The Great Recession

“The Great Recession”

In 2008 many American families suffered a drastic change in their lifestyles. Those days where American families used to have a great prosperity with high incomes and big houses without worrying about unemployment came to an end. Also, Wall Street started experiencing many great losses, many large bank corporations started suffering and many American families becamehomeless as well.. The American Dream was gone. It was the beginning of a new economic crisis in the United States. An economic crisis that didn’t disappear but kept changing and evolving like a snowball which resulted in what we now call “The Great Recession”.
This “Great Recession” is a period of a very low economic growth. This crisis brings panic to every country in the world having this can causea global crisis for other countries. Therefore, it’s extremely important to find out the main causes of this economic disaster in order to avoid it from happening in the future and find effective ways to fix it.
A look to the past reveals that this economic crisis started at the beginning of the century when Allan Greenspan, former Federal President, decided to keep interest rates too low andmake cuts in the interest rates of mortgages.
This situation encouraged homeowners to take highly adjustable mortgages. As Stanford economist adviser John Taylor said “the Fed's easy money policies spurred a frenzy of irresponsible borrowing on the part of banks and consumers alike”. Therefore, this situation was making even bigger a real state and credit bubble. This was an 8 trillion dollarbubble that was carrying the economy of the United States. However, Federal authorities failed in using their power to regulate this economic situation. They should have recognized all the risk this system was bringing to the economy.
Also, they should not have allowed all the high risk loans banks were given to customers and realized all the risk the banks were taken by using the new unsupervisedmarket in more and more exotic derivatives.
Instead, they were amaze of the amount of money the system was creating and they didn’t pay attention to the risks the system may offer. As the economist Paul Krugman states "Regulation didn't keep up with the system." This poor regulation is what causes the United States stand economically at this moment.
In the other hand, the economist Joseph E.Stiglitz in his article “The Anatomy of a Murder: Who Killed America’s Economy” writes “I would argue that blame should be centrally placed on the banks and the investors”.
Commonly the banks and the financial sector have an important role during this economic crisis. They were the one in charge to study and regulate the risk in loans for people. However in this case they were the one whichcreated the risk for customers.
The banks applied incentive structures that were designed to induce a short-sighted and excessively risky behavior. They were given more subprime loans and they created a new financial product named low- or no documentation product.
Basically banks were giving loans to anybody who wanted to take the risk of taking a loan out, which means they have to pay it back withinterest. Also, banks employ an unnecessary leverage at a 30-1 leverage ratio.
In addition, banks and financial institutions didn’t keep debt or risky loans on their accounts. Banks used a high complex CDO’S in order to get rid of those risky debts but at the same time they were making billions of dollars in profit by selling them. Therefore, they didn’t suffer the consequences of any failureof payment by the customers. It was clear how investor didn’t understand the risk they were getting into. However, bankers knew that those deals weren’t a smart investment and made bets against those investments through Credit Default Swaps.
All of this risk was what made this big bubble collapse and large American banks like Lehman Brothers went to bankruptcy. Also, this economic collapse...