Housing Building Fatigue and the Great Recession: The Possible Connection

One of the worst recessions in the American history that haunted the US from December 2007 till June 2009, started with the deflation and bursting of the $8trillion housing bubble. It is one of the most horrifying economic downturns in the U.S history affecting millions of people. The loss of wealth resulting from this downturn triggered the sharp cutbacks in consumer spending. The decline in consumption, accompanied by the chaos in the financial market and the bursting of the housing bubble also caused the decline in business investment. With a massive drop in consumer spending and business investment, the unemployment rate peaked.

In 2008 through 2009, about 8.4 million jobs were lost by the U.S market. The job loss during the Great Recession was primarily due to a drop in family incomes, and a rise in poverty. The bursting of the housing bubble and the stock market drop was an indication that there was also a significant drop in family wealth.  

As the confidence of consumers in the American economic system was lost and the dollar value dropped, it restricted the U.S companies from making investments overseas. A majority of these companies diverted their liquid assets into hard assets such as real estate, that later sank in value. To make the situation worse, during the period from 2004 to 2007, gasoline prices doubled, causing transportation costs and increasing the prices of a number of goods.

When the U.S government rejected the bail application of Lehman Brothers that was linked strongly with international banks, terror began to spread to other economies. Banks across the globe began their march towards this downturn as the American economy tailed off and affected other economies. The pessimism, panic and negativity spread by the media was indicating that the American economy was headed for a recession.

The consumer confidence declined, and people started cutting back on their spending. With great horror surrounding the market, about 465 U.S banks collapsed during the economic collapse including the Columbia Bank. A number of people had to lose a lot of money with the failure of the banking system. A substantial decline in consumer confidence and an increase in interest rates spread in the economy and ultimately led to the financial market crisis.

According to a report compiled by the U.S Financial Inquiry Commission in 2011 reported the reasons of the Great Recession. The reasons listed in the report include inefficiencies in financial regulation that includes the failure of the Federal Reserve System to branch out the surge of noxious mortgages; dramatic collapse in corporate governance that includes the fact that a number of financial firms acted carelessly and accepting too much risk. This was a lethal combination of excessive borrowing and risk by households and Wall Street that is held responsible for putting the financial system on a collision with crisis; a lack of understanding of the financial system and systematic breaches in ethics and accountability  at different levels and stages. All these factors contributed to the perfect squall of greed, fear and mistakes, causing the Great Recession from which the U.S economy is still recovering.