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What Was the Great Recession? How Did It Affect the World?

What Was the Great Recession? How Long Did It Last? The most severe economic downturn since World War II occurred between December 2007 and June 2009….

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What Was the Great Recession? How Long Did It Last?

The most severe economic downturn since World War II occurred between December 2007 and June 2009. During this period, hundreds of banks failed, millions of homes went into foreclosure, and Americans lost over $14 trillion in net worth. Unemployment levels swelled from 5% in 2007 to 10% in 2009.

A recession is defined as two consecutive quarters of contraction in gross domestic product (GDP). During a recession, companies fold, people lose their jobs, and manufacturing output declines on lower demand.

The recession of 2007–2009, however, is known as the Great Recession, with “great” being defined as “large,” and not “excellent,” because it lasted longer than other recessions and had widespread global effects. Typically, recessions average 11 months, while this one stretched for over 18 months. in addition, its severity rivaled the Great Depression in terms of GDP decline as measured from peak to trough; hence, it earned a similar moniker.

As a result of the Great Recession, the U.S. government made sweeping regulatory reforms, provided millions of dollars in housing credits to beleaguered homeowners, and “bailed out” key financial players, like Bear Stearns and AIG. In order to restart the economic engine, the Federal Reserve slashed interest rates down to zero—for the first time in history.

But just what caused this crisis?

What Started the Great Recession? Who Was Most Affected?

The red-hot U.S. housing market accounted for nearly half of all new jobs created in the early 2000s—it seemed like nothing could go wrong in the housing sector, before everything quickly did. Housing prices had doubled since the 90s, first-time homeownership rates were soaring, and investment banks were trading mortgage debt for profits around the world. An asset bubble had formed in the housing sector, and when that bubble burst, it set off a series of events with dire consequences.

Subprime Mortgages Imploded

Subprime mortgages—a new category of mortgage that was introduced in this period—allowed consumers with less than perfect credit to purchase homes of their own. These mortgages reset at higher rates—often every year—in accordance with their loan terms or whenever prevailing interest rates rose.

Subprime loans were often poorly explained and targeted toward low-income buyers who did not understand just what they were getting into by predatory lenders. In addition, between 2004 and 2006, the Fed increased the Fed Funds Rate from 1.0% to 5.25%, and as a result, millions of subprime borrowers were unable to make their home payments and thus defaulted on their loans.

The Mortgage Industry Entered Crisis Mode

With mounting losses on their balance sheets, dozens of subprime mortgage lenders went into bankruptcy. In addition, government-sponsored enterprises Fannie Mae and Freddie Mac had taken on trillions of dollars of leveraged loan guarantees—they teetered on the brink of insolvency before the U.S. government sent them emergency funding and placed them under conservatorship.

Financial Firms Collapsed After Taking on Excessive Risk

Banks had pooled together thousands of home loans into mortgage-backed securities, with the riskiest pools, or tranches, containing subprime mortgages. To offset their increased risk, these securities boasted high yields, which enticed institutional investors like hedge funds, money market funds, and insurance companies.

Clearly, toxic subprime debt had invaded the economy at every level, and when the bubble burst, a panic broke out, followed by a wave of capitulation. Many mortgage-backed securities became worthless, and their bond funding collapsed. Banks experienced a credit crunch, which meant they no longer had the funds to lend to one another, leaving many on the brink of failure.

On September 15, 2008, Lehman Brothers, one of the world’s largest investment banks, declared bankruptcy. It was heavily leveraged in subprime debt, and its failure would be the largest in U.S. history. President George W. Bush coined the term “too big to fail,” as he called for the U.S. government to step in with emergency aid to prevent other companies from going under and avoid a global financial meltdown. The U.S. government also bailed out AIG, an insurance behemoth, and Bear Stearns, another large investment bank.

In response to the collapse of Lehman Brothers, the Dow Jones Industrial Average fell more than 500 points in September 2008, which resulted in its largest single-day point decline in almost a decade. On December 1, 2008, the National Bureau of Economic Research officially declared that the U.S. economy had entered a recession as of December 2007.

How Did the Great Recession Affect the World?

The Great Recession didn’t just affect the United States; all countries with rapid credit growth and large account deficits were impacted. Global trade nearly collapsed, declining by 15% between 2008 and 2009. Global unemployment rose by 3 percent between 2007 and 2010 for an astounding 30 million total jobs lost.

While investment banks and commercial banks were declaring bankruptcy in Europe and South America, fund inflows from developing nations in East Asia and the Middle East had actually contributed to the U.S. mortgage market before its implosion.

In addition, Europe had experienced its own housing bubble, with home prices in Ireland, Iceland, Spain, and Denmark swelling before losing as much as 40% of their total value by the end of 2011.

To make matters worse, many European countries “bailed out” failing banks with taxpayer money, causing budget deficits to surge. Fears were mounting that governments would default on their debts, causing interest rates to skyrocket while currencies lost their value.

Greece declared a financial emergency in October 2009 and needed a 45-billion-euro bailout from the European Union and the International Monetary Fund. Greek government bonds were downgraded to junk status, and when the Greek government announced a series of fiscal austerity measures, Greek citizens responded with protests, riots, and unrest. The entire European continent experienced a sovereign debt crisis that lasted from 2009 through 2010.

Who Was to Blame for the Great Recession?

Interestingly, analysts believe the Federal Reserve could be both the Great Recession’s cause and its solution. Critics argue that Alan Greenspan, who chaired the Federal Reserve from 1987 to 2006, had kept interest rates too low during the aftermath of the dot-com bubble in the early 2000s, creating an economic boom that was simply unsustainable. Greenspan himself admitted in 2005 that there was a bubble in the housing sector, stating, “At a minimum, there's a little ‘froth’... It's hard not to see that there are a lot of local bubbles.”

Other critics believe that Ben Bernanke, Fed Chair from 2006 to 2014, should have immediately lowered interest rates in the aftermath of the collapse of Lehman Brothers, and by waiting several weeks to do so (until the October 2008 FOMC meeting), the Fed had set the expectation that it would keep monetary policy tight, thus causing the markets to tumble.

How Was the Great Recession Resolved?

But the Fed has also been praised for its efforts to inject emergency funding to stave off a second Great Depression, and it is also credited with the market’s eventual rebound. The Fed kept interest rates at nearly zero for an unprecedented 6-year period, from 2008 to 2014.

It also injected more than $4 trillion to the financial system through quantitative easing measures, which added liquidity to the markets and made it easier for banks to lend.

The “Bailout Bill,” adopted by the U.S. Congress in September 2008, sent $700 billion in emergency aid to banks and financial institutions, while the Troubled Asset Relief Program (TARP) added billions more to stabilize financial markets through federal investment in mortgage-backed securities and banks. The economy was jumpstarted again, and it would go on to grow an average of 2.3% per year from the middle of 2009 through 2019.

The U.S. Congress also passed measures intended to increase regulation over the financial sector. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, prohibited banks from taking future speculative risks. It also created the Consumer Financial Protection Bureau to safeguard homebuyers. President Barack Obama sent temporary tax credits to homeowners, and banks were encouraged to rework payments with “underwater” borrowers instead of seeking foreclosure.

The financial industry lost 4% of its workers during the Great Recession; these jobs went to other industries, like healthcare and education. Unemployment levels would bottom out in 2010 before beginning a decade-long rebound that would only be hampered by the COVID-19 crisis.

Could Another Great Recession Happen?

TheStreet.com’s Daniel Kline says that inflated prices and rising interest rates have people concerned about a repeat of the 2008 housing crash.

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Spread & Containment

$265 Billion In Added Value To Evaporate From Germany Economy Amid Energy Crisis, Study Warns

$265 Billion In Added Value To Evaporate From Germany Economy Amid Energy Crisis, Study Warns

A new report published by the Employment Research…

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$265 Billion In Added Value To Evaporate From Germany Economy Amid Energy Crisis, Study Warns

A new report published by the Employment Research (IAB) on Tuesday outlines how Germany's economy will lose a whopping 260 billion euros ($265 billion) in added value by the end of the decade due to high energy prices sparked by Russia's invasion of Ukraine which will have severe ramifications on the labor market, according to Reuters

IAB said Germany's price-adjusted GDP could be 1.7% lower in 2023, with approximately 240,000 job losses, adding labor market turmoil could last through 2026. It expects the labor market will begin rehealing by 2030 with 60,000 job additions.

The report pointed out the hospitality industry will be one of the biggest losers in the coming downturn that the coronavirus pandemic has already hit. Consumers who have seen their purchasing power collapse due to negative real wage growth as the highest inflation in decades runs rampant through the economy will reduce spending. 

IAB said energy-intensive industries, such as chemical and metal industries, will be significantly affected by soaring power prices. 

In one scenario, IAB said if energy prices, already up 160%, were to double again, Germany's economic output would crater by nearly 4% than it would have without energy supply disruptions from Russia. Under this assumption, 660,000 fewer people would be employed after three years and still 60,000 fewer in 2030. 

This week alone, German power prices hit record highs as a heat wave increased demand, putting pressure on energy supplies ahead of winter. 

Rising power costs are putting German households in economic misery as economic sentiment across the euro-area economy tumbled to a new record low. What happens in Germany tends to spread to the rest of the EU. 

There are concerns that a sharp weakening of growth in Germany could trigger stagflation as German inflation unexpectedly re-accelerated in July, with EU-Harmonized CPI rising 8.5% YoY. 

Germany is facing an unprecedented energy crisis as Russian natural gas cuts via the Nord Stream 1 pipeline will reverse the prosperity many have been accustomed to as the largest economy in Europe. 

"We are facing the biggest crisis the country has ever had. We have to be honest and say: First of all, we will lose the prosperity that we have had for years," Rainer Dulger, head of the Confederation of German Employers' Associations, warned last month. 

Besides Dulger, Economy Minister Robert Habeck warned of a "catastrophic winter" ahead over Russian NatGas cut fears.

Other officials and experts forecast bankruptcies, inflation, and energy rationing this winter that could unleash a tsunami of shockwaves across the German economy.  

Yasmin Fahimi, the head of the German Federation of Trade Unions, warned last month:

"Because of the NatGas bottlenecks, entire industries are in danger of permanently collapsing: aluminum, glass, the chemical industry." 

IAB's report appears to be on point as the German economy seems to be diving head first into an economic crisis. Much of this could've been prevented, but Europe and the US have been so adamant about slapping Russia with sanctions that have embarrassingly backfired. 

Tyler Durden Wed, 08/10/2022 - 04:15

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International

“Anything But A Cashless Society”: Physical Money Makes Comeback As UK Households Battle Inflation

"Anything But A Cashless Society": Physical Money Makes Comeback As UK Households Battle Inflation

The World Economic Forum (WEF) has been…

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"Anything But A Cashless Society": Physical Money Makes Comeback As UK Households Battle Inflation

The World Economic Forum (WEF) has been pushing hard for a 'cashless society' in a post-pandemic world, though physical money has made a comeback in at least one European country as consumers increasingly use notes and coins to help them balance household budgets amid an inflationary storm

Britain's Post Office released a report Monday that revealed even though the recent accelerated use of cards and digital payments on smartphones, demand for cash surged this summer, according to The Guardian. It said branches handled £801mln in personal cash withdrawals in July, an increase of 8% over June. The yearly change on last month's figures was up 20% versus the July 2021 figure of £665mln.

Across the Post Office's 11,500 branches, £3.31bln in cash was deposited and withdrawn in July -- a record high for any month dating back over three centuries of operations. 

The report pointed out that increasing physical cash demand was primarily due to more people managing their budgets via notes and coins on a "day-by-day basis." It said some withdrawals were from vacationers needing cash for "staycations" in the UK. About 600,000 cash payouts totaling £90mln were from people who received power bill support from the government, the Post Office noted. 

Britain is "anything but a cashless society," according to the Post Office's banking director Martin Kearsley.

"We're seeing more and more people increasingly reliant on cash as the tried and tested way to manage a budget. Whether that's for a staycation in the UK or if it's to help prepare for financial pressures expected in the autumn, cash access in every community is critical," Kearsley said.

We noted in February 2021, UK's largest ATM network saw plummeting demand as consumers reduced cash usage. At the time, we asked this question: "How long will the desire for good old-fashioned bank notes last?

... and the answer is not long per the Post Office's new report as The Guardian explains: "inflation going up and many bills expected to rise further – has led a growing numbers of people to turn once again to cash to help them plan their spending." 

So much for WEF, central banks, and major corporations pushing for cashless societies worldwide, more importantly, trying to usher in a hyper-centralized CBDC dystopia. With physical cash back in style in the UK, the move towards a cashless society could be a much more challenging task for elites than previously thought. 

Tyler Durden Wed, 08/10/2022 - 02:45

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International

Something Just Doesn’t Add Up In Chinese Trade Data

Something Just Doesn’t Add Up In Chinese Trade Data

By Ye Xie, Bloomberg markets live commentator and reporter

An unusual discrepancy has…

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Something Just Doesn’t Add Up In Chinese Trade Data

By Ye Xie, Bloomberg markets live commentator and reporter

An unusual discrepancy has showed up in two sets of trade data in China. Depending on which official sources you use, China’s trade surplus, could either be overstated or under-reported by a staggering $166 billion over the past year.

China watchers cannot fully explain the mystery. It’s as if Chinese residents bought a lot of stuff overseas, and instead of shipping the items home, they were kept abroad for some reason.  

China’s exports have been surprisingly resilient, despite a slowing global economy and Covid disruptions. On Monday, General Administration of Customs data showed China’s exports increased 18% in July from a year earlier. In contrast, imports grew only 2.3%, reflecting weak domestic demand.

The result is China’s trade surplus keeps swelling, which has underpinned the yuan by offsetting capital outflows. The surplus over the past year amounted to a record $864 billion, more than double the level at the end of 2019.

But when comparing the Customs data with that from the State Administration of Foreign Exchange (SAFE), a different picture emerges. The SAFE data shows the surplus is growing at a much slower pace -- about 20% less than the customs figure

The two data sets used to track each other closely. SAFE typically reports fewer imports, thus a higher surplus, because it excludes costs, insurance and freight from the value of goods imported, in line with the international standard practice, Adam Wolfe, an economist at Absolute Strategy Research, noted.

The other adjustments that SAFE does include:

  • It only records transactions that involve a change of ownership;
  • It adjusts for returned items;
  • It adds goods bought and resold abroad that don’t cross China’s border, but result in income for a Chinese entity -- a practice known  as “merchanting.”

The relationship between the two data sets has flipped since 2021, as SAFE reported higher imports, resulting in a smaller surplus than the Customs data.

It’s particularly odd because it happened at a time when shipping costs skyrocketed. When SAFE removes freight and insurance costs, it would have resulted in even lower, not higher, imports.

Taken at face value, the discrepancy suggests that somebody in China “bought” lots of goods from abroad, but they have never arrived in China. These transactions would be recorded by SAFE as imports, but not at the Customs office.

Craig Botham at Pantheon Macroeconomics, suspects that Covid-19 may be playing a role here. Foreign firms unable to manufacture in factories elsewhere during the pandemic might have transferred materials to China for assembly, a transaction excluded by SAFE.

Could Chinese buyers overstate their foreign purchases to SAFE, which regulates the capital account, so they can move money out of the country? The cross-border transactions show there was widespread overpaying for imports in 2014-2015, during a period of intense capital flight, but not at the moment, Wolfe pointed out.

Source: Absolute Strategy Research

The bottom line is that there aren’t many good explanations. As Alex Etra, a senior strategist at Exante Data, said, there’s “no smoking gun” to suggest something fishy is going on.

It’s another mysterious puzzle waiting to be solved.

Tyler Durden Tue, 08/09/2022 - 22:28

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