Causes of the Economic Crisis

Causes to the Current Economic Crisis

On February 8, 2010, in our Supply Chain Management course, we had the privilege of listening to VP of Marketing Support of BNSF, Mr. Paul B. Anderson’s outlook on the current economic crisis and the causes leading to the recession. The three main causes he pointed out to us are: the housing bubble bursting, the increase in oil prices, and the credit crunch. Although there is debate amongst all the factors that led to this crisis, these three main points have proven to play significant roles in causing a recession that is said to be just as horrible as the Great Depression that began in 1929.

The first cause leading to the economic crisis is the collapse of the housing bubble. From the time after the dot.com bubble collapsed and the terrorist attacks occurred on September 11, 2001, the Federal Reserve lowered the federal funds rate significantly to encourage borrowing to combat the perceived risk of deflation. With interest rates being low, it made applying for credit easy and caused a boom in the mortgage market. This led to the creation of mortgage-backed securities and was hot buy for financial institutions worldwide. It was only a matter of time until most people couldn’t afford to repay their loans and caused a dramatic decrease in value of MBS’s. Inadvertently, with all the major financial institutions having ownership in subprime loans and credit default swaps, led to a numerous amount of bank failures worldwide and cause even more turmoil in the economy. This was a major cause to the Stock Market crashing in September of 2008.

Another effect on the Stock Market plummeting was the creation of the commodity bubble. Before 2008, oil prices soared to record highs (oil peaked at $147.30/barrel), which were a good thing if your portfolio consisted of shares in the oil market, but it actually hurt the average consumer even more. With oil prices skyrocketing, the price of purchasing gas increased dramatically as well....