Causes of economic recession
February 5, 2010
The causes of economic recession are only slightly different one recession from the other. I have observed and done business in all the recessions from 1978 to 2009. I have read what other economists have written, that no one knows what causes recessions. I know why that is true for them. They have never fiscally experienced what the affects are to realize the cause in real time. They only read what other academics say or write about causes of economic recession. Since the academics don’t know for the same reasons it’s exactly like the blind leading the blind.
Causes of economic recession in the past have started with bad economic policies from the federal government and congress. Overspending by congress has always forced interest rates up to finance that debt. This forces the Federal Reserve to raise interest rates to attract enough money to finance the deficit. This usually happens over a long enough period of time that it goes almost unnoticed by the general public. This short memory or just a lack of interest by the public gives cover to the politicians who constantly overspend. Because of this lack of interest and until millions of people lose their job the politicians or the liberal fringe news media can tell the public whatever they wish and the public doesn’t know any different.
All the recessions I have experienced first started with high federal government deficit spending, which will lead to higher interest rates. Higher interest rates slow the economy down as barrowing money becomes more expensive for home buyers and businesses big and small. I have seen this in every recession from 1978 and including the one we are in now in 2010. There are many smaller factors that could be pointed to, but they are small compared to the higher interest rates combined with high federal deficits, taking most of the available money out of the world’s economic system to finance the federal debt.
The Causes of economic recession that started in December of 2007 and is still ongoing in February of 2010 was caused for the aforesaid reasons. We had an interest rate set so low that a home mortgage was below 4%. Then the Federal Reserve raised their rate from 1% to 5%. This put home mortgages at 7% to almost 8% this slowed the housing market dramatically in 2007 and latter resulted in the 2008 bank collapse. These were the main causes of economic recession.
The details and the real causes of economic recession that we are now in the middle of now, goes all the way back to Jimmy Carters presidency from 1978 to 1982. He signed a bill called the community reinvestment act. This new legislation was supposed to help poor people get mortgage loans. Then Bill Clinton didn’t think the community reinvestment act legislation went far enough, so in his last year in office 1999. Bill Clinton strengthened the law which allowed a lot more people that could not afford a home mortgage to get one. The law forced banks to give loans to people with bad credit and no proof of income, other than a written statement that they had enough income to pay the mortgage loan. Over the period from 2001 to 2006, millions of what is called subprime mortgages was given to unqualified barrowers. Almost every one of these subprime loans went into for closer.
These high risk subprime loans were immediately sold off to other bigger banks and investment firms like bonds and were referred to as credit default swaps. This was unregulated area of the banking system. No one was keeping track of the total amount of the credit default swaps. When everything did fall apart there were $60 trillion of these bad loans. Interest rates went back up and the housing market reverses course and prices started to fall in value, so did you credit default swaps which are all subprime loans and since they traded just like bonds eventually no one trusted them and eventually there was no market for them. This led to these credit default swaps being worthless. As these bonds dropped in value the bankers no longer would buy them. This lead to the frozen credit markets within the banking system. This made $60 trillion in credit fault swaps became worthless and it was exactly like $60 trillion just disappeared or vanished into thin air. That's where it all came from in the first place, out of thin air and that's where it went back to.
These credit default swaps were sold from 30 to as many as 60 times over and over. What the banking system did was turn $3 trillion in home mortgage loans, into $60 trillion in credit default swaps. This problem was known by the federal government back in 2004. Many politicians knew that something had to be done to correct this problem. But nothing was ever done, even though they were warned many times by auditors and other politicians and Pres. George Bush told Congress 17 times that legislation needed to be passed to correct this problem. In 2006 John McCain wrote new banking rule legislation specifically for the problems with Freddie and Fannie. That never made it to the floor of the house to be voted on because the democrats controlled the house and the senate by 2006. Nothing was ever done and here we are with a broken banking system and George Bush gets the blame from liberal fringe news media. While the two Democratic politicians who were in charge of the banking committees Chris Dodd and Barney Frank go without any investigation. They are the ones that did nothing and were warned by auditors that there was major fraud with Freddie and Fannie May. These two banks were the originator of most of these subprime mortgages. This was one of the many causes of economic recession that we are in now.
There is a number on the US debt clock that was put there to keep track of the total Federal Reserve money that has been paid out to bail out the banks. This number is now $7 trillion as of February 1, 2010. This is just more money being printed up or made up out of thin air. That is more than half the federal deficit accumulated over 234 years in the United States being in existence. In just 16 months you can't just print or make up $7 trillion in phony paper or cyber money without causing extreme inflation in the outgoing years. This extreme inflation will come within the next 24 months, not in 10 years like most of the news media is talking about.
The current causes of economic recession are not the normal ones that historically start or create recessions. This is all new territory. We have no precedent to go by. The Great Depression 1929 to 1939 was nothing like this. There were no credit default swaps 80 years ago. We had no socialist system in place like we do have now that pays out $1.8 trillion a year in wealth redistribution. The banking system failed in 1933 because the people physically ran on the banks to get all their money out of the banks at the same time. This however is similar to what happened to the banks in 2008 except the banks are running on the banks more than the people were. The banks lost faith in each other and did not trust one another anymore. This led to the whole banking system freezing up and put us right where we are now, with a broken financial system. This time it was the banks standing in line at the banks not the people.
The causes of economic recession in this case can be found in political mistakes made by Congress. First the community reinvestment act is exactly how we got 3 million bad mortgage loans in a period of just three years, 2006 to 2008. Then on top of that, congress knew about the specific problems in the banking system. Congress did nothing, even when they were warned many times by independent auditors, other congressmen and the president. As of February 2010 nothing has been done yet to stop this type of activity. So who’s in the banks pockets getting payoffs not to regulate?
The causes of economic recession in this case were very poorly written legislation, the community reinvestment act that turned the banking system into an arm of the department of social services or the department of welfare. There are people who say that capitalism has failed. The facts are Congress turning the banks into a social system or wing of the welfare department, is what made the bank’s collapse, not capitalism. Under old bank rules before the community reinvestment act these bad loans would've never been made. Prior to community reinvestment act it was against the law to make a loan the way the subprime mortgages were made. If not for that this would've never happened. This once again proves that socialism doesn't work. It never has and never will, not one time.
It also proves if you put too much socialism in any capitalist system capitalist economic system will collapse. This happens due to the overburden of socialism or too much money being taken out of the private sector and redistributed to other sectors of the economy that isn't producing anything. There is always a tipping point and we have reached it. Socialism has never worked in any shape or form. Here's some really big proofs were socialism has been tried for many years and failed miserably right from the start. First look at Russia they ran a communist economic system for 70 years and their people lived in severe poverty. Then they changed into a capitalist system their standard of living increased by 500%. Then we have to take a look at communist China they tried communism forever 30 years and for 30 years their people lived in severe poverty the very same as Russia. Once they changed over to capitalism they too experience the same 500% increases in their standard of living. So it's a choice do you want to live in severe poverty under socialism. This is the exact same economic system as communism. Or you will live a high standard of living that we have here in the United States.
Our political divisions are also one of the causes of economic recession. This struggle with our politics between the Socialist and the conservatives is a big part of the problem here in the United States. We have one party that wants wealth redistribution and socialism. That would be the Democrats. Then we have another party that is normally more for small government low taxes and favorable to business to create jobs and expand the economy. Normally that's the Republicans, but in the prior eight years with George Bush and for 6 of those eight years Republicans had a majority of Republicans they did something that was not normal for Republicans. They spent like drunken sailors and created a new social program. The old folks in this country survived for more than 200 years without the young working people buying their medicine for them. This is not why Republicans were elected. That's one of many reasons why they lost the House and the Senate to the Democrats. If the American people thought that they were going to punish the Republicans by not reelecting them. It looks like that backfired on the American people.
The next big problem that we have to face is the bankrupt social security system. The security system is said to become bankrupt in seven years or by the year 2017. This is an old figure from before the banks collapsed and they are still talking the same old story from prior to 2008 bank catastrophe. Now as of 2010 has anyone noticed that tax revenues, federal and social security taxes collected have created a deficit of $1.3 trillion? Social security is long past being broken. They don’t want to make that known to the public because it will scare the old folks depending on social security. We don’t have 7 years to fix social security any more.
The congressional budget Office has given its most recent deficit projection for 2010 and that’s $ 1.3 Trillion. There’s a really big problem with their calculations. First they have calculated in the taxes from cap and trade. This is not law yet. Then they also calculated in the 14 new taxes on the American people with the healthcare legislation. This is not law yet. Then they forgot to include the newest second stimulus package renamed a jobs bill at a cost 174 Billion added to the deficit. The jobs bill has been passed by the house of representative. It only needs to be passed by the senate and they will add more to it, when they get their hands on it. This jobs bill will definitely become law and they excluded that from their budget calculations and added in projected taxes from cap and trade and the health care bill that is not law yet. This is against the rules of the congressional budget office to surmise that a law will be passed, when it has not. Here is why they broke their own rule. If they did the budget under the rules, the deficit would have been 1.6 trillion and when the jobs bill is added, it will be $1.784 trillion. That number is $400 Billion more than last year and that doesn’t include off budget deficit spending. If you add the more than $100 Billion in off budget deficit spending that brings the total deficit to 1.9 Trillion for 2010. Reporting that could cause another panic. These are only some of the Causes of economic recession. If this continues we will enter into a depression in 2011
Americans are in very big trouble; these are just some of the causes of economic recession. We have a huge mess that has to be cleaned up. But who is going to do it? We have the wrong people in charge of all three branches of our government. It is an historical fact that democrats look at economics through the eyes of a socialist. That is what they are by definition and by their actions. We have people in power that only understand a failed system of socialist economics. How can they fix what is broken, in what really is a capitalist economy. They can’t or they won’t and the results will be the same in 2010 that we had in 2009. It looks to me, as if it’s intentional. We also have 3 more years of these progressive, socialist, Democrats being in control. The 2010 elections won’t make any real difference with president Oboma in control of the veto powers.
Here is a summary of the Causes of economic recession.
Causes of economic recession step 1
Government spends too much in deficit spending.
Causes of economic recession step 2
Federal Reserve will raise interest to attract Investment money to finance the deficits spending
Causes of economic recession step 3
Housing and other industries slow from the higher Interest rate
Causes of economic recession step 4
Banks don’t loan as much when interest rates are high and the overall economy shrinks.
Causes of economic recession