The Great Recession with Respect to the U.S.

1. Introduction

A recession is defined by the National Bureau of Economic Research (NBER) as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales”. While there are typically many factors that make a contribution to an economy slipping into recession, the ultimate cause can be traced back to inflation.

While the many different reasons for inflation may be poles apart, the result of a rise in the prices of goods and services is a decline in economic activity. The most recent recession in the United States was a culmination of the failure of several different aspects of the financial market mixed with a bubble burst in the real estate market running concurrent with an increase in energy costs, mainly oil.

2. The Bubble

A bubble is created when an asset becomes over valued and investors become complacent and in a sense trapped in a state of “irrational exuberance”. The phrase irrational exuberance can be attributed to Alan Greenspan, former chairman of the Federal Reserve, who first used the phrase in a 1996 speech to the American Enterprise Institute. He was depicting the greedy chaos that takes place during a bull market.

As investors pursue continually higher returns in the economic environment that history has proven to us it cannot sustain, the bubble grows and grows until something in the economy causes investors to panic. When the panic ensues, a collapse in the stock market is imminent, which ultimately spreads throughout the entire economy.

Unknowingly, Greenspan was able to produce the same panic, on a small scale, that he was describing. Basing their investment decisions on past history, investors sold off their stocks the very next day causing a decline in the stock market. The alarm that was felt in the market was because investors feared that the Federal...