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After the Great Recession; the Laws of Unintended Consequences

De Koning, Kees (2019): After the Great Recession; the Laws of Unintended Consequences.

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The United States (U.S.) financial crisis of 2008 created a recession: the Great Recession. A recession is technically declared over after two subsequent quarters of economic growth. By Q3 2009 this recession was declared over.

However the laws of unintended consequences show a totally different picture. Between May 2007 and October 2009 nearly 7 million U.S. individuals lost their jobs and thereby their incomes. It took just over ten years before the unemployment rate had dropped again to 4.4% -to what it was in December 2006.

Equally unintended was the development in the real median household income. In 2007 this income was $59,534. It dropped to $54,569 for 2012 and it only returned back to the levels of 2007, by 2016.

Another unintended consequence was the difference between the fix for the banks in trouble and those for individual mortgage borrowers in trouble. Nearly all banks were bailed out in 2008, with the odd one declared bankrupt. For individual households/mortgage borrowers there was no respite in being pursued for outstanding mortgage debt. Over the period 2007-2014 21.228 million U.S. households were confronted with foreclosure proceedings. This number represented 41.4% of all household mortgage holders in the U.S.

House prices tumbled after 2007. The S&P/Case-Shiller national home price index seasonally adjusted stood at 184.52 in January 2007 and for the first time only exceeded this level by November 2018 at 184.87.

New housing starts also dropped significantly. In January 2006 the number was 2.273 million annualized new starts. The trend line moved from annualized 490,000 new starts in January 2009 to 1.230 million by January 2019.

Another main unintended consequence of the financial crisis was the effect on U.S. government borrowings. U.S. Federal debt increased by $4.8 trillion between Q4 2007 and Q4 2010, while real GDP still shrank. In three years the Federal Government’s debt increased by more than 50% and its growth did not stop there. Could it be argued that the government’s debt increase paid the price for the bankers’ follies?

Another major change was in interest rates. Fed funds rates have not been so low for over 60 years, until recently.

All these factors show that a more streamlined approach to economic thinking is needed. The interactions between the financial markets and the real economy can be better handled. Some suggestions are made in this paper.

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