The Economic Crisis

[2win]

Ohhhh. Well, that clears everything up for me. Thanks andrewwski!

[paradoxgirl]

ok, im not sure how many of you economic geniuses are currently on and chatting, but i could really use your help. i have a paper due tomorrow about comparing and contrasting the starts of the great Depression (with a captial d) and the "current economic doodoo". i have been searching for hours and no one seems able to tell me exactly how the current recession started. i know it obvioulsy had something to do with the stock market crash (and i understand a little about that) but there are also all of these companies failing and getting bailed out and i dont understand that at all! if anyone could please explain to me how the recession started, i would be forever in your debt! (no pun intended)

[andrewwski]

The stock market didn't crash this time. It plummeted hard, yes, and fast, but it didn't crash, and it was not a cause of the recession, rather it was an effect.

This recession was caused by the collapse of the housing market. A housing "bubble" essentially built up in the mid 2000's, and "burst" in 07 or 08. This was due greatly to the sub-prime mortgages given by banks. Banks were giving mortgages to people who really could not afford them, and the housing prices kept going up and up. However, the bubble had to burst sometime - in 07-08 the supply had outgrown the demand, and prices started falling. When they fell, they fell below the price that many people paid for them - thus destroying the equity of the home. This led to a rise in foreclosures - many people borrowed against equity if they could not meet the minimum payments otherwise. Others foreclosed purposely - their home was worth less than their mortgage.

This caused financial disaster for the lenders, who now had all of this "bad debt." Essentially lenders, including mortgage corporations and banks, held all of this debt from people that would never repay it. Things got so bad that many banks stopped lending, which made things worse. Without being able to secure a loan, spending decreases.

Other markets felt the effects of this too - especially the auto industry. With the economy so bad, people stopped buying new cars. This hit American manufacturers especially hard.

The bailouts existed basically to keep some of these companies solvent. Without government assistance, many claim that they would no longer be able to survive, and would end up folding. This would be even more devastating to the economy.

Whether or not people agree with the bailouts is a different story. Same goes for the stimulus packages. Although generally increasing government spending is one way to quicken the recovery - it's worked every time since the Great Depression. Nobody knows if it will have indeed worked this time - that remains to be seen.

[Phenylethylamine]

Correct me if I'm wrong- since obviously economics is not my strong suit, lol- but didn't the extra spending under FDR's New Deal actually fail to end the Great Depression? From what I've read/heard/been taught, the Depression continued until WWII started, at which point wartime industries jump-started the economy.

[andrewwski]

Correct. It didn't make anything worse - it certainly improved things to some extent, and if nothing else inspired hope, but ultimately it was WWII that ended the Great Depression, yes.

[Phenylethylamine]

Okay, good, so I didn't completely mis-learn that period of history Yeah, it certainly was better than nothing, but not fully effective. Are there any precedents for a situation like this being rectified otherwise? I somehow doubt that 1. another world war is likely to occur anytime soon (especially since the first two were basically the same war), and 2. the economic benefits of such a war, were it to occur, would outweigh all the negative impacts of war in general.

[Avis_de-Incendia]

I dunno, its like picking 2 bad things. War, or Economic Failure.

What I wish is that the Economy could just "start all over." Be fresh and balanced again, you know.

[andrewwski]

Okay, good, so I didn't completely mis-learn that period of history Yeah, it certainly was better than nothing, but not fully effective. Are there any precedents for a situation like this being rectified otherwise? I somehow doubt that 1. another world war is likely to occur anytime soon (especially since the first two were basically the same war), and 2. the economic benefits of such a war, were it to occur, would outweigh all the negative impacts of war in general.

Yes, because drawing comparisons between this recession and the Great Depression is not justified. This is nowhere near the magnitude of the Depression - instead it would be best to compare it to the recession of the early 80s. However, you cannot really compare it to any one in the past, as they all have different causes.

It's just a low point in a natural business cycle. Yes, it's a bad one, but we will come out of it. Once the housing market is stabilized and banks start lending normally again, things will be on the upswing. One could argue that it's already starting to happen.

Oh, and the economy is never balanced. Well, rarely anyway. It fluctuates up and down, and we try to bring it back towards a balance.

[2win]

Yup. Have you guys heard that the great-granddaughter of the founder of Bank of America called the current CEO's of BOA "idiots"? I got a real laugh out of that.

[andrewwski]

No, that's really not a good source. It explains nothing and was written by somebody who doesn't speak native English.