The Great Recession after Crisis 2006 – 2008

continued from » EU

The Great Depression in the 1930s

The Great Recession was the worst financial blow-up since the Great Depression (1929-1932).

There had been earlier financial crisis (e.g., Mexico 1994, Asia 1997, Russia 1998) which effected specific areas, but this time the whole world was endangered, not just one region. (cf. Ossenbruegge 2011, p.357)

Before the big financial crisis started, the US economy was already in troubles in the 2000s; this was characterized by its weak growth: the GDP was only 2.8% a year and without housing just 1.6%. It was a very hard time for workers in particularly because there was no net job growth, no wage growth and so the family income was very flat.

Although this time was very hard for workers, for capital it was ok, but for finance it was great.

Being in debt became a normal lifestyle. The slogan “If you can’t afford it, borrow!” made the finance sector recover. George W. Bush also called on the Americans to “go out and buy” after 9/11.

While the society bought stuff on tick, the US government used bonds to cover deficits. During Bush’s term, there had been tax cuts and federal debts building through the boom. In 1980 it started to get bad.

In the 2000s, there was a huge housing boom (especially in California, Arizona, Nevada and Michigan) in the US because people got easy mortgages: no income-checks, no down-payment. They just couldn’t afford it but the banks gave it to them.

Due to the housing boom, people got jobs as mortgage-sellers and real estate brokers, etc.

In 2006 and 2007, of course, people couldn’t pay back their debts, so the banks got into trouble. As an effect of that interest and mortgage rates were rising. Summing up, there had been a wealth loss of $6 trillion in households.

Lehman Bros.

The bad development followed:

Big New York investment banks collapsed (for example Lehman Bros.). Not just the US economy suffered, but the whole world: For example, banks in Germany, Iceland and Ireland which held American Property Investment.

During 2009 the US-unemployment rate (about 15%) was rising: 700,000 job losses per month. About 10 million people lost the jobs in total.

America is recovering. In the news, it is said that America was doing fine, but the reality speaks another language. Although the GDP was growing from 2009 to 2011, there are not enough jobs due to the lack of investment, companies don’t hire new workers. The GDP is growing, yes, but it is still not up to 2007. The recovery after an event like that is too slow.

The main effects on world economy were the following:

Many real estates stayed empty, and prices were falling with increasing spreading of the crisis.

People employed in the FIRE-sector (Financial, Insurance, Real Estate) lost their jobs (they are the biggest group to lose their jobs). Due to that crisis, other economies got and/or will get more influence. Especially the BRIC (Brazil, Russia, India, China) economies are on the rise.

Also, long-term government debt due to intervention measurements will be hard to pay off.