Trace the Historical Causation Term Paper

Pages: 8 (2556 words)  ·  Style: MLA  ·  Bibliography Sources: 5  ·  File: .docx  ·  Level: College Senior  ·  Topic: Economics

The housing market was extremely hot, with investors, first time buyers, and homeowners all trying to capitalize on the rising market. The bubble burst as homebuyers began to see their mortgage payments go up as their loans were modified.

Many people blamed sub-prime lenders, who often used shoddy business practices in offering loans to people that could not qualify with more traditional lenders. Another writer notes, "One of the causes of the current recession was the misperception of housing price dynamics by financial institutions" (Rockrohr). Many shoddy lenders offer low-rate introductory mortgages to under qualified buyers. These mortgages offered extremely low introductory rates that rose dramatically in a period of three to five years. These so-called Adjustable-Rate Mortgages (ARMs) were the only way many homebuyers were able to qualify for loans. They could make the low minimum payments, but when the ARMs increased in three to five years, they could not. This helped fuel the housing boom, where home values rose dramatically, as well. Construction also boomed, adding dramatic numbers of new housing to many hot real estate markets.Buy full Download Microsoft Word File paper
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The low-cost ARMs also allowed new homebuyers to buy appliances, home improvements, and furniture, adding to the economy in a strong surge. When they defaulted on their mortgages, they often defaulted on their credit cards that had fueled many of these purchases, and that just helped drag the economy down even further, and sent it further into decline. Home prices still have not hit rock bottom, and many homeowners have seen their home's worth decrease to many thousands of dollars below what they owe on the mortgage. These "underwater" homeowners will probably have to wait at least a decade to see their home's value increase to where it was before the bubble burst. These homeowner's are trapped in their homes, trying to hang on. They cannot sell for anywhere near what they owe on the house, and they cannot refinance because of their home's devaluation. They continue to make their mortgage payments if they can, but they are the consumers who are struggling to get along. They help keep the recession in place because they can no longer afford to buy for the home, eat out, or travel, and there are millions of Americans suffering this fate during the current recession.

Many of the homebuyers did not understand or prepare for the rise in their mortgages after the introductory rates expired and their mortgage payment often rose to double what it was in the beginning, and they began defaulting on their homes in record numbers. The lenders were also at fault in many cases. After defaults started to increase, studies showed that many lenders were using shoddy business practices. They pushed the sub-prime ARMs, never disclosed how much the payments would rise, and approved just about everyone, despite their credit worthiness or income. They set these homeowners up for failure with their illegal practices. Many of them were shut down, and there were some controls for lenders. However, it seems the Fed policy of keeping interest rates low helped in part support these lenders and their practices, at least that is what many of the Fed's critics believe. This triggered major finance failures that could have endangered the entire economy, which is when the government first stepped in to create a program that could keep the major lenders from failing. Their failure could have made the recession much worse than it already is.

Also at play is the loss of jobs that came as consumers stopped buying homes and spending money. Another reporter notes, "It's the first time since the Great Depression that a recession has wiped out all the jobs created during the previous business cycle, according to Heidi Shierholz, an economist at the Economic Policy Institute, a think tank" (Rugaber 2). He continues, "14.7 million: People unemployed in June 2009, the most ever in records dating to 1948. 12.1 million: People unemployed in December 1982, the record before the current downturn" (Rugaber 2). Unemployment continued to skyrocket through January 2010, when a modest gain was reported, but the effects of the current recession will certainly be felt for years to come. It may take decades for home prices to reach their 2006 record highs.

The current recession has much in common with the Great Depression. They both had their origins in housing prices, consumerism, and a stock market devaluation. They both continued for many years, and it took years for the country to recover. That seems to be the case for the current recession, as well. They both created unprecedented legislation and changes in the government, and they helped create new programs, too. The current recession's influence on society and the government will certainly continue for years, and it will be interesting to see how the country finally pulls out of the recession and starts down the path to normalcy. Until then, there is certain to be more unemployment, more businesses closing down or laying off workers, and more mortgage defaults, but as history shows, eventually the country, (and the world) will recover from this recession.


It will certainly take time for the country to recover from the current recession. Housing prices continue to fall, and experts predict there will be another round of home defaults when current low-rate loans mature, just what occurred in 2006. This could lead to an ever deeper recession instead of recovery, and it could lead to more financial institution bailouts or failures. It seems that now would be the time to put some kind of regulatory guidelines in place to help prevent this from happening again, and that the Federal Reserve could play a role in those regulations. However, it does not seem to be a priority for the government at the time, which is a little frightening to many who understand economics and how another economic downturn could affect this already struggling country.


Adelmann, Bob. "Bernanke: Lax Oversight Recession's Cause." New 2010. 20 March 2010.


Brinkmann, Jay, and Orawin Velz. "The 2009 Outlook." Mortgage Banking Jan. 2009: 22+..

Rockrohr, Phil. "Current Recession Not the Great Recession." University of Chicago. 2009. 20 March 2010.


Rugeber, Christopher. "Breaking Down Jobless Numbers." Daily Herald (Arlington Heights, IL) 3 July 2009: 2.

Shull, Bernard. The Fourth Branch:… [END OF PREVIEW] . . . READ MORE

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APA Style

Trace the Historical Causation.  (2010, March 5).  Retrieved April 3, 2020, from

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"Trace the Historical Causation."  March 5, 2010.  Accessed April 3, 2020.