The American economy is just making a comeback from the 2008 economic recession. The recession took the economy to its lowest point in 25 years. The recession arose from the housing bubble, which led to the eventual disintegration of the financial markets. The housing market caused the disintegration of the markets due to irresponsible activities by investors and financial institutions. The housing market is quite different from the stocks market hence; the circumstances that led to the recession involved a series of unique events. The housing industry involves risks that is quite complex to understand because people view houses as assets that cannot depreciate in value, just like land. There are several factors that can be used to examine and explain how the housing bubble came about and how t led to the collapse of the economy.
The American housing market had never experienced a bubble before hence; investors did not anticipate any risks in the market. The housing industry involves huge costs that discourage investors from engaging in speculative behaviour. In the period between 1995 and 1999, the housing market experienced steady growth. The stock market experienced a crash in 2000 hence; it caused a shift in investments. Many investors shifted from stock markets and invested in the housing industry. The bubble was fuelled by a lot of cheap finances in the form of loans prior to the recession. Commercial banks and the Federal Reserve got more interested in the housing market and helped in wealth creation and develop a secure asset, which people can borrow and grow the economy.
With the increased financial innovation, people could lend money through interest adjustable loans, zero down loans and interest only loans. As the housing prices went up, people rushed to buy houses. Financial institutions had adopted a system where zero percent reserves were needs to purchase homes. The banks were assured to create an unlimited supply of money. The banks started approving loans without security with the view of passing the risk over to a third party. The bubble peaked at around 2006 when the bubble burst and some loans began going into default. The credit market started to freeze in 2007 and subprime credit dried up completely. Interest rates for credits such as corporate and consumer loans went up significantly. The housing market kept on declining long after the recession in 2009. It caused unemployment of over 10% and over 3 million foreclosure fillings.
There are three main indicators that economists use in predicting upcoming economic trends. For instance, the economic and social statistics released by the American government departments. These indicators are subdivided into three main parts; leading, coincident and lagging indicators. The classifications are based on the kind of prediction that is made from that particular indicator.
Leading indicators are defined as indicators that signal future happenings. This is best explained by the analogy of traffic lights where the amber light is usually a signal that the red light is next. Economists use the leading indicator to tell the possible outcomes of the economy. For instance, the economic recession could be predicted using this economic indicator. The leading indicators in the economic world are not always accurate. For instance the freezing of the credit markets and the increase of interest rates at the height of the housing bubble was a leading indicator that there would be a recession. This indicator was followed by the decline of some big financial institutions such as the Lehman Brothers. The second example of a leading indicator in relation to the financial recession was the increase in the GDP of the US economy in the 4th quarter of 2009. It was accompanied by corporate earning increase and stabilization of unemployment rates. This was a leading indicator that the economic recession had come to an end and that the economy was on its way to full recovery.
Lagging economic indicators are those that come before an event. For instance, they green light in traffic lights come before the amber light. The lagging indicators are used to illustrate the fact that an economic cycle is taking place. One of the lagging indicators during the economic recessions include the rise in unemployment rates to over 10 percent. During the recession, unemployment rates became very high, an indicator that the economy had failed to perform well in the immediate past. Another example related to the recession was the rise in interest rates in the economy after the credit market froze. The interest rates for the corporate and consumer markets went very high, an indicator that the financial market had failed.
The coincidental economic indicator is one that occurs at around the same period as the economic conditions they signify. These indicators are usually the characteristics of the economic condition. These indicators also change simultaneously as the economy. During the economic recession, one of the coincidental indicators in the economy included low personal income rates. The economy had become weak the credit markets had failed hence; people lost jobs and the general income rates became low. Secondly, the economic recession had the loss of employment as a coincidental indicator. The economy had weakened and some institutions had wound up hence; people lost employment at that time.
The American economy is on the recovery lane from the recession. However the recovery has been quite slow because of several factors. The president has the opportunity to speed up the recovery process if he chooses to adopt certain measures. These measure would help reduce unemployment rates and reduce interest rates. The president should urge the Federal Reserve to increase government spending through its monetary and fiscal policy. According to Keynesian economics, increased government spending helps increase the supply of money in the economy. Government spending can go to helping the some of the financial institutions that went under during the recession to recover completely or put them under receivership.
Government should also increase money supply through reducing the discount rates of the Federal Reserve. This will make commercial banks to reduce their lending rates hence more people will access funds. Investors will easily get money to invest because of low interest rates. Increased investments will lead to higher economic growth and recovery. As a result, the income rate will go up, unemployment will reduce significantly. The president should also intervene in ensuring that investors are given incentives to increase and expand their business activities. For example, incentives on tax cuts can be introduced to ensure that people invest in some of the major sectors such as industrialization, insurance and food production.
Therefore, the American economy has undergone an economic phase before, during and after the economic recession. The crisis was caused by a bubble in the housing industry as a result of poor operations by investors and banks. The recession can be explained using three kinds of economic indicators; the leading, coincidental and lagging indicators. However, the economy has improved over the years since 2009. The progress has been quite slow due to the government’s policy. The president can use his influence on the Federal Reserve to manipulate the economy through monetary and fiscal policies. This will increase money supply in the economy hence; high investments and creation of employment. Tax incentives can also be used to boost investments in some of the affected sectors to create employment in the long run.
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Carlstrom, C. T., & Fuerst, T. S. (2001). Perils of Price Deflations: An Analysis of the Great Depression, Economic Commentary. Retrieved June 20, 2013, from Federal Reserve Bank of Cleveland: http://clevelandfed.org/Research/Commentary/2001/0215.htm
Yellen, J. L. (2009, January 15). The Outlook for 2009: Economic Turmoil and Policy Responses. Retrieved from Federal Reserve Bank of San Francisco: http://www.frbsf.org/our-district/press/presidents-speeches/yellen-speeches/2009/january/yellen-outlook-2009-economic-turmoil-policy-responses/