Two Economic Downturns

Two Economic Downturns

December of 2007 marked the start of the Great Recession that has been the worst economic downturn since the Great Depression dating all the way back to 1929. Although both financial crises are roughly seventy-eight years apart, they both started similarly. In fact, they are more closely related than many would think. I will discuss the similarities and differences between the two horrible events that took place within the United States and how they each started. Historians frequently state that history repeats itself and these two events are proof of just that.

The Great Depression started when the stock market crashed on October 29, 1929, known as Black Tuesday. Although the stock market crash is most commonly associated with the depression, really the events that led up to it caused the significant damage. During the 1920’s there was a real estate bubble more severe than the one that started the Recession in 2007. At the end of World War I, the newly created Federal Reserve slashed interest rates, which set off a massive wave of home construction especially in Florida. By the time, the Federal Reserve took action the boom was completely out of control. Household savings and bank balance sheets became reliant on the mispricing of real estate and other equity holdings.

The Great Recession also started similarly with a real estate bubble as well. The dot.com burst of the early 2000’s led to the housing bubble. After the dot.com burst, many Americans invested money in real estate because the Federal Reserve lowered interest rates and they thought the market would further appreciate. What ended up happening was the banks made it too easy to get loans and many investors were taking out adjustable rate mortgages. Housing prices began to decline, many people could not refinance, and the mortgage payments became a very high monthly payment that majority of subprime borrowers could not afford. The borrowers became upside down and during 2007,...