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December 4, 2012

The Great Recession


There are a lot of theories on the causes of the recession of 2007-08, commonly referred
to as The Great Recession. The right blames government intervention in financial markets, low
interest rates, and easy credit, while the left blames free market excess, greed, and deregulation. I
thought it might be worthwhile to compile a list of causes based on some of the most intelligent
analysis, and see if we cant identify the people who caused this mess.
The first cause that came up was about the housing policy. As many as half of all
mortgages in the United States were considered inferior and liable to defaulted when were
entered the recession. This was proven clean to be the result of the housing policies that the
government was encouraging about home ownership. This resulted in misallocation of capital,
lower mortgage standards, and created a turn in the estate market. Facts show that banks are
required to offer loans to people who are less likely to afford a mortgage and they were not allow
to use their own lending standards. On top of this, the Department of Housing and Urban
Development (HUD) had an official policy of increasing home ownership by lowering mortgage
underwriting standards. This had a significant effect on the quality of mortgages in circulation
prior to the recession. This is why housing policy were a strong cause for the recession.
Another cause for the recession was banking regulations that concentrated mortgage
securities with a small number of firms, also they offered implied government insurance on bad
mortgages, and lastly they established accounting guidelines that allowed banks to significantly
reduce their capital position. This is where Fannie Mae and Freddie Mac come in. Both entities,
while technically private entities, made the federal government the implicit backers of every

mortgage held. That implied guarantee was made explicit once they were bailed out following
this latest recession.
A third cause of the recession is the Federal Reserve policy on low interest rates.
Extremely low rates provide cheap money and easy credit, which was obviously a contributor to
the housing and lending policies described above. This low rate policy is relatively recent
phenomenon. Paul Volcker has rates as high as 20%, after him Alan Greenspan stepped in and
rates were around 3% to 6%. In 2006, Ben Bernanke brought interest rates to historical low level
for the period of the time.
The final cause of the Great Recession is the inflation-suppression policy that our
government has held since the 1980s. The argument is that taming inflation led to lower interest
rates and a general feeling that the business cycle had grown less volatile. As a result, households
felt richer, which led to a surge in borrowing by both households and institutions and eventually
a lowering of lending standards and, most importantly, misreading of risk.
There are many causes that were discussed to be the causes of the recession but there
were all cleared up in time. One explanation for The Great Recession is a lack of regulation,
primarily in the financial sector. This explanation doesnt hold up, however, because the major
players in the collapse are heavily regulated and have been for many years. If there is any blame
on the part of regulators, its that they were no smarter than the people who were being regulated
and they didnt anticipate the problems that led to the financial downturn. One could argue that
this is the primary role of a regulator, so blame would rest on the government bureaucrat.
Another explanation for the financial collapse is the greed and dishonesty of Wall Street.
In this case, the explanation is insufficient because there has never been a shortage of greed on

Wall Street, and 2007-08 were no different. Ultimately, this is just an emotional reaction one
that makes the accuser feel that they hold some moral high ground and is not based in
reality. Greed is a part of any economic activity, and there was no unusually high amount of
greed and dishonesty in 2007-08.
A third cause is that the federal government introduced a moral hazard on Wall Street. In
other words, the major players in the financial sector believed that they could take irrational risks
knowing that they would be bailed out. Once again, this explanation is inadequate because
historically most investors have not been protected from their financial losses. That means that in
2007, it was impossible for anyone to predict in advance who would be bailed out, so there was
no moral hazard introduced ahead of the financial collapse.
In conclusion, there are many causes for the recession to have occurred, but many of
these causes have been cleared up to show whether or not they actually did have any cause for
the recession. Housing policies was shown the have a big impact in the recession. Banking
regulations showed that this affected a lot of people. With the banking regulations, interest rate
policy and the inflation suppression policy, it added up to have a huge impact and was a major
cause for the recession. Those are the major causes of the 2007 recession.

Works Cited
Amadeo, Kimberly. "Causes of Economic Recession." Causes of Economic Recession. N.p., 6
July 2012. Web. 4 Dec. 2012.

Koba, Mark. "What Is a Recession: CNBC Explains." What Is a Recession: CNBC Explains.
N.p., n.d. Web. 4 Dec. 2012.
Weisberg, Jacob. "What Caused the Great Recession?" What Caused the Great Recession? N.p.,
10 Jan. 2010. Web. 4 Dec. 2012.
"Who and What Caused The Great Recession." Who and What Caused The Great Recession.
N.p., 13 July 2011. Web. 4 Dec. 2012.