What caused the recession?

[Melanieshaman]

I would prefer to keep this civil, no attacking people or parties per say. I have done a little reading on Alan Greenspan and deregulation in the 80s (I think it was). There are much smarter people here than i on this subject, and i be curious to hear/read opinions on what caused it.

Again please say say OMGWTFGOP!! or it was those tree huggin liberals! Just some events, facts, whatever. I look forward to some insight.



ps The reason i am doing this, is because i did some soul searching today, and i decided at my age to "re-educate" myself. I kept myself out of the loop for a few years (due to my transition and being solely focused on that). Also, i realized i have "dumbed myself down" by not keeping up with a lot of things i used to be nuts over.

thanks

[Nightc2k]

World War I ?

[Melanieshaman]

World War I ?

that long ago for something that basically JUST happened? how so?

[Lymph]

World War I ?

I don't think they mean the great depression lol

[Melanieshaman]

I don't think they mean the great depression lol

Recession (checks topic title) ok just making sure i typed that right..ya the CURRENT recession.

[sydazlir]

I don't think they mean the great depression lol

World War 1 didn't even cause the Great Depression. Wars are great for a nation's economy (if not fought on said nation's soil). World War 1 was a great economic time for America, and World War 2 pulled us out of the Great Depression.

It was how the nation reacted to the dying down of the wartime economy and stupid people with stocks that caused the Great Depression.

EDIT: On topic, it was frivolous spending for the most. part. It's a bit of a cycle. Recession-> people are wary with the economy -> begin to trust more -> start spending a lot, boom fo economy -> comes crashing down again because of overspending.

[herpecin]

the easiest thing to blame is the repeal of the Glass Stegal Act. it separated consumer and commercial banks to prevent exactly what happened in 2008.

[Mormolyce]

Basically it comes down to there being too much separation between people lending money and those borrowing it.

Let's say you take out a loan from a bank for $100,000. Depending on who you are, how stable your job is and so on there is a certain chance that you won't be able to pay it off and the loan "goes bad". The bank loses whatever money you haven't paid off yet (possibly all of it). Now financial institutions go to a lot of effort to assess you to figure out what the chance of that is, and assigns you a certain amount of risk. If they think you're too risky they won't give you a loan at all, if you have some risk you might get a loan but at a high interest rate to offset the bank's chance of losing money on you, and if you have low risk you might get a loan at a lower interest rate.

This is all the same as if you were lending money to someone. If you think the jerk is never going to pay you back you wouldn't lend to them, if you think he probably will but there's a chance he won't you'd consider that a high-risk investment and expect some extra money in return for taking that risk. This kind of lending works well because it's direct, it's your money (and in the bank's case, it's the bank's money) so you're going to be careful with it and get an accurate assessment of the risks and price it accordingly (or flat out refuse to make the loan). You (and the bank) are dealing with the person taking the loan directly so you know who they are and can get some indication of their risk.

Now of course, in the case of a big bank (or other financial institution) they don't just lend to one person. That would be really risky anyway because there's always the chance a person will go bad no matter how low-risk they seem. But if you give out thousands of loans, well that's a bit safer because if a few of them go bad you're still okay - you'll earn enough interest off the rest of the loans to make up for those losses. In fact you take that into account when you set your prices - you need to make enough money off the good loans to cover losses taken on bad ones. So you have a "book" of loans, with different levels of risk. As long as you keep track of how risky each loan is individually, you know how risky your book is overall and therefore how much you have to charge in interest to ensure you're not losing money because of the bad loans.

Now this is all traditional banking and that's not really a problem because banks have been managing their overall lending risk for centuries (well sometimes they get it wrong, lose a lot of money and sink but on the whole, it works). The problem is that over time financial institutions became more and more clever about how they "bundle" loans up and sell and re-sell and re-re-sell the debt. They developed things called "financial instruments" which are derived from loans and have varying levels of complexity. Without getting into all the technical details, the banking system got very complex to the point where the people lending the money out had no reliable way to tell how risky the loans were because there were so many layers and institutions in between. People thought they were lending out to low risk debtors but actually it was going to incredibly risky debtors, and of course this ultimately caught up with them and everyone started losing piles of money. People got scared and pulled all their money out of lending which made it impossible to get a loan to do anything, the economy contracted, people got more scared, BIG companies collapsed, people got even more scared... basically a big chain reaction.

And on top of all this there was a fair amount of naked profiteering and flat-out fraud on the part of some major players that exacerbated the situation. That's kind of inevitable in a complex system which is hard to track and a vibrant economy where there's huge amounts of money to be made because everyone thinks they're getting an awesome return on low-risk investments (which are actually a big bomb of bad debt waiting to go off).

That's about the simplest way I can think of putting it. At the core, the issue is that when you spend your own money you're super careful with it. When you spend someone else's you're a lot less careful. When there's a lot of crap in the way between the people spending the money and where it actually gets spent, a lot of risk gets into the system and the economy is very precarious.

[nias]

If you are referring to the recession around 2008 then the main cause you are looking for is the collapse of the housing bubble and the following credit crisis.

Essentially housing was considered a market that would never decline. Prices went up and up, causing institutions to go out of control with mortgages. They would ofter double and even triple mortgages to many people who they knew had no chances of paying them. I think I read one story about a janitor who was given a mortgage on a $500,000 house. They figured that the worst that could happen would be people defaulting on their loans and leaving them a valuable property. Eventually the bubble burst, causing many to default on their mortgages. This left the investment banks with hefty bills and a ton of worthless properties. The whole situation was made worse by outrageous leverage, mortgage based derivatives, and a ton of shady activity by ratings agencies and investment groups. The result was a credit crisis, which seriously impaired the economy.




shorter version: a bunch of rich people played a dangerous game, blew up the economy, and ran off with the money

[Lymph]

World War 1 didn't even cause the Great Depression. Wars are great for a nation's economy (if not fought on said nation's soil). World War 1 was a great economic time for America, and World War 2 pulled us out of the Great Depression.

It was how the nation reacted to the dying down of the wartime economy and stupid people with stocks that caused the Great Depression.

EDIT: On topic, it was frivolous spending for the most. part. It's a bit of a cycle. Recession-> people are wary with the economy -> begin to trust more -> start spending a lot, boom fo economy -> comes crashing down again because of overspending.

Yeah I know that WWI did not cause it, but I did not know what else nightc2k could have meant :P
WW2 did help our economy a lot, but I am not sure that all (foreign) wars do.. it doesn't seem like the war in iraq or Afghanistan has. Did vietnam?

[Melanieshaman]

Unfortunately, I'm going to have to predict that you will get two versions of what caused it.

I'm going with de-regulation of banks over the past 20-30 years. And then a bubble so large that Greenspan decided to just let it keep on growing. Then, pop!

Sounds like some of you really know your shtuff! wow thanks for the insights. I have much research and reading to do. But thanks for the running headstart.

[McFrotton]

Recession (checks topic title) ok just making sure i typed that right..ya the CURRENT recession.

Carefull planning by people that now are richier than they were before it

[Melanieshaman]

If you want some really, really indepth information, I'd suggest PM'ing Diurdi and Wells on this subject.

But by all means, DON'T let them talk about it in this thread, PM them separately. You'll thank me later, haha.

oh ok lol i might just do that

[Hedleyazg]

Deregulation of the banking industry and them giving out loans to people they knew couldn't pay them back.

---------- Post added 2012-04-17 at 08:20 PM ----------

If you want some really, really indepth information, I'd suggest PM'ing Diurdi and Wells on this subject.

But by all means, DON'T let them talk about it in this thread, PM them separately. You'll thank me later, haha.

What this guy said, do that before this thread turns into a circus.

[Mormolyce]

War's aren't good for the economy, that's a myth.

http://economics.about.com/od/warand...andeconomy.htm

[Prag]

Predatory lending is, from the documentaries I've seen, the biggest culprit. Corporations handing out money intentionally to people that couldn't afford to repay it to stimulate the housing market, essentially BETTING that these people would fail, is what caused the recession.

In my opinion, the recession is only still around for the middle/lower class. The upper class remains largely unaffected. They're paying a little more for small things, but the large price is nowhere close to them.

[semaphore]

Massive excess of Chinese savings flooded the western banking system, creating massive, unsustainable bubbles. Bubbles which were allowed to form as a result of deregulation and/or government and/or banking policies. When the bubble bursts, recession ensues.

Anyone who tries to say that one of the world global recessions in modern history was due to (insert favourite culprit/scapgoat) is just oversimplifying a complex situation.

[BlueGender]

I think I heard somewhere talking about the direct cause.

Banking, greed, scandals, illegal acts, housing loans, etc.

[mistuhbull]

Housing Bubble+Trickle Down doesn't work

[mrwingtipshoes]

The bank failing due to people unable to pay their balloon payments. This was all caused by the attitude that everyone has the right to own a house. Problem has two main issues. Curtain people do not make enough money to earn a house, plain and simple it just can't happen when your combine family income is $20k for 2 people, it can when its $38k a year(When we bought our house) as long as your other debt is minimal.(this all matters on where you live)

Second part of the problem is that people seem to feel that they have the right to buy their dream home. When making $40k a year between 2 25 year olds you can NOT but a 200k dollar home, I realize you want 2 acres of land and an inground pool but you can't afford to do it. The balloon payment set ups made it so if you didn't get the job you were expecting and if you didn't get the raise/promotion you were expecting that you. were. screwed.

What should have been done is banks should have told me that couldn't afford to buy a house "Sorry but you can't do it, come back in a while when you are making more money." and should have been denying balloon payments "Sorry you just don't have enough income for THAT house, choose something more you're speed" when you see retail managers with $150k houses, 2 $45k beemers and a $16k harley dresser there is something wrong, especially 2 years later when they are living in a 2 bedroom apartment and driving Hyundia Accents.

Not only does it kill the economy it kills the mental status of those who were screwed by the system.