What are the main causes the recession?

Answer 1

You will hear many opinions but it was clearly an irresponsible lack of reasonable securities regulations, brought on by political zeal to deregulate private business.

In 1995 JP Morgan got Congress to legalize what are called "Credit Default Swaps," which are just insurance policies by another name, but they are free of insurance policy requirements that they be financially sound, backed by asset reserves insurance policies. A CDS was issued by anybody for the premium (not just insurance companies), just a contract.

CDSs are sneaky though because they also allow people to insure things they don't own, which is another way of saying "gambling." Ordinarily people can only insure investments and things they own, such as your car or a lender buying mortgage insurance to protect against a borrower's defaulting. But you could get a CDS on anything, that paid off on whether someone else's stock went up or down for example.

A long time ago they allowed gambling on other people's assets, gambling on stock values (without actually buying the stock) at what were called "bucket shops." But it was outlawed in 1915 under all state's laws because of the financial disasters it caused --but Congress overruled them in 1995.

After the Dot.com collapse of 2001 the Fed lowered interest rates to get us out of the Dot.com bust recession and investors invested in real estate. But because mortgages could now be 'insured' with CDS's (who had no real standards or even a central marketplace. totally unregulated), Wall Street and the banks could sell bundles of mortgage loans stamped "AAA insured" as "mortgage backed securities," sell stock in them on Wall Street. Real estate values rocketed up , up and up, 15% per year. Today, as of 3/11, oustanding Credit Default Swaps 'insure' some $45 TRILLION (with a T) dollars!

Soon they were loaning money to anyone and everyone, to "sub-prime" (unqualified) borrowers to buy real estate because it was just going up (and the mortgages could be 'insured' and sold to investors). The banks were effectively not really even loaning their own money, they sold off the mortgages, so they did not care.

It was great for a while, people could even borrow more money on their houses as real estate values increased. Any borrower could just sell the property for a profit if they could pay the mortgage so there was no risk. The borrowers, Stock Market and executives made huge amounts of money.

But sooner or later the Ponzi scheme gave out, people thought real estate prices were insane, weak borrowers could not borrow enough to pay their mortgages, foreclosures mounted and the whole house of cards fell down. No one wanted to buy real estate and prices plummeted.

Had the U.S. Congress not bailed out banks with $3 trillion most of those CDS's would have become due and defaulted on and most banks would have gone bankrupt, the entire world financial system would have been destroyed. (The US even had to buy the AIG insurance company so they could payoff about $100 billion in CDS "polcies" that did become due.)

If they had not, instead of 10% national unemployment you would have had something the like 50% unemployment of the Great Depression.

WE DODGED A BULLET so far. Currently, as of 3/11, the banks are complaining about regulations yet Credit Default Swaps are still legal. Housing has another 10-20% drop to go before it reaches prices that actually reflect what people can pay for housing. And about a fifth of the houses have bigger mortgages on them than they are worth.