Thread: What caused the recession?

When people talk about the recession, what is accepted as fact about the cause(s) is not how I remember things. That is true for both regular people conversing, as well as what I see and hear in the news media, from both sides politically.

Now, I wonder if I am remembering things wrong, or has history been altered somehow... If the latter is true, then I wonder why? Is it a matter of if something is repeated enough it becomes true, or is there some kind of conspiracy going on, and if so, by whom?

I know I haven't stated how I remember things. I really want to hear from some of you folks first.

What I remember was a perfect storm...

Well, it was on the horizon when Bush took office. The dot com era was the start. There were signs that it was a down turn was coming, but because Clinton's Council of Economic Advisors announced the "end of the business cycle", anyone who mentioned the signs of the downturn were accused of talking down the economy... (interesting reading
here)

Then, 9/11 happened. I was attending Baylor University at the time, and I had the unique perspective of being a student when it happened, and then went back and finished after a couple years' hiatus. What I learned was something that I missed almost immediately afterward because we were trying to figure out what happened. The next day, CNN & Reuters predicted a world wide recession. When I went back to school, I learned that was actually the point of the attacks. Whether or not that is the real motivation, I cannot say for sure, but if it weren't it was icing on the cake, I suppose.

Then, as the economy struggled to get back on track, we had the major real estate bubble burst and ridiculous mortgage situation that led us to where we are today... It wasn't any one thing, it was several negative events that brought us to where we are now.

When I first started university, they were predicting that by 2010 there would be more jobs than there were going to be people to fill them... How's that working out for everyone?

IMHO - the core issue was money that was too easy: e.g. excessively low interest rates kept that were kept near zero for far too long -- which led to people buy far more home than they would be able to afford in normal times, or second homes/vacation homes/speculative home buying (or whatever the case might be)... far much credit card spending... etc.

This in turn ignited a real estate and spending craze which created even more demand (I want what the Jones' have even if I don't have the cash to pay for it)... which, seeing a market of even more customers chomping at the bit to spend on credit, prompted banks to ease lending standards even further... which, in turn, enticed people to spend/borrow more than they could ever realisticly repay... with this cycle becoming self-feeding and growing until it could no longer sustain itself... And, as has been happening since the dawn of time, the market cycle tried to move back into equilibrium by swinging the other way.

Unfortunately, just like any other cycle in nature, it can't just swing back to the middle and stop there... it has to swing both ways a few times before finally finding a balance again.

Everything else (such as 9/11 as Paul mentioned, fallout from the tech boom (hey, are just as susceptible to the lure of lower interest borrowing, getting caught up in the craze and going hog wild on credit as people are), etc) only served to exacerbate the problem even further.

Like I said, just my humble opinion.

There is so much to consider, the dot com boom going bust is probably one thing as is 9-11 and billions and billions spent on the two wars. The tax cuts , the real estate bubble brought on by deregulation and poor management and oversight by the fed.

I grew up in a manufacturing based economy. How long can a consumer based economy last when consumer confidence goes South ? Note the reports that China and India recovered from the recession early and strong. When you make the stuff the consumers have to buy it.

Gas prices are going up again and one big reason is more demand for fuel in China to for their manufacturing. We're winners though because we can buy cheap goods at wallmart and target. Whoop de do.

Now 'we' are trying to get a trade agreement with South Korea just in case there were any manufacturing jobs left that our government forgot to give tax incentives to move off shore. Pleasant dreams.

That's a good point Jimmy... the lack of manufacturing and natural resources in the US (relative to consumption) has really hurt as well.

Good points about the recession and all valid points. Putting that behind us fuel is going to go up because the more money the government prints and spends the more the value of the dollar will fall. That is going to cause prices of energy, our lifeblood, to go up. I live in California and it is bleak here. Fuel, taxes and more taxes, and more taxes are on the horizon. They don't get it and probably never will. We are heading for bankruptcy. Who in the world would buy a California bond? It will not be worth the money it is printed on in the near future.

The real reason for the recession is the citizens spending money they did not have, the government spending money they did not have and the feeling that it was all ok!

Take Care,
Richard

Originally Posted by richmondesi

That's a good point Jimmy... the lack of manufacturing and natural resources in the US (relative to consumption) has really hurt as well.

Paul, sometimes I think about the fact that younger people in this country today don't remember a time when there was prosperity and a blue collar middle class. It only lasted about 30 years if you come right down to it. Guys died in the streets to get an 8 hour day and a forty hour work week. Literally died in the street fighting goons and cops paid for by the companies.

There was a window of time from after WW2 up into the late '60s early '70s when a man could go to work, feed his family, while the wife stayed home raising the kids. A home, a couple of cars and money to send the kids to college with a pension at retirement.

The companies never gave up. They used their political influence and whittled away at it. Gradually the union busters, the entrepreneurs and their bought and paid for politicians killed the goose that laid the golden egg. Back then a CEO didn't need to make 400% more than their employees and the government didn't give tax incentives to companies to move their production overseas. Democrats didn't push legislation such as NAFTA and say it was a good thing.

All over this country there are abandoned shells that once were factories, mills, and plants. I used to see them when I lived in Norther New Jersey in Newark, South Kearny, Elizabeth and Patterson. Forget about Pittsburgh and the steel mills and Detroit's auto plants.

Now mothers leave their latchkey kids to work two and three jobs and hope they don't get sick because they can't afford health insurance. The kids who used to be out and self sufficient at 18 or 20 are still living at home into their 20s unable to afford their own housing.

The way it was for that short window of time was what they used to refer to as "the American dream." I used to say buy American, the job you save may be your own but the cow is so far out of the barn now that I don't think there is anyway to shut the door. End of rant.

To me the reason for the recession is the wrong economic premisses before the recession. Since I have some science background I believe in conservation laws (actually I believe in symmetry, the conservation laws are a result of it). So even in the dot-com years, I had discussions with my friends that the prevalent economic view about zero-sum rules being non-applicable to the economy, cannot be right and soon we'll have hard evidence for it.

Based on these theories for decades people in US, at least, have been encouraged to spend more than they have and they have been doing just that. So the recession is just the cost of getting back to a more sensible way of living, and in my opinion absolutely unavoidable. Whether it was precipitated by the housing bubble, or the dot-com one, doesn't really matter, if neither had triggered it, one of the next bubbles (and there are more to come) would have.

As far as manufacturing goes, the same way the industrial revolution killed certain type of jobs and created different types, the new technologies, along with the globalization are going to obsolete the industry of the 50s and the 60s. Just another thing that is unavoidable.

As others have pointed out, there are many factors that caused things spiral downward. The mortgage crisis, the thing that recently tipped the scales, was partially caused by allowing sub prime mortgages to be securitized, and that, coupled with the stripping of regulations, such as the Glass-Stegal act, and financial institutions taking advantage of these reduced regulations, allowed for a perfect storm of stupid, with the toxic mortgage assets as the base. These reduced regulations allowed the financial corporations that are "too big to fail" by dissolving the barriers between banks, brokerage firms and other financial institutions.

Another example, Fanny mae, and one other company, maybe Merill Lynch, were allowed to speculatively invest with insane leverage-I dont remember what it was exactly, but something like 200:1 or 400:1-- leverage a forex trader with 2 months experience or half a brain would balk at. They did need a special dispensation to use the extreme leverage, but institutions like that shouldn't be involved in extreme speculation in the first place, and wouldn't have been ten years ago. Of course, they amassed a huge debt because of speculating with this ridiculous leverage. Frankly, the fact that they petitioned to use such leverage in the first place should have been a sign that whoever was in control of the money was too damn stupid to be doing that job in the first place.

AIG mainly collapsed b/c of credit default swaps, with were insurance against bad investments (such as the toxic mortgage securities), but the swaps were unregulated b/c they were labeled "swaps" instead of "insurance". These were bought as insurance against the toxic assets, and when the securities began to fail and the crisis began AIG ended up owing much more than its value to those that had invested in the swaps to offset the risk of the securities, leaving those investors even further up the creek, exacerbating the situation even more, and bankrupting AIG.

I'd go more in depth, but it would take about 3 hours and three pages to type and I don't remember it all off the top of my head. There are many similar examples, essentially the financial markets were having a field day and had gone completely insane. The fun thing is, I don't think that any safeguards to prevent this sort of thing from happening again have been reinstated. You know, increased regulation would be "bad for business".

I will add that many of these regulations were drawn up by SEC head Joe Kennedy under FDR after the crash of the 30s. FDR got Kennedy to draw them up because "it takes a crook to catch a crook". Well, the crooks got their way again, with similar results.

If you want good indepth reporting, dig up the NPR stories, they're about the only ones that have actually done really informative pieces on the economic situation. That is, if you can stand the awful, awful liberal bias at NPR .

I still remember the exact moment when I realized that the dotcom bubble would collapse horribly. It was when I read a comic in a computer magazine. Nerd 1 got a phone call from the boss, said 'um... yes... ok...', hagns up the phone and says to nerd 2 'the boss just told me that from now on he wants us to start making a profit', to which nerd 2 said 'weird... we're a dotcom, right?'

At that very moment I realized that a) the dotcom business model was not sustainable and that b) the money of all the people who got rich came from the people who bought all the tech stock and expected a similar payout when they sold their shares. It was like watching a train wreck happening while the passengers were unaware of what was going to happen, sticking their fingers in their ears and singing 'lalalala I can't hear you'

And predictably, it happened. The economy recovered to some degree. But 9/11 triggered 2 wars which destabilized the global economy and sent fuel prices up in the air. Meanwhile the American lifestyle enabled the credit crunch to build up, and when that imploded, a good deal of financial backbone broke down and cause massive panick.

Imo, one of the reasons that the US is hit extra hard (apart from the obvious was spending) is that there is no decent health insurance, and no social safety net. So anyone who gets unlucky now is really going to fall on hard times, get homeless or a crappy job, and is lost to the economy.

Belgium seems to be doing ok for now, and hopefully it'll stay that way.