The Great Recession Paper

Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1of 3

Sept.

15 2023

Kaitlin Trent

MAT 1010

Great Recession of 2007

In 2007 the economy suffered a crisis that rivaled the Great Depression in severity. This Great

Recession was caused by mortgage loans in America becoming dangerously easy to obtain due to the

lenders’ lack of restrictions on who could take out loans and at high interest rates. These people usually

had lower credit and income than what would be necessary to pay back the loans plus the higher

interest. This caused the housing bubble to burst as demand decreased, and banks ultimately money as

did everyone else, when the housing prices went down as well. As banks and people lost vast amounts of

money, they were not able to then spend as much overall, causing the economy to sink even further. In

2008, the government had to intervene and bail out the banks as they were not able to loan as much to

the people, but this increased the national deficit. Overall, millions of businesses closed, causing millions

of people to lose their jobs, causing millions of homes to be foreclosed on.

Debt played a tremendous role in this recession. Banks crumbled due to the amount of loans

that were not able to be repaid. Debt was one of the largest reasons the recession hit as hard as it did.

Small businesses could not repay start up and property loans and equally, individuals were buried in debt

because of banks not checking for their ability to repay or their debt-to-income ratios. In the housing

market, the value of houses overall was decreasing so people were either strapped to a costly loan or

had to sell and hope to find better means to fund housing elsewhere.

This leads into the easy ability for people to take out loans at that point in time. Typically, banks

require the debt-to-income ratio to be under 50-36% (depending on the bank) but in this era, banks
were not noting debt to income ratio or income at all often. This made it easy for people to take out

loans. Especially for houses. People could take out loans for multiple houses with higher interest rates,

and very lax emphasis on paying them back in full. So, when we’re talking about hundreds of thousands

of loans per bank being defaulted on all in a small period, the banks and economy couldn’t keep up with

the losses. Subprime mortgages were one of the biggest reasons that banks like Wachovia failed during

this time. The TARP or Troubled Asset Relief Program sought out to mitigate the losses that banks faced

during this time. The government had to buy out various banks, and some banks were forced to merge

to stay afloat.

Unfortunately, a lot of the patterns that began the 2008 crisis, are starting to crop up again. As we had

discussed in class, banks are now starting to accept 50% debt to income ratios over 36%. I have also

noticed, in my grandmother’s time as a real estate agent, there are far more loans for housing that have

certain tax breaks, or lack of a down payment. There are lots of people currently searching for homes

and praying that prices go down, all while taxes on properties are skyrocketing. Everything seems to ebb

and flow at different rates, and in this economic climate, where things are volatile and people are going

into high amounts of debt simply to survive, I could see this happening again. Even if only on the bank

side of things. People are taking out massive amounts of money to cover groceries, bills, car repairs, etc.

There are many different loan options and the emergence of pay advance apps that seem to be

heightening the issue. These apps loan anywhere from $20-$300 at a time without a credit check, or

knowledge of monthly income. They then take the borrowed amount out via auto-pay once paychecks

are deposited, then creating the vicious cycle of needing to borrow money to pay off the borrowed

money. Then you also have individual stores and chains offering credit cards almost desperately with

little regard to income, with asinine interest rates. This is crippling many families in younger generations

while older generations can begin to live off their saved retirement at an easier pace. Thus, deepening
the rift between generations and essentially crippling generational wealth because of the economy

bleeding people dry.

On top of everything, we are also still financially recovering from Covid, where many families lost jobs,

and small businesses closed. With many businesses leading back into in person work rather than remote,

a lot of families are having to re-adjust for sky-rocketed childcare costs. Groceries are also rising in price.

Overall, daily life has gotten extremely pricey, which would force families to rely on borrowed funds to

get by.

The great recession of 2008 was caused by greedy banks, setting up families for failure with high interest

rates. The housing bubble burst causing a lot of those loans to be defaulted on and banks to crumble.

Banks these days seem to be getting greedy again, raising the debt-to-income ratio and enjoying the

need for the public to rely on money borrowed from the banks. This will soon cause families to go

bankrupt and default on many loans where banks will have to support losing money in mass quantities. I

just hope that they are more prepared this time.

You might also like