From 2001 to 2010: The United States' Most Difficult Economic Decade
From 2001 to 2010, the United States had its most difficult economic decade. It all started after the terrorist attacks of September 11, 2001. The world's largest and strongest economy was contracting at an alarming rate, and a solution had to be found before it was too late.
The Investigative Focus: Mortgage Housing
To compensate for the losses, economists chose to investigate mortgage housing. Deregulation policies were implemented, allowing banks to operate as both commercial and investment organizations. Minority Americans were heaping on the pressure to get their dream homes. Lending rates rose, and banks withheld mortgages as collateral. Monthly payback rates surged, and borrowers were in a payment shock, and most of them walked away from the responsibility. The banks remained in financial bankruptcy and had to sell out the mortgages at relatively low costs below their expected prices. The housing market collapsed by 2008 and the great recession set in. The essay will focus on the logic, evidence, and controversies in understanding the US most significant economic crisis since 1930.
Peter Wallson's Perspective: The Initial Onset of the Great Recession
Peter Wallson points out that the great recession began in late 2007 following the subprime mortgage crisis. Real estate bubbles, where interest rates increased drastically and that the borrowers could not pay the loans on monthly due was the initials onset of the payment shock. The shock made most of the Americans to quit responsibilities and let go of the mortgages had they had used as securities for an acquisition of loans (Wallson 3). Peter describes the cause of the shock to have originated from many angles. He most certainly begins by pointing out the mistakes that were made by the banking institutions which took too many reckless risks in a bid to gain and exploit the situation that was facing the country at that time. Wallson's article illustrates that the financial policies that were passed and the deregulation approaches had limited success, and the inference was to implicate devastating economic shock.
Breakdown of Systems: A Contributing Factor to the Crisis
Breakdown of systems especially the Federal Reserve contribute to bad borrowing that saw almost everyone who had a fixed asset and wanted a loan approved. Some of the assets that were adopted as the alternative for mortgages had limited information, and this facilitated the ability of the borrowers to walk away from their responsibility of repaying the loans with stipulated interest rates. The reckless borrowing and irresponsibility of the borrowers combined with the Wall Street saga to set the economy on the path of a financial crisis (Wallson 4). Peter Wallson's article describes the choices of the financial remedies as lack of financial insight and the consequences were entirely avoidable if only the lawmakers and bankers took to think of the outcome consequences before taking the wrong actions.
Financial Shock Intermediation: Affecting Output and Employment
Financial shock intermediation affected output and employment not only in the US but also in Europe where close to one million jobs were lost during the great US recession. Dealers in housing and marketing industry had to lose jobs following the collapse of mortgage bubbles. The classical perspective illustrates that the US had to change its export of goods and services and major on technology as the core factor that influenced and run its economy. Physically, this meant that hands-on employees had to look for alternative jobs that required manual labor. The output was cut down in a bid to assemble the liquid to restore back the economy.
The Classical Perspective Model: Explaining the Great Recession
The Classical perspective model has been used by economist to explain the reasons behind the great recession that was observed in 2008 (Wallson 5). Research had shown that American economy was increasing by 3% for every year. The perspective begins by reflecting the similar occurrences in the 1930s when America went through the great depression. The Classical view model explains that the great recession was potentiated by the rush for liquid cash by most of the financial institution especially after the failure of Lahman. The traditional perspective model equates recession with the modern day great depression of the 1930s but even on a larger scale. Historically, banks were controlled be the Central Bank to inject a given amount of cash in circulation with controlled interests. At the onset of the recession, all banks violated the historical borrowing culture and opted to venture into risks.
The Result of the Models: Inflation and Decline in Supply
The result explained by the models coincides with the rates of inflation in the country at that time. The annual 3% gain had decreased by 60%, and the cut on output was totally going down. Inflation was further manifested by impairment of the free market system such that the private sectors and the public balance sheet were already at disequilibrium (Konczal 2). Reduction in the aggregate demand was thwarting the economy from operating at its full capacity. Economist described the inflation as a subset of the recession, an influence that was bound to occur sooner or later. The government, however, had the ability to supply its side with incentives but still, the recovery would not be adequate given that private sectors were also immensely feeling the impact of the recession.
The Classical Model: Decline in Demand and Labor Returns
The classical model affirms that a decline in demand is not likely to influence an economy that much, but a fall in supply ultimately does. By 2008, the gross domestic product of US had declined by 9.8%, and another 5.1% also followed in 2009 (Fernald 29). According to the economist, this already warranted for a collapse in the aggregate demand. This meant the counteractive policies of supply would have little or no effect at all. Prices were rising as the supply of money into the economy was kept at relatively constant. The ideology infers that more money had to be injected and with the situation that was already prominent in the US economy, any surge in the money supply would lower the price of commodities drastically given that deficits were already prominent both in the public and the financial institutions.
The Structural Problems of Labor: A Core Contributor to the Recession
Purchasing power and labor returns were subjected to a tax rise of more than 15.2% higher than before and including both the self-employed and small businesses. The Classical model explains that the equity capital market had then increased by 125% as compared to the old average of 50% from history (Konczal 3). Wages had to be raised to meet the household demands of the workers. The structural problems of labor are pointed out by the classical model as the core contributors of the recession. The model also succeeds in outlining the government policies that facilitate inflation in the first instance and gave a chance for the recession. The first policy was George Bush's increase in minimum wage in 2008 and 2009 without analyzing the "disemploying impacts" that would later fall in the labor market.
The Simultaneous Failures: Programs and Designs
The classical model also points out the simultaneous failures of systems and plans to stimulate their intended purposes. Programs were developed and failed amongst them including reducing and later increasing the temporary tax and still, the multipliers obtained a negative result (Fernald 35). The model succeeds by finally touching on the retention of mortgages by financial scrutinizing firms that stopped the benefits of the owners and the businesses as well despite the increase in income. The illustrations outlined by the classical model also confirm the earlier statement, that the events of recession could be avoided.
The Impact of Minimum Wages and the Poor Designs
The increase in the minimum wages ultimately reduced government expenditure on purchases. Mike Konzal also confirms that the poor designs were used in multiplying the Keynesian stimulus. The alterations of the actual stimuli had an impact felt on both the side of government and private sectors (Fernald 37). The new classical model has thus managed to explain the recession using real shock and not majoring on the decline in the aggregate demand.
Conclusion: The Choices Made and Their Disastrous Consequences
In conclusion, the setback in the economy that was brought about by the great recession of 2013 enabled the US economist to remain aware of how choices made at the beginning, though to benefit a country can turn out to be disastrous. Basing on the explanation of the logics and reasons behind happenings of the great recession, the new classical model hypotheses which states; "Saying that someone is dead because he has stopped breathing does not explain anything," can relate to this situation. It implores that manipulation of the Keynesian stimuli by the economists and financial institutions had to cause severe consequences to the country.
Works Cited
Wallson, Peter J. “The true story of the financial crisis. The American Spectator (2011).
Konczal, Mike. “The Voluntarism Fantasy.” Democracy 32 (2014): 51
Fernald, John G. “Productivity and Potential Output before, during, and after the Great Recession.” NBER Macroeconomics Annual 29.1 (2015): 1-51.
