Paper Example on Causes of the Economic Recession of 2008

Introduction

The economic recession, popularly known as the Great Recession, began in the year 2008 and impacted some of the highest registered rates of unemployment and home foreclosures in the U.S. (Wegman et al., 2017). The Great Recession severely impacted the local labor market and the national economy at large. However, studies done up to ten years later confirmed some dynamics that could have led to the recession in 2008. According to scholars, ten years down the line, after the aftermath of the recession of 2008, the similar impacts on workers and trading risky securities persist to date (Wegman et al., 2017). Therefore, this review will afford a critical evaluation of what caused the economic recession of 2008, which is considered crucial today to prevent another occurrence of recession.

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Before evaluating the recession of 2008, it is significant to have a comprehensive understanding of what recession means (Powell et al., 2016). Recession is defined as a decline or stagnation in the growth of the economy. However, the dynamics that have been used to describe "recession" have changed over the years. Since the occurrence of the recession, International Monetary Fund (IMF), for instance, has redefined the definition of “global recession," linking it to the decline of real per-capita world gross domestic product (Powell et al., 2016). On the other side, there are several causes to blame for the occurrence of the recession. These have different severity on the religious, political, and social life of the citizens.

Causes of Economic Recession of 2008

The economic recession of 2008 has been linked to many causes, including the subprime crisis, Fed drops interest rates, and the stimulus package, among others. This review will only discuss three significant causes; fall of the housing market, risk-taking behavior, and excessive private debt levels.

Fall of the House Market

Failures in the dynamics of the housing market play a more significant role in the economic recession. Subprime lending provided comfortable credit conditions for some time. However, the subprime lender new century Financial was declared bankruptcy in April 2007(Király, 2020). This was after Federal Home Loan Mortgage Corporation announced that it would not purchase risky subprime mortgages or related securities. Therefore, since there was no market for the owned mortgages, the American Home Mortgage Investment Corp collapsed in August 2007 in the then subprime crisis, leading to a decline in the housing market (Király, 2020). Mortgage underwriting was another contributing factor to the economic recession. Lenders offered hazardous loans to borrowers since loans were being issued without adequate review and documentation. Many borrowers thus ended up plunging into severe loan retrievals. This opened ways for loan fraud, which affected many borrowers and consequently fell in the market. Again, predatory lending was another factor that led to the recession (Király, 2020). It led to unsafe and unsecured loans. Another issue that led to the fall of the housing market was down payments and negative equity. Low down payments resulted in highly leveraged investment on the side of the homeowners.

Risk-taking behaviors

Risk-taking behavior was another issue considered in the occurrence of the economic recession. According to President Barrack Obama, who was speaking in 2009, complained that the culture of irresponsibility resulted in the crisis (Bonaparte et al., 2019). Many people took the risk of obtaining the houses without adequately acknowledging the underlying risks. In the subprime loans, many people just took the loans without knowing the calculations of how they could pay back the loan. In other words, people took risks when acquiring the mortgages without first analyzing what could befall them while they could be paying back (Bonaparte et al., 2019). It was clear that debt consumers acted with much focus on their rational self-interest because they could not evaluate the financial industry's veiled fault risk pricing procedure. This as well impacted the occurrence of the economic recession of 2008.

Excessive private debt level

In a bid to salvage the 2000 Stock Market Crisis and subsequent economic downtime, the Federal Reserve lifted strict credit availability measures and reviewed interest rates down than ever seen before (Király, 2020). The lowered rates of loan interest enhanced the growth of debts at all corners of the economy (Király, 2020). Consequently, high levels of debts have, in many viewpoints, been considered as a critical causative factor for the recession.

Discussion

Even though the economic recession was officially declared over in 2009, many countries worldwide still felt the impact of the economic downtime for several years later. Many countries were forced to increase taxes to be able to pay out their debts. What is very important is that question; is there any possibility of an economic recession occurring again? Yes, there is a higher probability of the recession occurring again, since the previous causative factors are still evident to date. For instance, After President Trump was sworn in as the President of the U.S., he and some congress members put several efforts to review critical spectra of the Dodd-Frank Act that could have helped to protect America from another recession (Larkin, 2018).

Conclusion

Despite the fact America and other European countries had healed from the severe impacts of the economic recession of 2008, there is still evidence that the causative factors still exist to date. Therefore, the U.S. government should review such risk factors and ensure that they are addressed before another recession. Apart from the cause of the economic crisis of 2008, several other factors could lead to the same in the U.S. today. Therefore, the federal government and the criminal justice system should work hard to ensure that adequate intervention is made before the situation worsens. Currently, political aspects pose a significant risk of another recession in the U.S.; and this should be addressed as fast as possible.

References

Bonaparte, Y., Khalaf, S., & Korniotis, G. M. (2019). Do Role Models Affect Risk-Taking Behavior? The Case of Minorities. Retrieved from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3518604

Király, J. (2020). Under the Clouds of the Subprime Crisis (July 2007–September 2008). In Hungary and Other Emerging E.U. Countries in the Financial Storm (pp. 31-44). Springer, Cham. Retrieved from: https://link.springer.com/chapter/10.1007/978-3-030-49544-2_4

Larkin Jr, P. J. (2018). The Trump Administration and the Congressional Review Act. Geo. JL & Pub. Pol' y, 16, 505. Retrieved from: https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/geojlap16&section=29

Powell, J. L., Chen, S., Pape, U., Chaves-Ávila, R., Pahl, J. B., Petrella, F., ... & Savall-Morera, T. (2016). Working under pressure: economic recession and third sector development in Europe. International Journal of Sociology and Social Policy. Retrieved from: https://www.emerald.com/insight/content/doi/10.1108/IJSSP-01-2016-0010/full/html

Wegman, F., Allsop, R., Antoniou, C., Bergel-Hayat, R., Elvik, R., Lassarre, S., ... & Wijnen, W. (2017). How did the economic recession (2008–2010) influence traffic fatalities in OECD-countries? Accident Analysis & Prevention, 102, 51-59. Retrieved from: https://www.sciencedirect.com/science/article/pii/S0001457517300490