Thread: The cause of the recession

The main cause of the recession was mortgage & loan defaults. The problem was generally not the borrowers, instead it was the lenders.

Many lenders pushed variable rates on mortgages, or approved high mortgage payments to individuals who could not afford them.

My hope is that, once this recession is over, we have learned our lesson.

Originally Posted by Promoneyearn

The main cause of the recession was mortgage & loan defaults. The problem was generally not the borrowers, instead it was the lenders.

Many lenders pushed variable rates on mortgages, or approved high mortgage payments to individuals who could not afford them.

My hope is that, once this recession is over, we have learned our lesson.

Recessions have a variety of causes and a wide range of symptoms.

Some causes are domestic in origin, stemming from policy mistakes on behalf of the economic authorities. For example, the central bank might allow the money supply to grow too slowly and keep interest rates above the level needed to maintain a steady rate of growth. Higher interest rates have the effect of dampening down spending by both households and businesses and can lead to plant closures and job losses.

External shocks can also bring about recession. For example in 1973-74 the large jump in world oil prices caused a sharp rise in cost push inflation and an acceleration in wages. Falling real purchasing power of consumers and a deflationary fiscal and monetary policy from the government sent the economy into reverse.

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Yes that is true, there are always a variety of factors.

This is staunchly debated topic; but the general consensus is that a recession is primarily caused by the actions taken to control the money supply in the economy.

The Federal Reserve is responsible for maintaining an ideal balance between money supply, interest rates, and inflation. When the Fed loses balance in this equation, the economy can spiral out of control, forcing it to correct itself. This is precisely what we have seen in 2007, where the Feds monetary policy of injecting tremendous amounts of money supply into the money market has kept interest rates lower while inflation continues to rise. This, coupled with relaxed policies in lending practices making it easy to borrow money; the economic activity became unsustainable resulting in the economy coming to a near halt.

It is also said that recession can be caused by factors that stunt short term growth in the economy, such as spiking oil prices or war. However, these are mostly short term in nature and tend to correct themselves in a quicker manner than the full blown recessions that have occurred in the past.

Originally Posted by Promoneyearn

The main cause of the recession was mortgage & loan defaults. The problem was generally not the borrowers, instead it was the lenders.

Many lenders pushed variable rates on mortgages, or approved high mortgage payments to individuals who could not afford them.

My hope is that, once this recession is over, we have learned our lesson.

I agree and I believe these banks should not get us taxpayers money for bailout.

Corporate fraud, money laundering and investor pessimism

Jenie is absolutely right.

Here is the good news: “Recession is over according to financial experts”
Source: Recession Is Over According to Financial Experts - ABC News

We have heard all the gloominess about the recession. It’s really good and welcoming news.

The Federal Reserve and the American people for taking the bait are the responsible parties. They preyed on our greed and we blame it on the politicians whom we asked to take care of our every need.

The money supply should be based on real economic output and not paper wealth (stocks, futures and housing debt). It should be increased when output increases, instead the Fed increased supply based on borrowing (consumer debt) which leads to inflation and massive debt for businesses and consumers.

Seems like the economy's doing much better now :-)