The Recession of 2007: Worst Economic Crisis since the Great Depression

Only available on StudyMode
  • Download(s) : 174
  • Published : November 5, 2012
Open Document
Text Preview
Summary

The recession of 2007 was the worst economic crisis this country has experienced since the Great Depression. Millions of people lost their jobs and their homes from the recession. This was caused in part by the housing bubble. Banks were giving out loans to whoever wanted one and the housing prices began to rise. When people were not able to pay their mortgages, they sold their house and made a profit. When the Federal Reserve raised the interest rate, people began to default on their mortgages and could no longer make a profit from selling their home. The recession got so bad that the unemployment rate more than doubled and the stock market suffered as well. The Dow Jones fell to a twelve year low of 6,547.05. The government tried to help by lowering the interest rate and implementing a fiscal stimulus package, but that still did not completely solve the problem. Through a second phase of quantitative easing, the government is hoping to get the economy flourishing again.

The Recession of 2007
Introduction
The recession of 2007 was the worst recession this country had experienced since the Great Depression in the 1930’s. Millions of jobs and millions of homes were lost. Many financial institutions went bankrupt and the government spent hundreds of billions of dollars to slow the recession. Causes

The cause of the recession can be traced back to the housing prices falling. From the 1950’s to the 1970’s, Savings and Loan institutions and Banks would give people traditional thirty-year fixed mortgages face to face. The loans would be used to purchase homes. In about the 1980’s, the rate of homes increased. This was attributed to the “American Dream” of purchasing a home and raising a family in it. The role of Government Sponsored Enterprises increased. The main Government Sponsored Enterprises were Fannie Mae and Freddie Mac. Fannie Mae is known as Federal National Mortgage Association. It was established in 1938 during the Great Depression as a federal agency. In 1968, the agency was chartered by Congress as a private shareholder owned company. Fannie Mae’s purpose is to expand the secondary mortgage market by securitizing mortgages into mortgage backed securities. (Fannie Mae) The Federal Home Loan Mortgage Corporation is commonly known as Freddie Mac. Freddie Mac was created in 1970 as a Government Sponsored Enterprise. The purpose of Freddie Mac is to expand the secondary mortgage market by buying and pooling mortgages and selling them to investors as mortgage backed securities. (Freddie Mac) Mortgage backed securities were bought from lenders, mortgage originators, and banks. Since these institutions were able to get these loans off their books, they were able to issue more mortgages. The increased mortgages meant that there were more opportunities for Government Sponsored Enterprises to pool these mortgages and sell them off to investors as more mortgage backed securities.

This would continue throughout the 1980’s and into the 1990’s. In the late 1990’s, housing prices increased greatly. Lenders and Loan Originators started giving out more and more loans and the world capital market was flowing with money. More and more loans were sold as mortgage backed securities and more loans were given out to more homebuyers. This was known as the housing bubble. The housing bubble is when housing prices get so high that they will not be able to sustain that level due to income levels. (National Public Radio)

In 2001, Enron energy trading company collapsed. Many people lost tons of money that they had invested in Enron. To help the economy, the Federal Reserve lowered the interest rate, but lowered the rate way too much.

The rapid decrease in the Federal Funds Rate would eventually lead to inflation. To avoid inflation, the Federal Reserve to increase the rate. As William Martin, Federal Reserve Chairman...
tracking img