The Great Recession Essay

In the mid to late 1990s and early 2000s, few people realized that there was something going on in the housing market. House prices were skyrocketing, with no evidence of slowing down. That is, until 2007, when the housing “bubble” burst, and sent the economy into shambles. On the surface, the market seemed to crash because of the increase in default rates, but a deeper look reveals the lax regulation policies that were in place, and a surge in subprime mortgage lending. Economists such as Alan Blinder believe that there is not just one main cause to the recession, but an interconnected group of causes. However, other economists such as Neal Larry and Atif Mian believe that the root of all the problems which were experienced was subprime lending

Since financial regulators were failing repeatedly at overseeing the market, this “encouraged mortgage brokers and subprime lenders to manipulate lower-income people into commitments for mortgages they clearly could never afford (1099).” People were manipulated with adjustable rate mortgages because they had teaser rates, which were low interest rates in the beginning, but they would eventually skyrocket. This jump in the interest rate is very risky normally, let alone for people who can barely afford their house to begin with. Neal then divulges into the misguided regulation that “lay at the heart of the crisis (1101).” Despite there being a large number of incentives for capitalists, which were the bankers, or the government, which were the regulators, to participate in risky activities, Neal argues that “the ignorance of the uncertainty surrounding any future venture is ultimately the more powerful explanation of how and why both regulators and capitalists led us into the crisis (1101).” To support his claims, Neal refers to many different sources of information, including reports and articles from the FCIC, the Senate Permanent Investigative Committee, the Lehman Brothers, and a few others. However, with all these different reports, they all have the same underlying theme, “the severing of the personal ties that had always been the basis of banking and

Instead of laying out the causes of the Great Recession, he states that this recession “provides another watershed moment to reevaluate our core economic beliefs (51)”. Atif provides two reasons as to why financial crises are preceded by a sharp rise in leverage. The first explanation is that credit expansion is associated with positive productivity, which then represents the crisis to come as an “unlucky event (51)”. The second explanation is that credit booms are fueled by shifts in the supply of credit. He examines data about mortgage growth, mortgage default rates, and house price growth and comes up with the conclusion that “if subprime credit growth were driven by expectations of higher house price appreciation in subprime neighborhoods, we should not have seen higher subprime credit growth in elastic cities that experienced no house price appreciation (53).” This supports the claim that a shift in supply of credit was responsible for the spike in leverage and home prices. This begs the question: what caused the outward shift of the supply of credit? Mian states that there are two primary reasons, the first is “the international financial literature on global savings imbalances (55),” which shows that the current account deficit rose at the same rate as household leverage. The second reason Mian gives is “subsidies for mortgage credit in the form of government homeownership initiatives, implicit government