Here is the unemployment rate over the last ten years:
What happened in 2008? Is that just what a recession looks like? Wouldn’t the change in unemployment be more gradual? Does the housing crisis share any of the blame for that?
Can someone explain that spike as if you were talking to a small child with a tenuous grasp on economics?
-Tom
If it’s any consolation*, the decrease is probably far less than it appears, once you factor in underemployment and workers who have given up seeking!
* It’s not! Hooray!
I lack the economics background to provide an answer to your actual question that would be particularly illuminating, so we’ll just have to wait until someone comes around with the Hard Factz.
I’m not an expert, merely someone who follows these things somewhat closely.
To get to your point about ‘is this what a recession looks like’, basically yes, exactly that. Now not all will look the same, this one merely had several negative feedback loops increasing the severity.
So short version: there are a lot of bad bank assets out there, ones that are being misrepresented to various places in regards to security. These things are basically housing loans that have been chopped up into thousands of pieces, an individual’s housing loan may be spread among dozens of securities, and sold.
Mortgage Backed Securities (which are what I will refer to as securities from here out) are basically a bundle of many fragments of loans. Any individual security will have a tiny percentage of an individual loan, with many loans compiled together. These are then sold to pension funds, various investment firms, etc. There is a risk, and a certain rate of default baked into them. That way if any individual loan defaults it has a small impact on many investors, instead of big impact on a few.
So these were sold, while the banks were deliberately deceptive about the risk, returns, and default rates. See that’s where sub prime loans come in. Not to go down that rabbit hole, but the short version is that banks knowingly and intentionally sold loans in such a way to increase their profit, knowing there was a higher risk due to them selling these shady loans. But they’re bundling them up and selling them as securities, so they are not on the hook when the default rates spike (as they did in 2007-8 when sub prime loans went bust big time).
This devastated many sectors of finance. Relaxed regulations had allowed places to overextend themselves, to lie and cheat the public, all in the name of short term profits. As the loans started to implode, the scale rippled. Places that had invested based on a set risk, for a set return, lost their shirts (why many pension funds got killed, California in particular was a big investor in these).
Fast forward a bit, and the money that greases the economy is dried up. Business loans are harder to get, many companies lost their cash funds, and as a result companies go out of business, cut back production, and lay off workers. Because the banks are in a mess of their own making the economy grinds to a halt. And because it is the banks access to capital, which might have otherwise have lessened the severity, you see the economy shedding upwards of 800k jobs a month.
Double the fun as banking is global, meaning that Europe, Japan, etc. all hit the same wall. Meaning that imports and exports dropped massively across the board, making recovery harder.
2008 was the largest economic upheaval to hit this country - and the entire world - since the Great Depression of the 1930s. A normal recession bears the same resemblance to the 2008 crisis as that 3.5 tremor you think is a big truck passing by has to to the 6.9 quake that hit San Fransciso that knocked over a freeway and killed 60 people. (Continuing the analogy, 2008 in turn was to the Great Depression as the '89 quake was to the great 1906 quake that killed hundreds.)
Switching metaphors from earthquakes to fires, the housing crisis was the match that started the fire. When it was discovered that vast numbers of mortgages were in fact worthless, a huge amount of wealth that people believed existed vanished. The effects of this sudden disappearance of wealth traveled throughout the economy - banks suddenly discovered that they didn’t really have as much money as they thought, so they stop giving loans, so businesses stop expanding, etc. This becomes a vicious cycle: the fire of a business downturn feeds on itself. All of this results in business closures, layoffs, and unemployment.
See The Big Short for more info about the housing crisis (but you already knew that.)
P.S. - Graduating into this bumblefuck was (and has continued to be) an enormous boon to my personal financial status. Along with the millions of other kids who got dumped out into the dumpster fire.
At the end of 2008 there was a real fear that the economy was just going to seize up due to the factors above. This is why Paulson was in such a panic and why a Republican President pushed through a huge stimulus package at the end of the year. There was also the risk that America’s entire auto industry would fail - that’s millions of jobs all tied together.
It was a huge mess.
I am not sure actual economists have more than a tenuous grasp.
The short story is that the entire construction industry had huge losses because banks wouldn’t loan new construction and already underway projects were all of a sudden underwater. The financial industry obviously took a huge hit. People with money were afraid of losing their jobs so put off purchases and stopped eating out. This hit retail hard. Lots of businesses delayed hiring out of uncertainty.
The Bureau of Labor Statistics has a short non technical pdf with plain text explanations and numbers by industry.
http://www.bls.gov/mlr/2011/04/art1full.pdf
Count me as part of that 2009 Spike
Basically, this is what a financial crisis looks like. The housing bubble caused a huge debt overhang in the private sector (people who owed a lot on mortgages so either couldn’t sell their house or take loans to improve it, or had to declare bankruptcy and hopefully find someone to consign a lease). The bad math of mortgage-backed securities caused a huge reduction in the total amount of money, the extent of which became clear with the Lehman collapse (the banks calculated the risk of default as if each loan’s circumstances were completely independent, when, in fact, they all were affected by housing prices - once those prices dipped, the default rate skyrocketed and the value of those assets plummeted). With private citizens having less money to spend (because they were paying off debt) and companies having less money (because their investments were suddenly worth less), a massive hiring freeze spread across the economy. Some places went out of business because of the lack of spending at retail, but a lot of that unemployment run-up would probably have been natural churn that simply turned into people not being able to get back into the workforce.
Same, that was a really dumb year to graduate from a private university with a degree in Philosophy and 80K in student debt.
It was an absolute miracle we avoided the 2nd Great Depression. This is the big reason why many Millenials will never be republicans.
I worked for a company who sold widgets to companies like EMC, Cisco, Ericsson, Huawei, and Lucent. They were cancelling orders like mad. Revenue forecasts were falling off a cliff. So they laid off a ton of people. Fortunately, I survived. Of course, there were no raises or incentives that year, and health insurance benefits were cut and premiums went through the roof. That’s why they say mean household income hasn’t really gone up in over 15 years.
The structural problems go far past the last 15 years- they go all the way back to Reagan. It’s really been since Carter era.
If you like to be entertained while be horrified, Too Big To Fail is a decent movie depiction.
This easily digestible Frontline piece summarizes the 2008 crash nicely IMO.
Honestly, I have no idea why @tomchick didn’t just tweet #realdonaldtrump to get the skinny on the '08 crisis, its causes and how it could have been avoided.
Thanks for the replies, guys. That’s exactly the info I was looking for. And, Lantz, this…
…is absolutely perfect. Jeeze, when did P&R become such a helpful asset?
I know, right? But that’s the main reason I was looking at this. I’m trying to parse the Republican narrative about the economy being in shambles.
-Tom
I always find this analysis of Bush’s tax plan before it was implemented the best way to frame current Republican thinking:
http://origin.heritage.org/Research/Reports/2001/04/The-Economic-Impact-of-President-Bushs-Tax-Relief-Plan
The final results show that the Bush plan would significantly increase economic growth and family income while substantially reducing federal debt.3
The other thing right-wingers love to do is point out Detroit as the prima facie example of liberal policies.
This academic opinion offers a slightly more nuanced view.*
They offer data* to support their argument.
** N,B, Republicans tend to as a party reject data.
Try being a graduating econ student while this is going on- which was the situation I was in. On one hand, you’re fascinated by how things are falling apart, on the other- you worry about how you’ll get a job. Economics made me decide to become a weatherman.
I’m just glad we didn’t get it as bad as Europe did.
We rejected the austerity measures Britain and Europe embraced. This, as much as anything, shows that countercyclical government spending (debt backed stimulus in a recession) is the proper answer economically.
The effects of austerity can be seen here:
1.0 is the 2008 quarter 1 baseline, basically before the floor fell out. This measures for, after inflation, the size of a countries economy. So .8 would mean the economy is 80% as large as it was pre recession. The country that faced the harshest austerity, Greece, is that teal line at the bottom, reading about .72. The top line is Ireland, but close is the US. As you can see the US, which rejected austerity measures mostly, outperforms almost everyone else. The recession was not as deep, and the recovery sooner and stronger.
The UK, which is probably the most economically similar to the US, took until about 2015 to reach their previous economic output, while the US reached that level sometime in 2011/ early 2012.
There’s obviously more to it than simply austerity= bad, as you can see Italy and others have done particularly poorly in recovery, but there are a few good data points showing that austerity did not work.
Yes, and also bear in mind that something like a quarter of all (private sector?) jobs created during the Bush years were in construction, so when it fell off a cliff, the impact on overall unemployment was particuarly dramatic.