Effect of the Economic Recession Research Paper Example | Topics and Well Written Essays - 500 words

Effect of the Economic Recession - Research Paper Example Many experts believe that the seeds of this recession lie in the policies of the Federal Reserve Bank of America in the aftermath of the attack on world trade center. The bank feared that the terrorist attack would create a panic in the market and hence will affect U.S. economy. Fearing this, the bank decided to lower the interest rates to a record low level (Makinen, 2011). The effect of this policy was that credit was cheaply available to the people. This situation was misused by Wall Street and many banks such as Fannie Mae and Freddie Mac. What these banks did was to provide people with a very cheap loan on houses that couldn’t have been affordable otherwise. The property market was rising at the time and so huge amount of sub-prime loans were issued to the American people. The people took loans from the banks as they were confident that the rise in house prices would provide them with the money they needed for repayment of a loan. But after some time of the boom, the property market busted. The price of the houses touched a record low and so people started to default on their loans. They didn’t have money to pay back. This meant that the banks who had issued this loan were in deep cash problems. The phenomenon was so huge that first Fannie Mae and Freddie Mac filed for bankruptcy (Jicking, 2007). Next in line was Lehman Brothers which had similar problems. With Lehman Brothers filing for Chapter 11 Bankruptcy, the world was heading towards credit crunch. The banks worldwide didn’t know which bank had how many bad debts to its credit. There was suspicion all around and hence the banks were weary of giving loans to each other. When the banks withheld supply of money in the market, the businesses started to feel the heat. All these events had a ripple effect. There was a reduction in demand and because of this unemployment rates went up in the U.S.