It has been nearly two years since we first began our Great Recession, diagnosis the worst phase of our economy since the Great Depression, but what caused this recession in the first place, and what are the possibilities of a “double-dip recession”?
Besides the corporate greed that was palpable during the 1980s, and into the 1990s, I believe that the first major event that became a great catalyst for our recession was the repeal of the Glass-Steagall Act. This piece of legislation, enacted during the Great Depression, banned banks from acting as insurance companies and investment banks. The repeal of this legislation allowed for banks, which were already huge, to merge, making them even bigger, thus beginning the age of “too big to fail” banks. An example of this was the merging of CitiBANK and Travelers INSURANCE. In fact, Robert Rubin, the Secretary of the Treasury under President Clinton, got a job at the newly merged Citigroup a year after that legislation was repealed
Also, during the 2000’s, Congress repetitively refused to regulate the laissez-faire style economy. Derivatives, or bets on the future prices of bonds, securities, and other financial instruments, were left unregulated. In 2004, banks were allowed to set their own amount of OUR money to risk. Some banks even went as far as risking 40 times the amount of money that they had.
Also, during this time frame, credit default swaps were becoming more common. These are unregulated, and they act like insurance for you. However, the ones in control of the credit default swaps are big businesses, and those investing in them wanted them to fail so they could win loads of money. The lack of regulating credit default swaps also contributed to our current recession.
And finally, mortgage lenders actually gained bonuses for making loans to those that could not afford them. From there, the banks bundled up those bad loans, packaged them up, got a Triple A ranking from rating companies like Moddy’s, Standard & Poor’s, and Fitch, which profited heavily from it, and sold them off to investors, tricking them into believing that they would offer big returns. Instead, they were toxic, and it fell apart in 2008.
One argument that I heard on the right was that the government OVERREGULATED, causing this recession. When I first heard that, I was like “WHAT!?” One of my friends gave me his interpretation: The government forced banks to make bad loans, causing this recession. Well, I looked into that, and this is what I found: The Community Reinvestment Act. That piece of legislation, originally passed in 1977, made it illegal to discriminate in poor and moderate income areas, a process known as redlining. The piece of legislation was altered over the years, but in my view, it didn’t cause the recession. I found no correlation against reducing discrimination in giving loans and our current recession. Plus, if it really had that big of a negative impact, our economy would have tanked a long time ago!
So the repeal of the Glass-Steagall Act and the deregulations, and the lack of regulations, in our economy, including on derivatives, credit default swaps, and the way lenders gave out profit-driven loans that they knew the buyer’s couldn’t pay back, caused this recession. So, to sum it up into one word: deregulation.
But what do we do from here? Well, we continue to invest into our economy using the principles of Keynesian economics. In case you don’t know, Keynesian economics calls for increasing spending, and the lowering of taxes for the middle and under classes, during tough economic times, to spur job growth, to invest in infrastructure, and to put people, temporarily and permanently, back to work, until the private sector grows back again. Once the economy improves to a healthy point, where barely anyone is out of work, THEN the government decreases spending, and increases taxes, to decrease the deficit that accumulated during the recession. The only problem, a problem that many European nations faced, is how and when to stop spending. That is one of the main reasons Keynesian is attacked by conservatives.
But what if we started to cut spending during a recovering economy? Well, that is already happening. Several states are increasing taxes, cutting spending, and laying off teachers, firefighters, police officers, and other public officials. What most of the states are doing is making our economy worse. Local politicians should realize that it is very dangerous to cut off the life support of a recovering economy. It is like pulling the plug on someone that is recovering in a hospital…that person will then die, or at best, suffer tremendously. And that is where our economy is potentially heading.
Not only are states doing regressive things to their economies, but the federal government is too. The Republicans in Congress, for example, voted nay to cut unemployment benefits and funds for veterans. Obviously, without a supermajority in the senate for Democrats, the Republicans are going to do all they can to obstruct legislation that would help our economy recover. In that process, they are harming the jobless, the poor, veterans, and other unfortunate people that suffered due to irresponsible and short term greed from both politicians and big corporations.
If this keeps up, we may face a “double-dip recession”. No you’re not going to get any germs from it…unless you lose your job, get sick, and can’t afford your medical bills, and then rake up mounds of debt because we don’t have universal healthcare! In all seriousness, though, a double-dip recession, as the name implies, means that the economy faces a downturn during its recovery. It occurred during the Great Depression for the exact reason it may occur now: because the government cut spending! Obviously our elected politicians are ignorant of American history if they believe that cutting spending is the answer to our problems.
Some economists are now predicting that the odds of a double-dip recession can be reached simply by flipping a coin. Well, let us hope that we land on the lucky.