The effects of the 2008 recession
The effects of the 2008 recession will be felt internationally in the next couple of decades. Their severity is still affecting the economic performance of some developed and developing nations. The weakening of critical economy boosters hinders the realization of both internal and external economies of scale. Employees were profoundly affected by the recession since millions of them lost their jobs. This situation was unavoidable because all institutions were negatively impacted. The banking sector’s concentration on one field left the others unattended. This strategy opened up the industry to the massive risks that later lowered profitability and continuity of services. Poor government control measures in mortgage issuance allowed unmeasurable irregularities to destabilize many countries. First world nations ought to work hard towards streamlining operations in their major sectors to avoid causing similar setbacks. The labor sector calls for suitable solutions to protect employees since they play crucial roles in every field. By embracing ethics and professionalism, the world can overcome all financial challenges.
The Great Recession of 2008
The term great recession depicts the sharp decline in economic activities between 2008 and 2010. This period is marked as the largest downturn to occur globally after the Great Depression. Numerous world markets faced tremendous operational challenges due to the recession’s negative outcomes. The U.S. stands out as a country that experienced severe consequences during this period, compared to other victims. For example, it caused the shortage of valuable assets. This aspect led to the financial sector’s collapse. Many peoples’ lives changed drastically as they could not cope with the complicated economic situation. In this case, both social and economic challenges ensued, thereby affecting the country’s economic performance. It is important to explore the recession’s aftermath the global market environment for proper planning. On a broader perspective, it affected not only family life, but also industrial production. Understanding the reasons behind its occurrence can enhance the creation of strategic plans to hinder its recurrence in the future. Also, all adverse effects can be utilized to create and implement better frameworks to protect the commercial sector. This research has the objective of unearthing all the factors that caused the economic recession. The study also intends to highlight the negative impacts of the economic downturn on America and the rest of the world.
Literature Review
Housing Bubble Bursting
There exists plenty of information regarding the emergence of the 2008 recession and the damages it brought forth. Numerous authors believe that various issues contributed to the recession. The housing bubble’s bursting is one factor that precipitated the recession. During the Consumer Age, housing prices increased tremendously. This aspect attracted many investors to benefit from housing profits. With the expectation that the process would continue rising, Americans bought more houses. To some extent, some homes were renovated to suppress the high demand. American residents secured loans to acquire their own houses to avoid higher prices in the future (Berger, Imbierowicz, " Rauch, 2016). The financial sector benefitted by issuing large loans to many clients. Both financial institutions and investors reaped huge profits from the housing sector’s profits. The high inflation in 2006 increased short-term interest rates, thereby complicating issues for low-income borrowers. To avoid high refinancing costs, most borrowers opted to sell their houses at reduced prices, while other defaulted their payments.
Subprime Lending
The collapse of the housing bubble paved the way for subprime lending. This concept allowed banks to issue mortgages to people who were likely to face challenges in maintaining repayment schedules. Subprime lending entails giving loans to all individuals without considering their past repayment behaviors. As a result of this predatory lending, low-income earners and individuals working in poorly compensated jobs were given loans to purchase houses. Banks took advantage of both collateralized debt and mortgage-backed securities which were more profitable than government securities. According to Farmer (2015), "the total amount of subprime mortgages in 2007 was $ 1.3 trillion" (p. 618). Banks introduced low-interest loans, as well as minimum repayment amounts, to take advantage of the housing sector. The lack of appropriate regulations in financial institutions worsened the situation when the subprime borrowers could not cope with the Federal Reserve’s intervention. In late 2007, the collapse of the housing sector brought forth mortgage delinquencies. Most of the global subprime mortgages ended up losing their value. The lack of excellent credit and financial institutions in the U.S. influenced the tightening of credit issuance around the world (Kroft, Lange, Notowidigdo, " Katz, 2016). This aspect slowed economic growth in both Europe and the U.S. As such, uncontrolled lending also fueled the recession’s ferocity.
Huge Debts
In 2000, the U.S. experienced a severe stock market crash that affected its economy immensely. In response to this challenge, the Federal Reserve reduced loan interest rates and eased access to credit. These action plans heightened the growth of debts in all areas of the economy. Fernald (2015) found that "the debts’ margin increased adequately because many borrowers took huge loans in pursuit of acquiring expensive houses" (p. 35). Instead of solving the stock market problems appropriately, the government led to the economy’s deterioration. High default cases weakened the financial institution’s stability. Thus, the debt spread between the people and the banks they relied on for credit assistance. With an unstable financial sector due to debts, other markets were adversely affected. For example, manufacturing firms could not get financial assistance as usual. Based on all these aspects, it is evident that the Federal Reserve contributed to the recession. All the strategic measures it took complicated issues, thereby making it impossible for all stakeholders to operate efficiently (Fernald, 2015). The idea of lowering and raising interest rates at different times without proper analysis strengthened the recession. For instance, increased defaulting forced many banks to withhold their lending to avoid incurring more losses. However, this move was not useful because all segments of the economy could not prevent financial challenges.
Effects of the 2008 Economic Crisis
Unemployment and Wage Reduction
The great recession was responsible for an increase of unemployment levels from 5 % in 2008 to 10 % in 2009 (Fernald, 2015). The recession introduced a profound disruption in local economies and industries. Structural unemployment emerged forcing lower-class individuals to seek employment in other fields. For instance, the housing sector’s financial challenges barred it from accommodating more employees. Banks were also not left behind due to the massive debts they had. Numerous institutions had to downsize to avoid dissolution. The subject issue was reducing costs by all possible means to remain relevant and operations (Kroft, Lange, Notowidigdo, " Katz, 2016). In this case, many people were left jobless. On the contrary, the few who remained employed were subjected to wage reductions. Cutbacks were established to help companies deal with their financial challenges. By the lapse of the recession, many countries’ economic stability had deteriorated. Underemployment also arose as most companies had limited jobs to offer.
Market Instability
The end of the slump left many organizations unable to thrive. Before its emergence, housing had acted as the core of economic growth and investment opportunities globally. However, the loss of equity and variable pricing and demand patterns discouraged customers and investors from resuming their operations. The industry’s recovery was difficult because financial institutions changed their uncontrolled lending practices. The customers were also concerned about avoiding incurring debts and facing increased interest rates (Fernald, 2015). Therefore, the recession posed long-term effects to the global business community. From these experiences, it is clear that balancing is required in every commercial segment to avoid causing another collapse.
Analysis
The great recession was promoted by a combination of causative agents. Their intensity fueled detrimental effects. Evidently, its results are still affecting many countries. This facet implies that the magnitude of the damage was quite high. The development of the global economy was deeply affected considering how different nations engage in commercial transactions. For example, the effects of the downturn in the U.S. and Europe strained their trade partners from the developing world. Uncontrolled money lending is presented as an ill-advised practice that is capable of transforming economic well-being. Also, the lack of ethics in financial institutions to the extent of embracing predatory lending can plunge a country in additional economic challenges. With the right measures in place, it is indisputable that the occurrence of another crash is not likely. Since employees, especially lower-income individuals were highly affected, governments should concentrate on improving their welfare (Farmer, 2015). Such a move can help initiate economic growth and development in different industries.
Summary and Conclusion
The 2008 recession refers to a period when economic operations were affected in an international spectrum. This unfavorable outcome was influenced by the deterioration of housing in the U.S. Prior to 2008, housing was a lucrative business that attracted lots of clients and investors. High prices enticed banks to issue uncontrolled loans and mortgages to both prime and subprime individuals. However, the costs reduced in 2007 due to high inflation that took place in the U.S. The extensive borrowing also created huge debts that people and institutions could not cope with. Thus, many organizations could not carry out their operations. This factor led to the downsizing of many firms. Unemployment increased, and wages were reduced to deal with financial difficulties. Market instability was experienced in various sections of the American and global economies. With all these factors in mind, it is critical to prevent another recession from taking place.
References
Berger, A. N., Imbierowicz, B., " Rauch, C. (2016). The roles of corporate governance in bank failures during the recent financial crisis. Journal of Money, Credit and Banking, 48(4), 729-770.
Farmer, R. E. (2015). The stock market crash really did cause the great recession. Oxford Bulletin of Economics and Statistics, 77(5), 617-633.
Fernald, J. G. (2015). Productivity and Potential Output before, during, and after the Great Recession. National Bureau of Economics Research Macroeconomics Annual, 29(1), 1-51.
Kroft, K., Lange, F., Notowidigdo, M. J., " Katz, L. F. (2016). Long-term unemployment and the Great Recession: the role of composition, duration dependence, and nonparticipation. Journal of Labor Economics, 34(1), 7-54.
