Free

Recession in the US Economy in 2007 - Essay Example

Add to wishlist

Summary

The paper "Recession in the US Economy in 2007" states that the US economic recession of 2007 was manifested in the form of a liquidity crisis caused by a plummet in real estate pricing and consequently the collapse of the US subprime mortgage industry…

Download full paper File format: .doc, available for editing

GRAB THE BEST PAPER93.2% of users find it useful

Read Text Preview

Subject: Macro & Microeconomics
Type: Essay
Level: Masters
Pages: 1 (250 words)
Downloads: 2
Author: gmurazik

Extract of sample "Recession in the US Economy in 2007"

While the 9/11 tragedy was unfavorable for many investors who had invested in treasury bills, it provided an opportunity for investment banks to borrow money at this low-interest rate and invest in the real estate industry where they would get good returns. In this case, the bank would turn the borrowed money into securities that it would sell to homeowners and get regular payments from all those mortgages. Initially, this turned out to be a highly profitable venture for both the lenders and the banks with up to 10% return on investment.

However, with time most people who could afford a mortgage had taken one and this caused a reduction in the number of new mortgage applicants. This compelled the banks to open up mortgages to other potential homeowners by removing all restrictions on securities. This encouraged many homeowners to take up mortgages. Unfortunately, many could not afford to repay the mortgages. This led to a high number of defaulters and higher-than-expected home foreclosure rates. Suddenly, there were too many homes up for sale in the market which exceeded the demand thereby resulting in a decline in the home value.

Role Played by the Financial Market
The financial market had a major role to play in the 2007 great recession. First, the low-interest rates offered by the central bank in response to the 9/11 tragedy fuelled the already rising housing bubble by the subprime mortgages and the related derivatives. In addition, the absence of regulation of the financial institutions involved in the sub-prime mortgage lending led to unprecedented growth of the real estate market and so did fraud. The bursting of the housing bubble led to the meltdown of the three principal derivative securities that had guarded the industry, namely Collateralized Debt Obligation (CDO), Mortgage Backed Securities (MBS), and Credit Default Swap (CDS) which eventually paralyzed the very supple and resilient financial market with its spill over into the entire economy. Read More

CHECK THESE SAMPLES OF Recession in the US Economy in 2007

UK economy during 2008 recession

Finally, the expectations and forecasts that UK economy would contract by more than 2 – 2.... 8bn so that it could pump money in the economy to eradicate liquidity crises and trigger consumer purchase responses.... Indeed, IS curve is derived from changes in desired investment and desired saving in an economy.... As far as the UK economy is concerned, I would assume that the IS – LM had been in general equilibrium prior to recession i-e the goods, asset and labour market were in equilibrium simultaneously....

4 Pages (1000 words) Essay

The using Okuns law to track and analyze the changes in the unemployment rates over the last decade

In 1962, Arthur Okun conducted an empirical research over the relation between changes in unemployment to the changes in gross national product in us economy.... In 1962, Arthur Okun conducted an empirical research over the relation between changes in unemployment to the changes in gross national product in us economy.... Many economists are even of the opinion that this recession has started during the last quarter of 2007 itself.... In late 2007 and even early 2008, most of the stock market indices across the world were touching the sky....

4 Pages (1000 words) Research Paper

Indian Economy Growth during Global Recession

The problem of the economic recession in the developed world are facing has drawn the attention of communities.... The economic recession in the developed world will have a deep impact on the developed world and last for a long time.... % in the Indian economy in the first fifty years of the twentieth century, the Indian economy started to demonstrate accelerated growth in the last decade of the twentieth century, with the economic growth touching six percent....

11 Pages (2750 words) Essay

2009 Economic Recession in the UK

The essay "2009 Economic recession in the UK" focuses on the critical analysis of the major issues and features of the UK 2009 economic recession.... the us and the UK are some of the worse affected countries while China and India-like countries escaped from many severe problems.... Archer predicted house prices would fall another 15%, while Capital Economics said it could be as much as 20% as the cost of the average home headed for a 50% fall from its peak in the summer of 2007 (Inman, 2009)....

10 Pages (2500 words) Essay

Oil Price Change on the United States Economy

An increase of 54% in the prices of crude oil in 2011 would lead to a double recession in the U.... This research paper "Oil Price Change on the United States economy" will use time series analysis to focus on the GDP growth using the prices of oil.... economy.... economy and makes predictions on how the economy will do in light of the recent oil prices.... The literature review will be used to describe how oil is an integral part of the economy, and how recessions and oil shocks have coincided ever since World War II....

8 Pages (2000 words) Research Paper

Changes in the Unemployment Rates

In the paper 'Changes in the Unemployment Rates,' the author conducted an empirical research over the relationship between changes in unemployment to the changes in the gross national product in the us economy.... Here this Okun's law will be used to analyze the movement in the rate of unemployment in the us over the last decade.... Here an attempt will be made to find out whether Okun coefficient is still the same in the us as documented by Arthur Okun....

5 Pages (1250 words) Research Paper

Financial Crisis and the 2008-2012 Great Recession

There are times when the economy is performing well and there are increased money incomes for people to spend.... The economy of any country or the world moves in different cyclic patterns on different factors prevailing in that country.... There are times when the economy is performing well and there are increased money incomes for people to spend.... The economy of any country or the world moves in different cyclic patterns on different factors prevailing in that country....

11 Pages (2750 words) Essay

The 2007-2009 Recession

However, the most current one started in 2007 December and came to an end in 2009 June.... The paper 'The 2007-2009 Recession' is a forceful example of macro & microeconomics literature review.... The paper 'The 2007-2009 Recession' is a forceful example of macro & microeconomics literature review.... The paper 'The 2007-2009 Recession' is a forceful example of macro & microeconomics literature review.... economy faced a great depression but after that, it went through vigorous growth, experiencing minor recessions in the whole of the 20th century....

7 Pages (1750 words) Literature review