Economics

Recession refers to a period when there is a contraction in the business cycle. During this period, the economic activities are usually on a slow down. During this period, the average spending of the population is usually on the decline. 2008 was the year when the United States economy was undergoing turmoil. In the month of September of that year, the Federal National Mortgage Association together with the Federal Home Loan Mortgage Corporation was declared bankrupt. Mortgage lenders thus lacked a secondary market where they could sell the subprime mortgages which they had already written. Institutions which relied on home mortgages as a base for their purchase of securities had no otherwise but to feel the pinch of the collapse of such institutions (Guryan, 2009).

The collapse of such great financial institutions marked the beginning of the global recession. This did not take place immediately but instead it followed a series of occurrences culminating in the global recession. The GDP was in the course of decline, dropping by approximately 1.6 percent between third and fourth quarters of the year 2008. This led to a general decrease in employment by approximately 1.6 percent. Though, employment was declining between the second and the third quarter, it was slight and this could be explained by the tax rebates stimulus effect which had disappeared. During this period, output was on the rise despite the lack of employment. This can be perceived to be impossible, but it can be explained by the fact that labor productivity had increased. When the labor productivity increases, production levels can be maintained even with lower number of employees (Sondra, 2008).

Many companies reduced the number of employees they had to enable them reduce their financial expenditure. The companies feared that they could be hard hit by the effects of recession to the point of collapse. Consumers had changed their trends as most people only restricted their spending to basic commodities and many other commodities were considered luxury. The manufacturing companies had to reduce their production rate due to the lack of ready market. In some cases, the wages for those people who were still in employment greatly reduced. Employment must have played a very key role in the 2008-2009 recessions. While employment played a key role in the recessions, other factors also played part in the initiation of the recessions. The most notable were the decline in stock investments prices, the housing sector as well as the banking industry (Guryan, 2009).

A number of banks had collapsed and others were at the brink of collapse. These banks had engaged themselves in the markets of real estate. This was considered a risky investment as the housing prices are susceptible to frequent changes in value. Initially, there had been a boom in the housing industry and investment in this sector was considered lucrative. Between 2007 and the year 2008, housing prices fell and the banks lost in the cause of this price drop. Mortgage backed securities explains the link between the housing markets and the banks. The owner of such securities has a stake on the mortgage repayment by the borrower. When banks give a loan with the house as a security, the banks transfer this ownership to mortgage agencies. The bank can also combine many loans to form mortgage-backed security which can then be purchased by the investors (Hetzel, 2009).

When many loans are bunched together as a single security, there is a considerable lower risk of loss compared to the case where there is only one loan which the borrower fails to pay. These loans are sold at an average price hence good loans sold at an average price is like a loss to the banks while bad loans sold at an average price are a source of profit. Initially, banks used to reap a lot of benefits from this investment. Rating agencies that were responsible for gauging the credit worthiness of the borrowers charged some fee to give a better rating to those who sell mortgage-backed securities. With a higher rating, they were able to make a greater profit than should be the case. When people lost their employment, they could no longer sustain the repayment of the mortgage loans they had borrowed. Their houses were taken away from them. The stock market was at the brink of collapse and the prices of houses had declined. This translated into heavy loses for the banks. The banks were running out of cash and their clients became very worried. Everybody rushed to the banks to withdraw their cash. That is the way the country plunged to these recessions. The recessions spread to have effects all over the world (Sondra, 2008).

Employment recession could only be ended by ensuring that demand was high. A stimulus package was initiated to increase demand for commodities which would in turn push up production and ultimately lead to more employment opportunities. With an increase in employment, there was enough money to be invested in the banks people could invest in the stock market as their confidence grew. Government invention played a key role in reversing this trend.