Financial Crisis

Econ 22:220 Monetary Institutions, Theory and Policy

The Great Recession

Due: 2010-11-09

Instructor: F. Zehtab-Jadid

Brendon Smith

#062071

The Great Recession

The global economy is currently in the midst of the worst financial crisis since the Great Depression of the 1930’s, and as such this period in history has been branded with the title: The Great Recession. During this time people the world over have lost jobs, homes, retirement savings, and ultimately lost confidence in the economy. Those who didn’t directly lose these things have at the very least experienced the fear of doing so. This isn’t how things were supposed to be though, as Joseph E. Stiglitz explains by offering: “Modern economics, with its faith in free markets and globalization, had promised prosperity for all, the amazing innovations that marked the latter half of the twentieth century, were supposed to enable better risk management, bringing with it the end of the business cycle.” However, being that we are experiencing the worst financial crisis in 75 years, these ideas clearly have not held true. Chain Reaction

The recession that we are mired in today began in 2008 with the bursting of the United States housing bubble. This caused a chain reaction throughout not only the American economy, but also through the global economy. As will be explained however, several developments occurring earlier formed the foundation of this crisis. In the spring of 2000 the bursting of the dot com bubble led to a short recession that would lead to a chain of events critical in developing the housing bubble. This of course set the stage for the primary causes of the crisis, being that banks and other investment intermediaries created dangerously high risk debt instruments in an effort to maximize their own profits. However, once the nature of these loans was revealed by a drop in the value of the assets backing them, economic contraction resulted at several levels within the economy, and...