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About LinkBacksWhat are the main causes for this economical recession?
May 1st, 2009, 03:56 AM
What are the main causes for this economical recession?
I think a lot of people have different opinions about that, but the most likely cause was the high oil prices that pretty much crippled the economy by making a lot of activities (like shipping and travel) more expensive than they had been.
It's generally accepted that a decline in housing prices complicated some financial instruments (mortgage backed securities), so that their "real" value was uncertain, and so their prices fell dramatically.
Banks and other financial institutions got scared (rightly so), so they moved to a more defensive strategy. They started keeping more and more assets in cash (money market, etc.) instead of high yield high risk investments (and medium yield medium risk investments).
This caused a contraction of the money supply, for reasons which are a tiny bit complicated to understand. But basically when a bank loans money to people, they create it out of thin air. So when they stop doing that, it's like suddenly there's less money being printed. Which in an economy based on increase and interest means that there's suddenly less money than there was. Which means it's harder to get a loan because banks have to charge higher interest rates to make it worth the risk, so all sorts of businesses which were only barely profitable (small businesses especially) start to die off, which creates unemployment, which means less things are getting produced, which means in real terms the economy recesses.
Basically there's fewer dollars floating around this year than last year. And it happened very quickly. That "shock" was more than many businesses could bare, so they closed, and that created a domino effect for the businesses that rely on those businesses, on and on down the line. This is called a "money supply shock" or "supply shock".
"most likely cause was the high oil prices "
I disagree, imo oil did not help but its not a cause at all. Shipping was halted at some point in previous months not because of oil but because of banks sitting on credit (letters of credit as payment for shipment of cargo to transit). Many company rely on short term bank loans to buy their input (commodities/parts/pay labor), which they pay back once they resell the output (commodity/finished product/service).
One of the many things going on is a massive transfer of wealth from the masses to the elite few, this massive theft is not sustainable but kept and concealed by debt and speculation that makes people think they are getting richer when they are actually getting poorer.
in short, the reason for the recession is people and institutions spending money they don't have + misjudging the risk of being caught with your pants down when the music stops
You make it sound like a moral failing. This is how you're supposed to run a business. If you actually paid for things with money you had you wouldn't be a very efficient business and would get out competed. For a business, running a healthy line of debt means they've extended themselves far enough to get a reasonable profit back for their investors and/or shareholders.Originally Posted by marnixR
It's sort of like animals in an ecosystem. The highly specialized animals are more efficient but less adaptive to change. Business with lots of debt are more efficient, but they run on the margins, and collapse is easy when conditions change.
I guess it depends on whether we're asking what kickstarted the whole process or what immediately preceeded our current predicament. Oil prices seem to have been the first thing that happened, that and 911.
So the Federal Reserve lowered interest rates to put more money out there. Then real estate prices started to go crazy, because people were taking out home loans left and right. Eventually it reached a point where, as Numsgil pointed out:
And then the whole bottom fell out of the industry, and with it many, many homeloans went into default.
my opinion:
It's the trouble when people start spending all their newfound wealth on something that cannot increase in quantity. They end up bidding against each other over the same plots of land, so each dollar you lend them just increases the price more, and then they borrow more, and then the price increases.... ad infinitum (or until the whole thing falls apart, whichever comes first)
Houses got built in the process, and that seems to be the only lasting economic good that came of it.
only up to a point - letting people or businesses borrow beyond the point where they can reasonably be expected to repay is taking a risk too far
that's where the banks failed to appreciate the extent of the risk they exposed themselves to - until it was too late
Apparently it was caused by global warming:
http://www.ocregister.com/articles/b...ifornia-demand
Heh, what wasn't?
Somehow, people seem happier if they can blame things on something they know exists, even if that was their fault to start with.
I think it gives them hope they can change it. (Sometimes maybe ill-founded hope?)
which fits in neatly with marnixR's first law of generalisation :
"everything either causes global warming or is caused by global warming"
There are many Theories to This The Economic Boom Reached The Top and It all Seemed to go Downhill. Mortage Crisis is a big answer to this.
Yeah, but the question is: what caused the Mortgage Crisis? "Idiot banks" doesn't do it for me. Their decision to give out too many loans was a direct consequence of the Fed's decision to lower interest rates. The idea was that, if people had easier access to credit, they would buy more stuff, and kick start the economy.
Now the trouble with that theory is that sometimes consumers choose to buy things that can't be manufactured, like land. If they bought cars, TV sets, or computers with the money, then the actual abundance of those things would increase because manufacturers would build more to fill demand, and then we'd all be richer, but the total abundance of real estate is unaffected by consumer demand.
The opposite idea: Reaganomics, or supply side economics has the flaw that the quality of goods tends to go down, but the stimulus money always goes to the manufacturers, so typically you don't see companies shutting down as much, and you can tailor supply side incentives to prevent factory work from moving overseas.
Lucky to get back on again.
My opinion is that those dollar addicts are stuffing their accounts and these hoarded dollars are not circulating.
So they do not contribute any action to the economy.
I hate to be so honest about these problems but the billionaires have to admit that
hoarded dollsrs are not doing anything.
SHARE THE WEALTH!
They could have bailed out those people that were unable to keep up with their morgage payments to prevent the housing crises. Where is the phillanthropy?
Cosmo
I half agree. The problem is that they're not circulating, but it's not the billionaires' doing. (They're the scape goat everytime there's a recession or depression.)
They're not circulating because they're all tied up in overvalued mortgages people are struggling to pay off.
The situation is so bad ... and the danger from the plight of home-owners so big ... that the government of the basic rules of the mortgage system will change.
Whether they can enforce it is still open, especially because the British are always happy to have their own house wanted, with flexible mortgages and personal debt. Television programs based on the real estate and debt counselling specialized, are the most popular in the country, because British consumers are the most indebted group within the G7 countries.
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