What Can Cause the Biggest Recession in the US?

What Can Cause the Biggest Recession in the US?

A recession is a period of economic decline characterized by a significant decline in economic activity and widespread job losses. While various factors can cause recessions, some events can trigger a more severe downturn. 

In 2023, there is still a threat of a recession looming over the United States. According to Goldman Sachs Research, the consensus estimate is a 65% chance of a significant downturn in the American economy within the next 12 months. However, our economic analysis rates the probability much lower, at 35%.

Chief U.S. economist, David Mericle, and our chief U.S. political economist, Alec Phillips, provide insights into why the risk is lower and address some of the important questions the U.S. economy faces this year. Despite the uncertainties, policymakers and experts must remain alert and take necessary measures to minimize the impact of any future economic downturn.

What Can Cause the Biggest Recession in the US?

Loose Lending Criteria in the Housing Industry:

The housing industry played a significant role in the 2008 recession. Loose lending criteria allowed people to buy homes they could not afford, leading to a housing bubble. When the bubble burst, many people defaulted on their mortgages, causing a wave of foreclosures that affected the entire housing market. This, in turn, triggered a recession that lasted for several years.

Little Supervision of Non-Depository Financial Institutions:

Various factors, including the inadequate oversight of non-depository financial institutions, such as investment banks and hedge funds, influenced the 2023 recession. These institutions engaged in high-risk financial activities, such as investing heavily in subprime mortgages and leveraging excessively. 

The subprime mortgage market’s collapse resulted in significant losses for these institutions, leading to a domino effect that further contributed to the RecessionRecession.

The lack of proper supervision and regulations allowed these institutions to engage in such risky practices, ultimately leading to a severe economic downturn. Regulators and policymakers must strengthen oversight measures and implement effective regulations to prevent a similar crisis from happening in the future.

Excessive Investments and Deregulatory:

Excessive investments and deregulation can also contribute to a recession. This was evident in the 1990 recession, caused by a speculative boom in the stock and real estate markets. Investors bought stocks and real estate at inflated prices, leading to a bubble. When the bubble burst, investors lost a lot of money, which triggered a recession.

Financing Criteria That Are Too Lax in the Home Market:

Looking ahead to 2023, the real estate market is expected to slow down and return to a normal pace. While there will still be a year-over-year increase in home values, growth is predicted to be slow.

Although home inventory remains low, data suggests it will continue to increase throughout the year. These trends indicate that the real estate market is stabilizing, and buyers may have more options in the coming months. Prospective buyers and sellers need to closely monitor these trends to make informed decisions about their real estate investments.

Scary Wall Street Activities:

Wall Street activities can also contribute to a recession. This was evident in the dot-com crash of 2000, which was caused by excessive speculation in technology stocks. When the bubble burst, many investors lost a lot of money, which triggered a recession.

Weak Defenders: 

Weak defenders, such as weak regulations or consumer protections, can also contribute to a recession. This was evident in the Great Depression of the 1930s, which was caused by various factors, including weak banking industry regulations and consumer protections.

What happened in 2008!

The Crisis with Subprime Mortgages: 

The subprime mortgage crisis of 2008 was a major contributing factor to the RecessionRecession. Banks and other financial institutions made risky loans to people with poor credit, and these loans were packaged and sold as securities to investors.

When the housing market declined, many of these securities became worthless, triggering a crisis that contributed to the RecessionRecession.

The Stock Market Collapse of 2008:

The stock market collapse of 2008 was another significant factor that contributed to the Recession. Investors lost a lot of money in the stock market, leading to a decline in consumer spending and economic growth.

Major Financial Institutions Fell: 

Several major financial institutions, such as Lehman Brothers and AIG, collapsed during the 2008 recession. These collapses contributed to losing confidence in the financial sector and triggered a recession.

To Stop a Total Collapse of the American Economy: To stop a total collapse of the American economy during the 2008 recession, the Federal Reserve implemented two key programs:

The Troubled Asset Relief Program (TARP)

The Troubled Asset Relief Program (TARP) and The American Recovery and Reinvestment Act (ARRA) were two key programs implemented by the Federal Reserve during the 2008 recession to prevent a total collapse of the American economy.

TARP was created in October 2008 and authorized purchasing of up to $700 billion in toxic assets from banks and other financial institutions. 

These toxic assets were contributing to the financial crisis, and the program’s goal was to remove them from the balance sheets of these institutions and stabilize the financial system. Ultimately, the program was able to help stabilize the financial system and prevent a deeper recession.

The American Recovery and Reinvestment Act (ARRA) was signed into law in February 2009 and was designed to stimulate the U.S. economy. The program provided funding for infrastructure projects, education, healthcare, and renewable energy, among other things.

 It also provided tax relief for individuals and businesses, extended unemployment benefits, and provided aid to states to prevent layoffs of public employees. The goal of the program was to create jobs and stimulate economic growth.

 While there is debate about the program’s effectiveness, so it is generally believed to have positively impacted the U.S. economy by preventing a deeper recession and spurring economic growth.

Effects may be seen on US Sectors incase of RECESSION

A recent study by the World Bank suggests that the global economy may be moving towards a recession in 2023, as central banks worldwide hike interest rates to address inflation. This could lead to a series of financial crises in emerging markets and developing economies, causing long-term damage to these regions.

So the effects of this economic downturn are expected to be widespread, impacting sectors such as the housing market, financial sector, and general economy. The potential consequences of a global recession underscore the need for policymakers to take action to stabilize the economy and prevent such a crisis from occurring.

The Housing Market’s Rise and Fall: 

In the 2022- 2023 Recession, the housing market was one of the hardest-hit sectors. The housing bubble had been growing for years, and many people had taken out mortgages they could not afford. 

As the economy slowed down, people lost their jobs and could not make their mortgage payments. This led to a significant increase in foreclosures and a steep decline in housing prices. The impact of the housing market crash was felt across the country as homeowners saw the value of their properties plummet.

Effects on the Financial Sector:

So the financial sector was another sector that the RecessionRecession severely impacted. As people lost their jobs, they could not repay their loans, and banks began to experience significant losses. 

Many banks and financial institutions had invested heavily in the housing market, and as the market crashed, they were left with significant losses. This led to the failure of several large financial institutions, including Lehman Brothers, which was one of the largest investment banks in the world.

Impacts on the General Economy: 

The Great Recession had far-reaching impacts on the general economy. As unemployment rose and people began to struggle financially, they spent less money, which led to a decline in consumer spending.

 This, in turn, led to a decline in business revenues and increased business closures. The decline in economic activity led to a decrease in tax revenues, which significantly impacted government budgets. As a result, governments at all levels had to make difficult decisions about budget cuts and layoffs.

Problems for Financial Regulation: 

The Great RecessionRecession highlighted the need for better financial regulation. The failure of large financial institutions and the impact of their collapse on the broader economy showed that the financial sector needed more oversight. 

The U.S. government implemented several financial reforms in response to the Recession Recession, including the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act aimed to increase transparency and accountability in the financial sector and prevent another financial crisis.

How to Prevent Recession?

In 2023, it is crucial to take proactive measures to prevent another recession. The government can play a critical role in preventing a recession by taking appropriate measures.

Government Spending That Is Quite High:

 Government spending is one of the most effective ways to prevent a recession. The government can boost the economy by increasing infrastructure projects, education, and healthcare spending. The spending should be strategic and targeted toward sectors that will positively impact the economy. This will create employment opportunities and increase consumer spending, boosting the economy.

Support to MSME: 

Small and medium-sized enterprises (MSMEs) are significant contributors to the economy. The government can support MSMEs by offering tax incentives, grants, and low-interest loans. This will enable MSMEs to expand their businesses, create employment opportunities, and contribute to economic growth. By supporting MSMEs, the government can also promote entrepreneurship and innovation.

Gain the Confidence of Investors: 

Investors play a critical role in the economy. To prevent a recession, the government needs to gain investors’ confidence. The government can do this by creating a stable and predictable investment environment. The government should also promote transparency and accountability in the financial sector. This will increase investor confidence, leading to increased investments and economic growth.

How To Cope With An Economic Crisis:

Economic crises are unexpected events that can impact individuals and businesses. Coping with an economic crisis requires careful planning, a sound financial strategy, and adapting to changing circumstances.

While there are no guarantees in economics, a recession appears likely to hit in full force by the second quarter of 2023, and many American families are already living the reality of a recession thanks to inflation and rising interest rates. With a downturn soon, executives must prepare their companies to weather the storm and return stronger once it subsides.

Be Cautious and Try to Cut Costs: 

During an economic crisis, it is essential to be cautious with your finances. You can start by reviewing your expenses and identifying areas to cut costs. This might mean canceling unnecessary subscriptions or memberships, reducing utility bills, and avoiding luxury purchases. By cutting costs, you can save money and build up your emergency fund.

Paying Back Existing Debt:

 If you have existing debt, it is crucial to prioritize paying it back during an economic crisis. Paying back debt can help reduce your financial burden and improve your credit score. You can start by paying off high-interest debt, such as credit card debt, and then move on to other forms of debt.

Have an Insurance Strategy and Emergency Savings:

Having insurance and emergency savings is critical during an economic crisis. Insurance can help protect you from unexpected expenses, such as medical bills or home repairs. In contrast, emergency savings can help cover your expenses in case of job loss or income reduction.

Start Exploring Alternative Revenue Sources:

 During an economic crisis, it is essential to explore alternative revenue sources. This might mean taking on a part-time job, freelancing, or starting a business. By diversifying your income streams, you can reduce your financial risk and increase your earning potential.

Invest and Preserve Money: 

Investing and preserving money is crucial during an economic crisis. This might mean investing in low-risk assets, such as bonds or real estate, or preserving your money by keeping it in a high-yield savings account. Investing and preserving your money can ensure that it retains its value over time.

Handle Financial Posts Correctly: 

Handling financial posts correctly is essential during an economic crisis. You should review your financial statements regularly, monitor your credit score, and stay up-to-date with your bills and payments. You can avoid penalties, fees, and other financial consequences by handling your financial posts correctly.

Applying for a Loan for Productive Debt: 

During an economic crisis, taking out a loan to cover your expenses might be tempting. However, applying for a loan for productive debt is essential, such as investing in education or starting a business. Taking out a loan for productive debt can increase your earning potential and improve your financial situation over time.

Conclusion:

These include the lack of financial regulation and supervision of non-depository financial institutions, such as hedge funds and investment banks. Additionally, the world economy’s vulnerability to inflation and central banks’ response to it can lead to a global recession, affecting multiple sectors.

It is crucial for policymakers to remain vigilant and take necessary measures to prevent a severe economic downturn that could impact millions of people. The lessons learned from previous recessions can provide valuable insights into how to mitigate the risks and stabilize the economy in the face of new challenges.

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