What is an economic recession? The National Bureau of Economic Research defines a recession as "A significant decline in economic activity spread across the economy, lasting more than a few months." What a recession basically involves is the overall decrease in activity of employment, investments, and business profits. Recessions also typically involve deflation (falling prices of goods and services), or alternatively, inflation (swiftly rising prices of goods and services).
Many people around the United States are aware of the current recession we are going through. However, many do not know how we, as a nation, found ourselves in this deep hole of despair and tough times.
Although it is debatable, there are several major factors which have contributed to the birth of the recession. One of the main contributors for the current recession is the sub-prime mortgage meltdown.
For those who may not be aware of what a sub-prime mortgage is, basically it is an adjustable-rate mortgage (a mortgage in which the interest rate can go up or down according to existing financial market conditions) that was given to people with poor credit scores, a number that showed their history of not paying their debts.
A major aspect of the damage the sub-prime mortgages caused were because of the brokers who offered them. These brokers were given commission, or money for offering a service, whenever they gave away a mortgage. Because of this, brokers gave mortgages even to people with low credit scores. These people who received the mortgages then bought houses without regarding the fact whether they could afford them or not.
In return, because so many people were buying houses, it caused a housing boom. Predatory lend
ers, mortgage lenders who strip borrowers of home equity (the difference between what their home is actually worth, and the price it was purchased for) and threaten foreclosure, then offered home lenders very low interests rates which caused more people to buy homes. Next, lenders would package and sell more mortgages to people in and out of the United States.
However, without the home buyers knowing, after a short period of time of purchasing their low interest mortgages, the interest rates would suddenly raised. Because of this, mortgages became even more expensive and more than some home owners could afford. This then caused countless houses to foreclose, and existing homes to lose property value. The housing market eventually resulted in a collapse.
The remaining question is, how come this was allowed to happen? Policy makers failed to pay attention to the signs of the upcoming housing market collapse. Over all, policy makers left the financial industry to make changes however they wanted to without having to worry about following the policy. But because of policy makers inability to do their job right, today we reap the results.