country for being "on the fast track," and called on Congress to make his tax cuts permanent. (Bajaj) At this time, the housing market was at its peak, the Dow Jones industrial average hit a new record closing at 11,727 points, and inflation was rising. Significant amounts of foreign money flowed into the United States from other fast-growing economies. The economy seemed to be going in the right direction. People had several amounts of credit cards, loans were easily taken out, and consuming was of second nature. Americans seemed to be hardwired to want more. What was once considered upscale was the new normal for home buyers. Everyone wanted his or her walk-in closets in their master bedroom, kitchen islands with cook tops, and three-car garages. Americans were undergoing the “cascading wealth effect.”
When people at the top of income distribution enjoy more luxuries, their increased standard of living cascades down, and raises the bar for people below. (Dunleavey) Because Americans were under serious inflationary pressure, the middle and lower class kept up to this “Luxury Fever.” Continuously swiping their credit cards, and taking out unaffordable loans. The inflow of funds from foreign investors continued to pour into the United States. The United States low interest rates established easy credit conditions, fueling both housing and credit bubbles.
Unfortunately, big things are hard to steer, and there’s nothing bigger than the United States economy. (Coy) The United States of America went into a Great Recession.
A recession is defined by the Princeton dictionary, to be a period of temporary economic decline during which trade, and industrial activity are reduced, generally identified by a fall in GDP. Gross Domestic Product or GDP, is a measure of all of the services, and goods produced in a country over a specific period, usually a year. The measure considers the market value of goods, and services to arrive at a number that is used to judge the growth rate of the economy, and the overall economic health of the nation. (Callen) The Great Recession is considered the worst financial crisis since the Great Depression.
The Great depression was a severe economic depression that affected the world in 1929. It has a list of causes, but the U.S. stock market crash was where it started. Then financial institutions began to fail, and American’s lost their savings because of uninsured bank deposits. Banks weren’t giving out loans, the unemployment rate dropped to 25%, and the people of Mississippi suffered a deadly drought.
While not as severe as the Great Depression, the Great Recession shares a number of similar characteristics that contributed significantly to the downturn. They both were results of a weak monetary policy, and an under-regulated financial sector. According to the U.S. Bureau of Economic Research, the Great Recession began in 2007, with the liquidity crisis.
Liquidity is the availability of immediate cash to a market or firm. BNP-Paribas, the largest bank in France, and one of the largest in the world, took the unusual, and severe step of suspending redemptions for three of its mutual funds on July 27, 2007 in the amount of $2.8 billion, citing: “The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating.” (Kennedy) In other words, there were no bids; therefore, no one wanted to buy. Brokers, and dealers weren’t giving them official indications on the market price on some of the assets in the fund, and the credit rating on paper was irrelevant because of the inability of determining its fair value.