Introduction to Big Recession

Ten years ago, the big recession was appeared, and it created distrust about the studies of macroeconomics and its application. After the depression of 1929 (“the crash of 29“), there were many advances in the area of macroeconomics. Some informs said that with the new advances of this science, States were able to guarantee the equilibrium in macroeconomic terms to maintain the production and employment in maximum inside the stability of prices.

One of the main causes was 15th of September of 2008, after 158 years of operate, Lehman Brothers, the forth bank bigger of United States of America broke. With this fall, the time of golden age of Investment bank was finished and it gave rise to what is now know “The Big Recession”.

In specific terms, when Lehman Brothers was fallen, the financial market presented their most pronounced falls since the attacks of Twin Towers on September 11, 2001. To reactive the economy, central banks:

  • Decreased the reference interest rate to promote families to consume and invest more.
  • Maintained levels around 1%. As it was so cheap to borrow, there was an excessive spending of United States citizens mainly for the purchase of houses, some of them by necessity, others to speculate.

Banks granted numerous mortgage loans to clients without enough support, that is, with low levels of income, high levels of delinquency, people without jobs… Therefore, they were mortgages of high level of risk because banks were granted to people with low credit rating, for this reason they were called “subprime” mortgages.

In this way the banks created “packages” with different mortgage credits in a single title to exchange it in the financial market.

But the biggest problem, it was that the debtors stopped paying at the same time. Everything worked well if people paid their debts and the price of homes increases. But the federal reserve in 2004 decided to raise the interest rate, to control inflation. Step from 1% to 5%.

Therefore, the credit rates were becoming more expensive. Due to the low credit rating, the debtors stopped paying their mortgages, the increase in housing supply was greater than the demand. In this way prices started to fall.

In addition, the financial institutions of both the United States and Europe and Asia had titles associated with the US financial market were affected by the default of debtors. “In the good times of happiness, nobody dares to stop the party“.

The crisis of the financial system led to the world falling in big economic recession. In 2009, the global GDP was reduced around 1.68%