The Great Recession of 2008: Causes and Consequences

The Great Recession of 2008: Causes and Consequences

Introduction

The global recession which started in 2007 reduced the economic earnings of many countries and even bankrupt countries like Iceland. Countries like Greece not only suffered themselves but have become a threat to a whole block of countries. The problem started in the sub-prime sector in the housing market of United States and spread in the international economies by the end of 2007. With the recession hitting the United States, the stronger and apparently independent economies like Europe and Japan also went into recession by mid 2008. After witnessing a boom in economic activities from 2001 to 2007, 2009 saw all countries in recession. The crisis was a surprise to all the economists, policy makers and others. Many like Jean-Philippe Cotis of OECD (2007) didn't anticipate the economic worries to grow to such large extent. When the downturn hit the economy, the entire economists were criticized for their inability to foresee this crisis. Scholars like Krugman (2009a) pointed out that his fellow economists failed to assess the market economy. Another scholar Galbraith (2009) highlighted more deep problems and said that due to the presumptions and established notions of economists and professors at US universities, they were unable to take alternative views on the economy which result in lack of proper analysis. Most of them shared similar views and they did not see the economic situation from any other perspective. During 2008 many economists underestimated the economic effects occurring on the economy which made the problem worse than ever.

Objectives

We will be reviewing two major causes of recession of 2008, the preexisting low interest rate and high risk investments made due to low government regulations especially in the housing market. It was observed that around 2001, the government to boost the economic growth lowered the interest rate and for the most of the boom period of 2001-2007 it remained under 1%. It gave business and people access to abundance in easy credit which resulted in economic growth. As we will review, it is usually a short term measure and the adverse effects of such growth rise up sooner or later. The second area of focus will be high risk investment. The low interest rate persuaded investors to seek an alternative of secure government investments with low returns to more profitable avenues with high risk. One of the chief areas was the sub-prime markets as the investors had already utilized the credit-worthy borrowers and now they moved to riskier investments with high returns. The subprime mortgage became the favorite for investment as the regulations were relaxed to allow disadvantage people to obtain homes.

Literature Review

We will be reviewing the literature on the two causes of the recession. First we will be reviewing the interest rate will be going through the studies which recommends that its effects on economic growth. We will be also looking at the effect of interest rate other decisions which caused the investors to opt for ...