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The National Bureau of Economic Research announced on December 1, 2008 that the U.S. economy had entered into a recession in December of 2007. Since the announcement, the unemployment rate has continuously been rising, the stock market has crashed and real GDP has plummeted. This paper discusses the source of the economic recession. The primary cause of the current recession was the credit crisis caused by the collapse of the housing market. This research attempts to identify the causes of this collapse and why it resulted in such a severe and widespread recession. This research looks at four specific causes of the housing bubble: low mortgage rates, low short-term interest rates, relaxed standards for mortgage loans, and irrational exuberance. This paper focuses on how the federal government began to intervene in the economy in unprecedented ways, looking at each in depth. The level of government intervention in the economy prevented an even more severe economic downturn and the long-term impact of the government's intervention will be the increasing national debt. It is estimated how much longer the recession will last. It is forecasted how much higher the unemployment rate will rise. We also answer the question of when the economy will begin to recover and how strong that recovery will be. Most importantly, we will look at how this recession has had a significantly negative impact on the global economy.

Introduction

The National Bureau of Economic Research announced on December 1, 2008 that the U. S. economy had entered a recession in December of 2007. The main economic indicators began to show an economy that was quickly beginning to fall apart. The unemployment rate increased from 4.9% in December 2007 to 9.6% in September 2009. The job market is looking more and more dismal as the years have been passing by since the recession was announced. This past year has undoubtedly brought many changes and challenges to both employers and employees. Layoffs, pay cuts and furloughs have been widespread, thus contributing to a job market saturated with qualified candidates competing for fewer jobs. Many students have decided to go straight to graduate school due to a dismal job market, others have decided that it's the right time to come back to school. Despite this steep competition among candidates, employers struggle to find professionals with in-demand skill sets. We are now facing times in which a college degree, whether it is a B.A., M.A. or Ph.D., will not be of and by itself a guarantee of employment security in the foreseeable future. The good jobs, of course, will go to the ablest, those with the best education and experience. A sluggish economy and an increasing proportion of college graduates in the population means that currently and also in the foreseeable future, a larger number of graduates will have to seek and accept employment at a level below their aspirations and abilities. In fact, Heisz et al. (2006) look at the short- and long-term career effects of graduating in a recession.

Unemployment is one of the most important economic indicators that has been suffering, but there are other macro variables that have fallen apart as well. The Dow Jones Industrial Average reached a peak of 14,278 on October 11, 2007 but fell to 6,440 on March 9, 2009, a drop of almost 55% from the peak. Real GDP increased by only 1.1% for the year of 2008. Real GDP decreased at annual rates of 6.3% in the 4th quarter of 2008 and of 5.7% in the 1st quarter of 2009. For the fiscal year ending September 30, 2008, the federal budget deficit was $455 billion. By the end of May 2009, just eight months later, the federal budget deficit reached $991.9 billion. This occurred due to the economic stimulus plans enacted in October of 2008 and February of 2009, as well as much higher federal spending for unemployment and other benefit programs. Meanwhile, tax revenues are running much lower this year compared to last, as shown by Abolafia (2005). It is interesting to keep in mind that in October of 2008, the U.S. budget deficit was only $438 billion.

This paper discusses the sources of the economic recession in Section I, while looking at ways the federal government intervened in Section II. In Section III we discuss the future of the recession, while in Section IV we look at the global impact the recession has had. Section V wraps up the paper with concluding remarks.

I. Sources of the Recession

a. Collapse of the Housing Market

Many agree that the primary cause of the current recession was the credit crisis caused by the collapse of the housing market. The US economy is in danger of a recession that has proven to be unusually long and severe. By any measure it is in far worse shape than in 2001 through 2002 and the unraveling of the housing bubble is clearly at hand. The sagging real estate market in 2007 left everyone no doubt that the housing bubble was quickly crashing and that hard times were on the way. The slump in home prices from the end of 2005 to the end of 2006 was the biggest year over year drop since the National Association of Realtors started keeping track in 1982. The Commerce Department announced that the construction of new homes fell in January by a whopping 14.3%. Prices fell in half of the nation's major markets and existing home sales declined in 40 states. Arizona, Florida, California, and Virginia have seen precipitous drops in sales.

Baker and Rosnick (2009) describe the severity of the housing market meltdown, coupled with the recent collapse of the stock market has had a severe negative impact on the wealth of the baby boom cohorts aged 45 to 54 and 55 to 64. Using data from the 2004 Survey of Consumer Finance and the November 2008 Case-Shiller 20 City Price Index, the authors create three possible scenarios for baby boomer wealth and find these households will enter retirement with little wealth beyond Social Security. For each cohort in 2004 and 2009, the paper analyzes net worth, financial assets, equity in real estate, percent of households in each cohort who will need cash to close on their primary residence, net worth of homeowners, net worth of non-homeowners, and the percent of homeowners who would need cash to close on their primary residence. This research attempts to identify the causes of this collapse and why it resulted in such a severe and widespread recession.

b. Four Causes of the Housing Bubble

There are four specific causes of the housing bubble: low mortgage rates, low short-term interest rates, relaxed standards for mortgage loans,