subject: Recession Today: What Just Happened? [print this page] Before the recession today hit the country and left everyone scared about what the future held for them, people were very optimistic about everything. High paying jobs were to be had, goods and services were affordable, and everyone just thought that nothing would change. Everything was fine, until the bubble burst and reality seeped in. Reports of impending doom trickled in from many experts and when the recession finally occurred, people were left astonished that it happened. People who used to have multiple figure salaries were relegated to become office clerks. Worse, thousands lost their jobs and were left unable to provide for themselves and their families. Millions were left asking themselves, "What was the catalyst that caused this disastrous recession?" "What caused this economic turbulence that experts deem the worst in history since the Great Depression of the 1930s?"
Because the effects of the recession today were so great and far reaching, many experts tried to get to the root of the problem. This prompted a lot of debate as to what actually caused the recession and the hows and whys of it even happening. Amidst all the furor and differing opinions over the recession and its causes, most experts agree on one catalyst: the collapse of the housing industry and the successive foreclosures that followed it. To understand how the housing industry could have helped cause the recession today, a short background is needed.
In the early 1990s, people with lesser means were provided with ARMS, or Adjustable Rate Mortgages to purchase their homes. ARMS were designed so that people can pay no or little down payment and their interest rates started low, but grew over the years. As the prices of commodities and mortgages increased over the years, thousands lost the ability to pay their mortgages, causing their homes to be foreclosed or repossessed by the banks.
The banks who provided loans to these people to purchase their homes had mortgages on the properties to protect their interest. These mortgages were put together as bonds or securities, known as MBS, and sold to financial institutions or traded. However, the problem was that an MBS was only good if the mortgages contained were being paid continually. Institutions and banks abroad stopped buying the securities, which led to less money being earned by the banks. This, in turn, made banks unable to lend to their customers, and since lending is their primary method of earning money, banks could not make up to their losses. The result of this was that thousands of homes were foreclosed. This affected the recession today because investors and foreign sources no longer invested in the country. This is just one side of the coin, but one can safely say that it is a primary cause for the recession in the country.
by: Jeff D McQueen
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