Irrational Exuberance The Economic Crisis Research Paper

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As banks faltered and default rates rose, rates of consumption and demand plummeted. Unemployment began to increase, and in a predictable Keynesian fashion, as individuals grew more insecure about their job prospects they began to spend less money. The United States has a particularly consumer-driven economy -- Americans are known for having historically low rates of savings and to engage in high rates of spending -- so this was particularly disruptive to the usual rhythms of the economy.

Young people graduating from college suffered some of the worst effects of the recession. "Unemployment rates for individuals younger than 25 are currently 21% in the euro area and 19% in the U.S." (Branchflower 2010). They were competing with older, more experienced workers who had recently lost their jobs. The fear is that today's low starting salaries create a class of permanently low-earning graduates, many of whom have high levels of college debt. Graduates today often find themselves forced to live with their parents rather than aspire to own their own homes as they build faltering careers. The rush to create a new class of homeowners may have ironically created a permanent class of younger people with slim hopes of ever owning their own abode.

Responses to the financial crisis

"Even before taking office, President Obama began work on a stimulus package. On Feb. 11, 2009, Congress gave final approval to a $787 billion bill, the American Recovery and Reinvestment Act" ("Economic stimulus," Times topics, 2010). However, the bill was considerably leaner than originally intended, because of Republican opposition to the spending bill. The Obama Administration was pressured both on the right and the left. Leftist critics were angry that banks and large industries, such as the automotive industry, had been bailed out by the federal government, while ordinary people were still floundering. They argued that the bill offered little help or hope for Americans under water with their mortgages, who owed more on their homes than the homes were worth. Republicans criticized the deficit-making potential of the bill and called for tax cuts rather than government spending. However, even Democrats such as Harry Reid supported a "$15 billion measure focused on a payroll tax exemption for companies that hire new workers, an idea that had been raised by Republicans as well as Democrats" ("Economic stimulus," Times topics, 2010). While the stimulus bill was praised for creating an estimated 2.5 million to 3.6 million jobs, a number of the stimulatory measures have been called transient rather than truly radical and transformative of the nation's infrastructure unlike Roosevelt's New Deal. The 'Cash for Clunkers' program designed to encourage the purchase of newer and more fuel-efficient cars and a tax credit for first time homebuyers temporarily caused a boost in sales and the economy as a whole but dissipated when the programs ended.

Conclusion

Nobel-prize winning economist Paul Krugman has stated that the American economy, although not technically in recession, is in a false recovery. "Growth is currently running somewhere between 1 and 2%, with a good chance that it will slow even further in the months ahead. Will the economy actually enter a double dip, with G.D.P. shrinking? Who cares? If unemployment rises for the rest of this year, which seems likely, it won't matter whether the G.D.P. numbers are slightly positive or slightly negative" (Krugman 2010). There has been little of the promised growth in new or 'green' industries and while fewer people are losing jobs, new jobs are not being generated. While immediately after the credit crisis, there were predictions in Vanity Fair magazine that the Gilded Age had ended, and Wall Street brokers would switch from $1,950 bottles of wine to $15 dollar vino, salaries of the most affluent members of the financial community have been restored, while the fortunes of middle-to-lower class Americans flounder (Ferguson 51).

Financial reforms of the banking industry that caused the crisis have also been halting and worldwide, economies that were decimated by the recession (including Greece and Iceland) still flounder. The housing sector has shed jobs at an alarming pace. While the stock market may have temporarily rebounded, talk of a 'double dip' recession, or another downturn, remains. Shaky jobs mean few buyers even for discounted houses. A lack of job growth and real investment in industry may mean that although a sweeping crisis may have been avoided, many Americans will still suffer from unemployment and high debt levels, even while savings rates rise to all time highs and interest rates sink to all-time lows. The culture in America may have shifted, as a result of the crisis -- or at very least in the short-term, fears have not abated.

Works Cited

Branchflower, David G. "Credit crisis creates Lost Generation." Bloomberg Business.

January 21, 2010. August 28, 2001.

http://www.bloomberg.com/news/2010-01-22/credit-crisis-creates-lost-generation-david-g-blanchflower.html

Ferguson, Niall. "Where did all the money go?" From the Great Hangover. Edited by Graydon

Carter. New York: Harper, 2010.

"Credit crunch to downturn." BBC. August 9, 2009. August 28, 2010.

http://news.bbc.co.uk/2/hi/business/7521250.stm

Der Hovanesian, Mara. "Bonfire of the builders." BusinessWeek. August 13, 2007.

August 28, 2010. http://www.businessweek.com/print/magazine/content/07_33/b4046601.htm?chan=gl

"Economic stimulus." Times Topics. The New York Times.

http://topics.nytimes.com/top/reference/timestopics/subjects/u/united_states_economy/economic_stimulus/index.html

Isidore, Chris. "It's official: U.S. In a recession." CNN.com. December 1, 2008.

August 28, 2010.

http://money.cnn.com/2008/12/01/news/economy/recession/index.htm

Krugman, Paul. "This Is Not a Recovery." The New York Times. August 26, 2010.

August 28, 2010.

http://www.nytimes.com/2010/08/27/opinion/27krugman.html?src=me&ref=general

Ritholtz, Barry. "Explaining the impact of ultra-low rates to Greenspan." The…[continue]

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