Analysis of reasons for the great recession

Overview:

The great recession was one of the most significant global financial decline, which started in 2007and lasted until 2009. Due to this, many jobs were affected, as economic sectors had incurred huge losses, primarily due to investing in housing projects, which then suffered losses. There are many reasons for this, although the primary reason recognized is the government’s inability to implement new growth models with time.

Analysis of reasons stated in Article 1

Article 1 states that the recession was due to the increasing defaults and foreclosures, which were implemented on the mortgage market (Love, & Mattern, 2011). Soon, this spread to the other mortgage markets as well, like corporate bonds and real estate. The existing financial institutions had been relying too much on foreclosures and mortgages for their primary source of income. As a result, their viability was threatened by the financial crisis. In March 2008, Bear Stearns was sold off to JPMorgan Chase at a bargain price.

In September of the same year, two of the biggest semi-public agencies Freddy Mac and Fannie Mae were taken over by the treasury department of the United States. In august of that year, the stock prices of both the companies had fallen by ninety percent, which had never happened before. This was followed by the financial downfall of other agencies like Lehmann Brothers. Government officials refused to intervene and save them. Other existing agencies reduced their money lending operations. The federal reserves somehow saved the American International Group (AIG). For this, they had to add up more than eighty-five billion dollars.

Analysis of reasons stated in Article 2

Article 2 compares the situation of the United States with the condition of Japan in the 1990s (Koo, 2013). like the US, Japan also relies on its central bank for its economy. The government of Japan spends about twenty percent of the country’s Gross Domestic Product (GDP) in banks. In return, the banks buy debt for the government. In January of 1990, the economy of Japan suffered a recession. The value of the housing properties was down by 87 percent. The bank of Japan tried to repel it by reducing the price of yen. The interest rate had been lowered from 6 percent to 0.5 percent by 1995. People had borrowed to buy real estate to maintain the economic bubble. However, with the reduced rates by the central bank, people were able to refinance their old debt and avoided borrowing more to support the economy.

This incident is somewhat similar to the American case, where the collapse of the real estate industry and excessive borrowing had resulted in the subsequent failure of other financial institutions as well, which had invested in housing projects and real estate firms. Like Japan, the financial institutions gave out loans, which later on became a liability after the real estate prices dropped.

Conclusions:

While the first article stated the failure of the mortgage market due to the increasing defaults and foreclosures were a reason behind the great recession, the second article compares the situation of the united states with Japan, which had faced a similar crisis in the early 1990s but had resurfaced by reducing the interest rates.

References:

Koo, R. C. (2013). The world in balance sheet recession: causes, cures and politics. In Post-Keynesian Views of the Crisis and its Remedies (pp. 58-77). Routledge.

Love, N. S., & Mattern, M. (2011). The great recession: Causes, consequences, and responses. New Political Science, 33(4), 401-411.