The Economic Recession of 2007 - Essay Example

Table of Contents Table of Contents The Economic Recession of 2007 2 Introduction 2 Causes and Consequences 2 Conclusion 3 Works Cited 4 The Economic Recession of 2007Introduction Concerns over the stability of the United States economy escalated as an epic of economic crisis shattered leading companies ushering in the economic recession of 2007. The end of December 2007 marked the beginning of the longest and deepest recession since 1930. By the start of 2008, the US experienced a decline in the labor market with over 325,000 job losses within a month (Isidore 2).

Pressure piled in consumers’ personal income coupled with declining industrial production saw the gross domestic product declined to unexpectedly low levels. Just like the previous recessions in 1990-1991 and 2001, the 2007 economic recession has run deep into the economy becoming the longest financial crisis since the great depression in the 1930s (Kaiser 3). Many states reacted by formulating large stimulus mechanisms in an effort to stabilize the economy. Other mechanisms were the bailout of leading financial institutions, which included loans, guarantees, and equity.

Causes and ConsequencesThe National Bureau of Economic Research and economists have indicated that the financial recession was triggered in the year 2006 by broad economic malaise. The sharp deterioration in house prices reduced purchases of homes subsequently damaging the real estate market. Price deterioration extended to increased mortgage closure that subsequently led to massive losses in billions of dollars by leading banks in the country. The ultimate condition was tightening credit by financial institutions.

The Federal Reserve Bank began to cut the discount rate and funds rate to no avail. Major Banks such as Lehman Brothers started filing for bankruptcy. Other banks opted to undertake mergers and acquisitions. JPM Chase acquired Bear Stearns as a strategy to survive in the crippling economy. As indicated by Cadieux & Conklin (9), the Federal Reserve cut the two rates below 2% by the fall of October 2008. Along the same line, central banks of leading world economies like China, Canada, and the United Kingdom as well as the ECB slashed their rates to rescue the global economy.

These efforts had little impact as the liquidity problem proved to have spread widely and damaged the operations of financial institutions. The rate of unemployment increased by 1.2% while an increasing number of distributions of jobless claims in the industry proved the economy was under recession (Cadieux & Conklin 12). The manufacturing and construction industries experienced large labor losses that significantly shattered the business cycle. Although the level of unemployment declined as time moved to the end of the recession in 2010, nonfarm employment declined to 1.

2 million as of February 2010 (Kaar 24). This indicates the severity of the crisis. Even after its end, the impact of the recession could be felt in the levels of nonfarm employment. Conclusion The economic recession of 2007 demonstrates the difficulty in restoring confidence in the global financial market once it is shattered. In an increasingly globalized economy, liquidity problem is a serious cause of solvency crises for many financial institutions. The liquidity crisis extends to the balance of payment crises responsible for shattering consumer confidence in the whole world.

This financial recession unveils the difficulty of restoring confidence in the global financial market once it is shattered. Today, leading economies record large deficits, slow growth, and financial regulations that are not working. Failures to attend to the financial problems today raise fears of a looming economic downturn in the United States.