Business Cycles: Phases, Indicators, Measures, Economic Evolution, Outlooks
is currently recovering from its worst recession in over 25 years. Most economists consider the rapid rise in housing prices (the bubble) and the subsequent collapse in that market to be the primary cause of the recession. Explain what housing market circumstances were responsible for the collapse of that market.
Observers attribute the 2001-2006 housing bubble to "everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan." (FactCheck.org.)
Causes were five-fold -- and all reducible to the consumer:
REALTORS encouraged people to buy (and sell)
Builders built more homes than were needed. This was fed by the media's emphasis on the American myth of each American needing a home to call himself. There was a home-buying mania.
Lenders created poorly designed loan products to fill demand. Economic derivatives, specially the "credit-default swap" were used irresponsibly in that swaps and other derivatives were sold and resold in ways that covered the amount of debt financial institutions were assuming. In the last stages of the housing boom, credit-default swaps in reference to mortgage-backed bonds were themselves bundled into financial instruments called collateralized debt obligations where buyers were essentially placing bets on whether bonds held by another would profit or fail. Risk became so great that in 2008, the Bank for International Settlements in Switzerland calculated that there was an approximate $680 trillion-worth value of derivatives across the globe up from $106 trillion in 2002. The derivatives had the reverse effect: intended to prevent doubt and uncertainty, they, instead, stoked insecurity and risk leading to Buffett's statement that derivatives, in the wrong hand, can be harmful (NY Times, 2012).
Borrowers took risky loans to get more houses. There were also historically low interest rates.
Houses were the only investment that escaped taxes. Buyers took opportunity of easy credit and excessively bid uo the prices of homes
Sellers sold at irrational prices (Century 21)
Fact.org painted a more detailed picture. Quoting the Economist, they said that the housign bubble was causative to "layered irresponsibility ... with hard-working homeowners and billionaire villains each playing a role." Other factors not listed above were:
The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making credit cheap causign banks to be generous in loans and people to be genours in buying.
Congress, that gave consumers tax incentive to buy more expensive houses.
Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.
The Clinton administration, that pushed for less stringent credit and downpayment requirements for working- and middle-class families.
Former Federal Reserve chairman Alan Greenspan, who encouraged Americans to take out adjustable rate mortgages.
Wall Street firms, who paid too little attention to the quality of the risky loans that lateer toppled banks
The Bush administration, which failed to regulate the securities market.
Collective delusion, that home prices would keep rising.
2. Economists classify macro-economic indicators as leading, lagging, or coincident. Define each classification and give two examples of each, relating them to the recession that began in 2007 and the recovery that is now under way.
An indicator is something that can be used to predict future economic patterns. Popular indicators include unemployment rates, housing starts, inflationary indexes and consumer confidence.
Indicators fall under one of three categories, each of which describes them:
1. Leading -- these indicate -- to some degree of accuracy -- coming economic event. An example is bond yields which are thought to be a good leading indicator of the stock market since bond trader's deal with speculation. Federal Reserve withholding of assets to bank results in fewer companies and fewer individuals being offered loans and therefore economic production will more likely suffer and there will be a rise in unemployment since money is scarce and few will be able to afford the short-term loans.
The Federal Reserve's reducing short- and long-term interest rates is another leading indicator since people are more liberal in borrowing when it becomes cheaper to do so. Result: People are more willing to buy goods and services and companies are more able to hire others. Production is boosted leading to greater availability of goods and cheaper prices (since there is…