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The 2007-08 Financial Crisis In Review
February 08, 2007
http://www.investopedia.com/articles/economics/09/financial-crisis-review.asp
When the Wall Street evangelists started preaching "no bailout for you" before the collapse of British bank Northern Rock, they hardly knew that history would ultimately have the last laugh. With the onset of the global credit crunch and the fall of Northern Rock, August 2007 turned out to be just the starting point for big financial landslides. Since then, we have seen many big names rise, fall, and fall even more. In this article, we'll recap how the financial crisis of 2007-08 unfolded. (For further reading, see Who Is To Blame For The Subprime Crisis?, The Bright Side Of The Credit Crisis and How Will The Subprime Mess Impact You?)
Before the Beginning
Like all previous cycles of booms and busts, the seeds of the subprime meltdown were sown during unusual times. In 2001, the U.S. economy experienced a mild, short-lived recession. Although the economy nicely withstood terrorist attacks, the bust of the dotcom bubble, and accounting scandals, the fear of recession really preoccupied everybody's minds. (Keep learning about bubbles in Why Housing Market Bubbles Pop and Economic Meltdowns: Let Them Burn Or Stamp Them Out?)
To keep recession away, the Federal Reserve lowered the Federal funds rate 11 times - from 6.5% in May 2000 to 1.75% in December 2001 - creating a flood of liquidity in the economy. Cheap money, once out of the bottle, always looks to be taken for a ride. It found easy prey in restless bankers - and even more restless borrowers who had no income, no job and no assets. These subprime borrowers wanted to realize their life's dream of acquiring a home. For them, holding the hands of a willing banker was a new ray of hope. More home loans, more home buyers, more appreciation in home prices. It wasn't long before things started to move just as the cheap money wanted them to.
This environment of easy credit and the upward spiral of home prices made investments in higher yielding subprime mortgages look like a new rush for gold. The Fed continued slashing interest rates, emboldened, perhaps, by continued low inflation despite lower interest rates. In June 2003, the Fed lowered interest rates to 1%, the lowest rate in 45 years. The whole financial market started resembling a candy shop where everything was selling at a huge discount and without any down payment. "Lick your candy now and pay for it later" - the entire subprime mortgage market seemed to encourage those with a sweet tooth for have-it-now investments. Unfortunately, no one was there to warn about the tummy aches that would follow. (For more reading on the subprime mortgage market, see our Subprime Mortgages special feature.)
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It's official: Recession since Dec. '07
December 01, 2008
NEW YORK (CNNMoney.com) -- The National Bureau of Economic Research said Monday that the U.S. has been in a recession since December 2007, making official what most Americans have already believed about the state of the economy .
The NBER is a private group of leading economists charged with dating the start and end of economic downturns. It typically takes a long time after the start of a recession to declare its start because of the need to look at final readings of various economic measures.
The NBER said that the deterioration in the labor market throughout 2008 was one key reason why it decided to state that the recession began last year.
Employers have trimmed payrolls by 1.2 million jobs in the first 10 months of this year. On Friday, economists are predicting the government will report a loss of another 325,000 jobs for November.
The NBER also looks at real personal income, industrial production as well as wholesale and retail sales. All those measures reached a peak between November 2007 and June 2008, the NBER said.
In addition, the NBER also considers the gross domestic product, which is the reading most typically associated with a recession in the general public.
Many people erroneously believe that a recession is defined by two consecutive quarters of economic activity declining. That has yet to take place during this recession.
This downturn longer than most
The NBER did not give any reasons or causes of the recession. But it is widely accepted that the housing downturn, which started in 2006, is a primary cause of the broader economic malaise.
The fall of housing prices from peak levels reached earlier this decade cut deeply into home building and home purchases. This also caused a sharp rise in mortgage foreclosures, which in turn resulted in losses of hundreds of billions of dollars among the nation's leading banks and a tightening of credit.
The current recession is one of the longest downturns since the Great Depression of the 1930's.
The last two recessions (1990-1991 and 2001) lasted eight months each, and only two of the 10 previous post-Depression downturns lasted as long as a full year, according to the NBER.
In a statement, White House Deputy Press Secretary Tony Fratto said that even though the recession is now official, it is more important to focus on the steps being taken to fix the economy.
"The most important things we can do for the economy right now are to return the financial and credit markets to normal, and to continue to make progress in housing, and that's where we'll continue to focus," he said. "Addressing these areas will do the most right now to return the economy to growth and job creation."
President-elect Obama's transition team did not have an immediate comment on the recession announcement. But other top Democrats said this is further proof of the need for another economic stimulus package, which Obama has advocated.
"With rising costs of living, rising unemployment, record foreclosures and depleted savings, we must do more to help families...
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Migration's Economic Tradeoffs: Farm Worker Wages and Food Costs
June 03, 2010
(June 2010) Migration is often characterized as either good or bad; migration is seen as a benefit for adding needed workers or blamed for depressing wages. In reality, most public policy choices are heated debates about which of two "goods" deserves higher priority, with no easy way to balance the tradeoffs. For example, raising interest rates can reduce inflation but increase unemployment, explaining the ongoing policy debate over which "good"—low inflation or low unemployment—should get higher priority.
Agriculture provides an example of tradeoffs between the "goods" of low food prices and decent incomes for farm workers. About 75 percent of the workers on U.S. crop farms were born abroad, mostly in Mexico. Over two-thirds of these immigrant farm workers are believed to be unauthorized. According to the U.S. Bureau of Labor Statistics' Consumer Expenditure Survey, there were 121 million "consumer units" in the United States in 2008. Each unit consists of an average of 2.5 persons, 1.3 wage-earners, and two vehicles. Average annual income before taxes was $63,600 and expenditures averaged $50,500 a year.
These expenditures included $6,400 for food (13 percent). Food spending was split between 57 percent for food eaten at home ($3,700 or $71 a week) and 43 percent for food bought away from home ($2,700 or $52 a week). To put the relatively low proportion of expenditures on food spending in perspective, $17,100 went toward housing and utilities; $8,600 for transportation; $3,000 for health care; $1,800 for apparel; and $2,800 for entertainment.
Americans spend relatively little on fresh fruits and vegetables. The average consumer unit spent more annually on alcoholic beverages ($444) than on fresh fruits and vegetables ($434). Even though there is little additional labor involved after some fresh fruits and vegetables leave the farm—strawberries are picked directly into the containers in which they are sold and iceberg lettuce gets its film wrapper in the field—farmers get a small share of the retail food dollar. In 2006, farmers received an average of 30 percent of the retail price of fresh fruits and 25 percent of the retail price of fresh vegetables. Annual expenditures of $434 per consumer unit come out to $120 to the farmer, and only one-third of this $120 went to farm workers, or $40 a year.1
What would happen to consumer food costs if farm wages rose and the extra costs were passed on to consumers? The average earnings of field workers were $9.78 an hour in 2008, according to a U.S. Department of Agriculture survey of farm employers, and a 40 percent increase would raise them to $13.69 an hour. If this wage increase were passed on to consumers, the 10 cent farm labor cost of a $1 pound of apples would rise to 14 cents, and the retail price would only rise to $1.04.
A 40 percent increase in farm worker wages would raise average consumer unit or household spending by just $16 a year, the cost of two movie tickets. However, seasonal farm workers employed 1,000 hours a year would see their earnings rise from $9,780 to $13,600, or from below to above the federal poverty line of $10,400 for an individual in 2008.
2007 economic forecast: Dollar decline, recession
January 02, 2007
Economists anticipate that the fall of the U.S. dollar in world currency markets that began in 2006 will accelerate in 2007.
“The dollar could lose as much as 30 percent of its value in 2007,” econometrician John Williams, who publishes the website Shadow Government Statistics, told WND. “In 2007, we are likely to see the economic downturn of 2006 develop into a structural recession and yet we have international trade and federal budged deficits careening out of control.”
Williams explained, “U.S. interest rates are still relatively low, compared to Europe. This will make it increasingly attractive for central bankers to consider moving foreign exchange reserves out of the dollar.”
The dollar, which began January 2006 at 88.86 on the FOREX international currency index ended the year at 83.67, a drop of approximately 6 percent. For the year, the dollar fell approximately 11.5 percent versus the euro, 13.6 percent versus the British pound, and by 7.3 percent versus the Swiss franc.
Bob Chapman, publisher of the economic newsletter The International Forecaster, told WND, “Central bankers in 2007 will begin to move away from the dollar in their foreign reserve holdings.”
Chapman’s Dec. 30 newsletter documented that the international move away from the dollar has already begun:
China, the second largest holder of U.S. debt, reduced purchases of U.S. bonds 1.7 percent in the first 10 months of the year. Central bankers in Venezuela, Indonesia and the UAE have said they will invest less of their reserves in dollar assets. Iran’s switch to euros is the greatest threat yet to dollar supremacy. The usage of the euro is now universal in Iran and it will spread to other Islamic oil-producing countries as well. The share of dollars as a percentage of OPEC foreign reserves has fallen from 67 percent to 65 percent in the first half of 2007.
Iran’s decision to hold only Euros may prompt a U.S. decision to launch a pre-emptive attack, Chapman speculated, with the public argument being Iran’s pursuit of nuclear weapons in defiance of the U.N. Security Council.
“Saddam Hussein signed his death warrant,” Chapman argued, “when he got the U.N. to agree that he could hold his oil-for-food reserves in euros. Ahmadinejad appears determined to go down the same path.”
Yet, the Federal Reserve finds itself in a dilemma, Chapman added. “The Fed will make an attempt sometime in 2007 to tighten rates in an effort to make yields more attractive and stem the tide of central banks fleeing the dollar,” he told WND, “but that will only expedite the fall of the housing market and quicken the U.S. recession which I believe began nearly 11 months ago, in February 2006.”
Williams agrees. “We are going to see a much lower dollar in 2007, especially against the euro, the British pound and the Swiss franc,” he said. “[Because of] the underlying fundamentals, such as U.S. economic activity versus European economic activity, the U.S. is struggling. The recession will be increasingly obvious as we proceed through 2007. Even worse, we have an inflationary problem with the higher oil prices over the last two years which are still working themselves into the system.”
In contrast, gold surged 23 percent in value last year, climbing to a 26-year high of $732 an ounce on May 12.