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American business history

A recession is a period of negative economic growth that lasts for at least two

successive quarters. It presents a reduction in the income level, increased

unemployment, and reduced GDP. The 2008 recession was caused by a boom in the

housing sector in the U.S. that peaked between 2005 and 2006. As a result, high cases

of subprime and adjustable mortgage rates defaults were witnessed. Therefore, banks

started to offer more credit to potential home owners causing an increase in housing

rates (Shiller 63).

Sublime lending by banks was another cause. The American housing sector

experienced a boom and this created stiff competition among leading mortgage

companies. Creditworthy borrowers reduced with time and this made lenders to relax

on underwriting standards providing credit to uncreditworthy borrowers (Fried, 93).

The presence of easy credit conditions was another factor. Before the 2008

recession, the Federal Reserve reduced its fund rates to 1 % from 6.5 %. It was aimed

at fighting deflation. This and other causes produced a high demand for financial

assets leading to the increase in prices of assets (Fried, 73).

Predatory lending by some financial intuitions caused the recession. Banks

enticed borrowers to acquire risk secured loans. The borrowers signed contracts with
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the banks in exchange for more expensive products. Although the banks advertised a

1% interest rate, the borrowers were actually charged a 1.5% rate, and they would be

put under the adjustable rate mortgage. This caused negative amortization. Other

causes of the recession include deregulation and over-leveraging among others (Fried

36).

In response to the recession, Congress and the President introduced new

regulations to address issues such introduction of bank cushioning, consumer

protection, increased authority of the Federal Reserve in regulating financial

institutions, and regulation of the shadow banking system. The US president in 2012

proposed other regulations to reduce the capacity of banks to take part in proprietary

trading. The Emergency Economic Stabilization Act of 2008 was also enacted to

address the causes and effects of the recession to stabilize the economy and improve

liquidity in the country (Fried, 52).

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Works Cited

Fried, Joseph. Who Really Drove the Economy into the Ditch? New York, NY: Algora

Publishing, 2012. Print

Shiller, Robert J. The Subprime Solution: How Todays Global Financial Crisis

Happened, and What to Do about It. Princeton University Press, Princeton and

Oxford. 2008.