The Economic Recession of 2007 (Essay Sample)

The Economic Recession of 2007
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Paper outline
* Introduction
* Background of the economic recession of 2007
* Main point No. 1: The search for higher profits
* Main point No. 2: The misconception of the risk
* Main point no. 3: A lax in the financial regulations
* Main point number 4: The bursting of the United States of America’s housing bubble
* Thesis statement: Although the 2007 economic recession could be attributed to several factors that include, the laxity in the financial regulations, the misconception of the risk and the bursting of the U.S. housing bubble are arguably the leading causes of the economic recession.
* Causes of the 2007 economic recession
* Body paragraph No. 1: The Search for higher profit
* Body paragraph No. 2: The misperception of risk
* The lax in financial regulation
* bursting of the US housing bubble
* The Impact of the crisis
* The fall in the economy
* Unemployment
* Collapse of major financial institutions
* Measures that can be taken mitigate the impact of the crisis
* Introduction of macro-economic policies
* Labor market measures to reduce effects of the crisis on the workers
* Conclusion
The Economic Recession of 2007
Introduction
As from 2007 to towards the end of 2009, there was a severe economic crisis in the United States of America. The impact was also felt by other nations of the world. The crisis, according to economic observers was caused by a combination of factors that include the increase in credit and the housing bubble. It started when the market suddenly cut off its usual funding to some of the key commercial entities in the United States (Acharya and Richardson 2). In my view, despite the fact that the 2007 economic recession could be attributed to several factors, the laxity in the financial regulations, the misperception of several financial risks and the bursting of the country’s housing bubble are unarguably the leading causes. This paper shall discuss each factor and then identify measures that could have been taken to mitigate the effects of the crisis.
The Causes of the 2007 Economic Recession
Notably, four core, but interrelated factors were the primary causes of the 2007 economic downturn. The factors are, first, most banks took no precaution while issuing unprotected loans; secondly, there was no regulation that governed the financial system and high-interest rates on house loans. The final factor is the imbalance in the global economics.
The aforementioned factors contributed to the crisis in the following ways. First, the misperception of the risk and the negligent financial regulation enabled banks to involve in risky economic activities. For instance, Investors were motivated to expand their businesses because government bonds attracted low-interest rates. Consequently, after exhausting the credit-worthy borrowers, they turned to riskier segments of the market and other non-standard loans (Thomas et al. 1).
Secondly, the lax regulations in the financial sector enabled financial institutions to participate in risky ventures without any precautionary measure. Unrestricted lending was encouraged by political authorities who wanted to enhance ownership rates among the disadvantaged and low-income groups (Thomas, et al. 2). Thus, the inability of the creditors to service their loans nearly led to the collapse of the financial institutions, leading to the 2007 financial crisis.
Thirdly, since there was an unprecedented increase in the housing rates, the delinquency rates on home loans began to appreciate towards 2006 and gained momentum in 2007 (Sher and Iyanatul 62). When there was a burst of the housing bubble as a result of high-interest rates and less demand for houses, the crisis began. Consequently, most mortgage lenders failed because of the bad loans that people could acquire from the subprime markets. In 2007, most banks and other financial institutions were affected when they experienced defaults in loan repayment.
According to Ockree and James, in mid-2007, financial institutions started to hoard liquidity thereby leading to the freezing of the market for asset-backed commercial paper (36). At this time, the economy had started feeling the impact of the credit crunch.
Impact of the crisis
The financial crisis did not just impact on US economy, but also around the world by both advanced and developing economies. Among the effects included the meltdown in the subprime mortgage market, the repercussions of the financial crisis and the ensuing credit crunch (Acharya and Richardson 3). Because of this, there was a significant slowdown in the United States economy (Sher and Iyanatul 46).
The impact was also felt by the middle-income countries including those in Central and Eastern Europe. In some Commonwealth states, the effects of the crisis were mainly driven by the combination of the credit crunch and the domestic imbalances.
The depression also had a bearing on the household-wealth in the United States and other foreign nations. In America, the household-wealth declined by 17 percent in 2007-2008 (Thomas, et al. 7). The rate of unemployment also increased after the collapse of m...