Recession of USA Research Paper Example | Topics and Well Written Essays - 2000 words

Recession of USA - Research Paper Example The initial response included the criticism on the subprime mortgage crisis and how financial institutions exploited this market in order to book higher risks in the accounts. Subsequent discussions also included the failure of the regulatory bodies to have an effective check on the financial institutions and their behavior, role of fair value accounting as well as the greed and lust of financial institutions to focus on achieving short term profitability while ignoring the long term impacts of the same on the viability of the system. This paper will attempt to explore and understand as to what factors resulted in these crisis, how the crisis deepened, what was the initial response of the government, did it worked, how the policies of current administration are different from old and finally how does it measure to the short run and long run macroeconomics of the country. What caused the recession in US? A mild recession in US existed in early years of 2000s when US, after witnessing a decade of economic prosperity started to show the signs of economic recession. This recession however could not last longer as it only existed for less than a year. It is also important to note that such type of recession was also experienced by European Union and other developed countries also. This was however, considered as a natural reaction of the economy after reaching its peak in most of the developed countries including US. This was also a period when dot com bubble burst and top level corporate frauds and scandals started to emerge. During the early 2000 NASDAQ crashed due to the dot com bubble and FED also started to increase the interest rates. It is believed that the consistent and gradual increase in the interest rates by FED also contributed towards the creation of recession in the economy during early 2000s. (Ruddy, 2006) This was also a period of 9/11 when terrorist attacks on US resulted into the sharp decline in Dow Jones as well as its impact on different sector s of the economy specially airline industry. Further, US has to divert significant resources towards the war thus increasing the government expenditure. This recession however, was not as damaging as the recession which started to emerge during 2007 as a result of the financial crisis in the country. The current economic recession in the country is therefore a direct result of the financial crisis which started to emerge during 2007. The financial crisis in US started with the subprime mortgage crisis when the subprime mortgage holders started to default on their obligations. Subprime borrowers are those borrowers whose credit history is not good and they could not obtain the credit on normal terms and conditions. Due to their overall situation, they pose a greater risk therefore in order to lend them, it becomes imperative for the banks to charge them higher interest rates. Based on the risk and return criteria banks therefore started to lend to such borrowers in a bid to earn high er profitability while ignoring the risks associated with such borrowers. The issue however, became critical when the banks started to securitize their subprime mortgage portfolio and issued mortgage backed securities offering subprime mortgage portfolio as collateral. (BROOKS & SIMON, 2007). When subprime borrowers started to become delinquent on their obligat