The Economy: One Year Later
People aren’t fighting over barrels of garbage for food. Children aren’t leaving school to support their families. People aren’t constantly packing their “belongings” and attempting to find new homes. In what has been called the worst recession since the Great Depression, United States citizens find themselves in turmoil, and like a needle in a haystack, searching for an answer.
The Beginning
In 2005, the housing market peaked. Many purchased mortgages, knowing financing would be easier due to low interest rates.
Economists and financial institutions viewed this differently. Economists saw the inevitable end to a temporary high and that eventually the market would collapse.
Financial institutions saw this as a pot of gold, a time where they could make money because everyone wanted to invest in the housing market. According to David Krause, adjunct assistant professor of finance, credit became too easy to access and led to an overflow in mortgage purchases. Investors in turn were purchasing mortgage-backed securities like they were stock.
People were investing in these mortgages without realizing that the bubble would eventually pop and the mortgages would eventually fault.
Julian Kossow, professor of law, said, “This added pressure to banks to give more money to borrowers, who took on riskier loans because of this.”
This pressure led many entities to disregard underwriting safeguards and engage in sub-prime lending. Fannie Mae and Freddie Mac were borrowing money to low-income families, and this posed as an incredible risk. According to Kossow, most investors simply didn’t know what they were doing. They were investing because everyone else was, oblivious to what economists saw as a foreseeable outcome.
One would think that the mortgage brokers would be the ones to take a moment to think of the phenomenon that was hitting, but instead they were gaining on other people’s losses.
Krause said, “Mortgage brokers were compensated for completing transactions.”
Homeowners were unable to pay mortgages. Large institutions such as AIG, Lehman Bros. and Merrill Lynch were unable to regain credit and either failed, were bought or taken over by the government. The collapse hit the moment house prices plummeted. Americans were officially in turmoil.
The “Solutions”
The first line of business was to deal with the financial institutions. According to Krause’s investigation, the U.S. government has committed to $11.5 trillion in bailout money and has funded $3 trillion. This bailout money includes the bailing out of institutions while also providing for the Troubled Asset Relief Program, designed to buy back much of the faulted securities in order to stabilize the market.
Obama then enacted the American Recovery and Reinvestment Act of 2009, commonly referred to as the Stimulus Package. The Act is an attempt to revitalize the dead economy through tax cuts and credits, unemployment benefits and construction projects. In an attempt to revive the housing market, this package includes refundable credit to homes bought in 2009 or after the recession hit.
“(The housing market) is just starting to come back,” said Kossow. “I give about 12 to 18 months, around 2011, for a full recovery.
Many people who criticize the recession are quick to point fingers to the government which regulates them. It is a known fact among business people that investment banks have much looser regulation enforced upon them than do commercial banks (Banking Act of 1933). In other words, the investment banks were allowed, with no obstruction, to lend away to anyone. They jumped on this opportunity. This freedom was a direct cause for the situation in which citizens found themselves.
“We have faced some foundational problems with the near collapse of major elements of the U.S. financial system,” Swank said.
But the U.S. has yet to promote solutions to the foundation of its system.
Krause said, “The U.S. government … has not come up with a plan that will clear the U.S. Congress regarding comprehensive financial regulation.”
In other words, the government has mastered how to react to a crisis but failed in its attempts to prevent one.
The Future: Another bailout plan?
That question has been a popular one for debate, and it doesn’t look to lose that reputation anytime soon. Being in a recession as colossal as this is tough. Workers get laid off, lose benefits and find it difficult to obtain credit. But that’s the way it is. It’s been only a year since the crisis hit, and to think of throwing close to another $1 trillion of taxpayers’ money to fix this mess is very scary to citizens. But the thought still looms.
The end to the recession “will be officially announced … as ending in (Quarter 3) 2009,” Krause said. “While many in Congress are debating whether another stimulus package might be needed, most economists believe that too much stimulus could result in a return of high inflation.”
The government has implemented a plan of action that, while not necessarily right away, is slowly ending the recession. The housing market is beginning to come back, the government continues to look into regulatory foundational changes and yes, the recession is ending.
Tags: bailout, business regulation, economy, finance, financial institutions, future, government, housing market, mortgage-backed securities, real-estate, recession, stimulus package
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