Recession: Unraveling the Strands of America’s Economic Crisis

February 23, 2017

In years to come, historians and economists will debate exactly what brought on the economic recession through which Americans continue to struggle. The roots of the situation in the United States are tightly interwoven with the housing bubble and stretch back to 2005. It was then that home prices reached their peak in high growth areas, particularly in the Southwest and Florida. Soaring home valuations led builders to take on more developments than ever and encouraged homeowners to leverage the equity in their homes in dangerous ways.

The underpinning of what appeared to be a robust home construction and real estate market, however was a mortgage industry that financed an over-abundance of sub-prime, high-risk loans to consumers with poor credit ratings and earnings ability. This was augmented by the popularity of the adjustable rate mortgage to these same customers who did not understand the potential for their payments to increase dramatically. Consequently, at the height of the crisis in mid-2008, many would find themselves “under water,” owing more on their homes than they were worth in a severely deflated real estate market.

In March 2007, this house of cards began to come down when foreclosure rates shot up. As the crisis deepened, 25 sub-prime lenders declared bankruptcy followed by deep-set troubles with large investment banks like Bear Stearns that traded largely in mortgage-backed securities. By the end of 2008, the federal government allocated more than $900 billion in special loans to the housing industry alone, including the bailout of Fannie Mae, Freddie Mac, and the Federal Housing Administration.

The fall-out from this situation spread rapidly through the economy, with the home construction industry seeing a 63% drop by mid-2008 with some regions down more than 80%. By early 2009, builders could point to only modest gains of around 15% to 17%, a bare start on the long climb back to previously prosperous levels. Concurrent with the collapse of the real estate market and the mortgage industry, the American automotive industry plunged, until both General Motors and Chrysler were forced into bankruptcy proceedings in early 2009 in spite of massive infusions of federal loans.

For the American consumer, the demons of foreclosure, job loss, and credit contraction stalked the fragile security of the middle class. Long accustomed to supporting their lifestyle on their credit cards, Americans were suddenly confronted with an overdue bill in what most economists agreed was a necessary, but painful correction in spending and saving habits. Many pinned their hopes on the election of Barack Obama in 2008 to “fix” the situation, but even in the face of aggressive federal stimulus moves, the economy remained sluggish well into 2009. By August, unemployment hovered just under 10%, with most analysts agreeing that real recovery would not occur until 2010 and perhaps 2011.