he PBS documentary, “Inside the Meltdown” explained the recession of 2008 in great detail. From watching this documentary, I learned why the great recession took place. The starting point of the documentary informed us that Wall Street gambled heavy on home mortgages creating a housing bubble. The high rate of mortgage returns, mortgage lenders became very pleasant lending money to an exceeding amount of people and not ensuring to get their money back causing the bubble to grow bigger. Shortly after, the bubble had burst due to uncontrolled risks on home mortgages. This occurs, when demand decreases while supplies increase resulting the fall of price. Following the bubble burst, rumors broadcasted quickly within the area stating that Bear Stearns is running out of cash and is in trouble. The Bear Stearns companies was initially buying mortgages and putting them into securities and then trading them with investors. A credit card swap is the bartering insurance on bonds to people who own them in that way insuring the buyer’s potential losses to recover the public’s trust in their company and keep systemic risk contained. Bearn Stearns tried to use this strategy to save its company, however was very ineffective and incapable of paying all the insurance on falsified bonds. Bear Stearns had these agreements would many people and you could only imagine the trouble of what it faced. When Bear Stearns ran out of options, they decided to go to the federal reserve and inquire a loan to prevent their company from collapsing. However, the federal reserve is the central bank of the United States and is not authorized to give money to a price business. Immediately after, an American banker who served as the 74th secretary of treasure, Henry Paulson put matters in his own hands. He determined an escape route through the system; he had the federal reserve loan money to JP Morgan which then loaned the money to Bear Sterns. Moral hazard took place here because of the works of Paulson, he bailed out the company and did not face its consequences to its full extent. According to moral hazard, if the government bailed out every company that undertook the path of Bear Stearns, visualize the rate of the company not making the same mistake.
Systemic risk is when an entire financial system is compromised rather than one entity failing and having that entity be controlled. So companies similar to Bear Stearns that meltdown from stock decline are terrified of systematic risk. This documentary portrayed how dangerous systemic risk can actually be. We witnessed Fannie May and Freddie Mac collapse right after the bailout of Bear Stearns. Systemic risk is often compared to a snowball effect because the financial system is compromised into a whole. Thus if one company failed, next go the others (hence, the domino effect). After the collapse of these companies, the government interfered once again and took over the company. This caused disturbance to the American economy; people have witnessed the two biggest companies fall, using logic they would immediately come to conclusion that any company would fall. Systemic risk, government interference, and moral hazard are like an equation and must keep each other balanced. An example which was given in the documentary, the Lehman company was at the starting point of failure. Dick Fluid requested a bailout from Henry Paulson who denied their request.
Because of Secretary Paulson’s decision the market began to crash after the collapse of Lehman Brothers. This is because the banks and the credit market stopped lending money to people which means no house mortgages and loans to small businesses. AIG, is a multinational insurance company and which is very well known. However, AIG was at its early stages of failing because commitments made exceeded the funds the company had. Furthermore, with the help of the government, AIG was quickly to get back up on its feet after the federal loaned AIG with 80 billion dollars.
Part II – Section 2: Analysis of data
I decided to talk about the series “Retail sales & Food Serve Sales” which essentially measures the number of receipts at the stores that sell goods to final customers. However, I am also analyzing the food service sales to measure how much money is being spent on food. I chose these data set because it would help me come to a conclusion on the question, do people spend more money on food other than general merchandise or clothing outliers. According to the “U.S. Census Bureau News” during 2015 and 2016, Food has had the highest sales than any other kinds of merchandise.[1] Customer spending reports approximately two-thirds of the American economy. Thus, if you know where the buyer is spending their money then you could predict when the economy is heading.
Another topic that caught my attention is food serve sales, because throughout the January 2007 to January 2010 sales were fluctuating across the graph. During January 2014, the percentage change of food sales has decreased in customer spending many times. However, the last of 2013, consumer spending increased to a high $180,166 million with a percentage change of 1.06 percent. By January 2014 spending decreased to $178,089 million with a percentage change of -1.15 percent. The trend line has a steady incline in spending between 2010 though 2016. The trend line helps me understand what happened during the recession because during the period of 2007 to 2009 food sales came to its lowest point. I think that people stopped spending money because once the two biggest companies in wall street collapsed, credits froze, so people didn’t want to spend money that they didn’t have to spend. Many people were being laid off and homes were being foreclosed. So you could only imagine the struggle of what those people went through. The reality was that people were scared and didn’t want to spend money, because they didn’t know what else could happen. However, once the economy stabilized in 2010; it has been shown that the economy is slowly recovering from the great recession. Furthermore, our number have been increasing, therefore our company is in good shape.
According to the database for personal saving due to the cause of the great recession, you will notice something very extraordinary. In the beginning of 2008, an enormous increase took place for personal saving. This is because many people lost trust for Bear Stearns and would take their money out of the bank. Personal saving is money which is put away for non-immediately used.[2]An example of this would be saving up for an expensive purchase such as a car or house. compared to March 2007, you would observe an extremely positive slope. In general, society has motivated individuals to save up money because when facing a bad day and you actually need money, you would know where to find it. Also another point to suggest personal savings is known as the first step to becoming an adult. Many people don’t realize the importance of saving. If you really think about it without personal saving you can become homeless. Also, no matter your age or the stage in life you will always need savings because you don’t know what the future has hidden for you. If you look at the date for personal saving rate in 2008, you will notice that in just three months it increased by 7.9 which is 125.71 percent. This was the biggest outlier in database; this was such enormous change. By December 2012, I notice that saving has slowly continued increasing and suddenly crashed in January 2013. I think people were comfortable with the economy and started spending money which is why the saving has crashed in 2013. When the recession happened, fear crawled amongst the people motivating them to save their money. However, as soon as the people felt that they were safe that’s when money started being spent; this explains the trend line for this data set.
Part II – Section 3: Article Research
Article 1: Consumers are saving more and spending less
According to the New York times article, American consumers and businesses are embarking on an era of thrift as the recession deepens, saving more money as they cut spending on purchases as varied as sweaters, new homes and office towers.[3] This means that customers are feared by the great recession which is why they are spending less. They aren’t comfortably in the economy they live in. Once again, they have seen the two biggest company collapse and using precautious to make sure nothing ever happens like this again. The reason why we save, is because maybe one day we are facing hardships, how will we get money that we already spent. Impossible right? So that’s why saving is the best way to handle the great recession.
Article 2: The Big Squeeze
Americans are going deeper into debt than ever before. Millions of households have supersized their credit card balances, and many have taken cash out of their homes by obtaining second mortgages, arguably unhealthy ways to try to maintain a comfortable lifestyle on a less-than-comfortable income. In 2005, for the first time since the Great Depression, the nation’s personal savings rate sank below zero, meaning that Americans were actually spending more than they were earning. As a result, among the bottom two-fifths of households, nearly one in four spends at least 40 percent of its monthly income paying down its debts. And foreclosure filings, spurred by the subprime mortgage crisis, were expected to soar to as many as two million in 2007. Two million foreclosures would represent one in sixty-two households.[4] The second point of interest expected as many as two million outliers due to the personal saving change rate which was 125.71 percent.
Article 3: Americans see biggest monthly income drop in 20 years
Monthly income was unusually high in December because companies paid out early dividends to avoid upcoming tax hikes. Companies like Wal-Mart, Oracle, and Costco Wholesale Corp paid special dividends to their shareholders at the end of 2012, instead of waiting until 2013.[5] Many factors occurred during 2013 that effected the personal savings rate to drop down. Many people were receiving their tax-
refund late and had other expenses to pay to such as the high gas prices, so they were spending
most of their money instead of saving.
Article 4: Retail sales rise beyond expectations
According to CBS news, Retail sales jumped in August, spurred by widespread gains beyond the expected increases of auto sales due to the government’s popular Cash for Clunkers program. while inflation at the wholesale level also rose last month as gasoline prices surged the most in a decade, the retail sales report is a sign that consumers may be less cautious about spending as the economy recovers. Consumer spending is closely watched because it accounts for about 70 percent of the nation’s economic activity.[6] Due to the recovery of the economy, people used less precautions. As stated in the article, people became less cautious which rose up the retail rate. So if we keep the people satisfied, our economy would be great.
Article 5: Retail sales raise hopes for 2014
According to USA today, Retail sales jumped more than economists expected in November, raising spirits about the state of consumers and their spending pattern heading into the new year. The Census Bureau said November sales rose 0.7%, the best gain in five months, beating forecasts for a 0.6% gain, the results include Black Friday, one of the biggest days of the holiday shopping season, but exclude Cyber Monday, which fell on Dec. 2 this year. The results appear to show consumers gaining confidence in the economy, which added more than 200,000 jobs in November as the unemployment rate fell to a five-year low of 7.0%. Retail sales’ gain was the biggest in five months, and the Census Bureau also revised its estimate of October’s sales gains to 0.6% from 0.4%. In the last year, retail sales have climbed 4.7%, the bureau said. The figures are not adjusted for inflation.[7] This article shows that consumers are becoming more comfortable with their purchase and making our economy a better place to live in. As stated in the article, 200,000 jobs appeared because of people of the rise of retail sales.
Article 6: The truth behind the march retail sales surge
Many retailers were negatively impacted by February’s severe snowstorms, especially in the Northeast. ICSC figures that the industryâ€wide weather drag on the February sales growth rate was worth about one percentage point. However, that did not seem to bring to a halt the retail recovery, even in the most weatherâ€sensitive segments. For example, apparelâ€specialty store sales posted a solid 6.8% gain—its strongest performance since March 2007 (+7.0%—which was impacted by the Easterâ€shift in the calendar). Macy’s experience in February was typical of the industry. Macy’s chairman, president and CEO Terry Lundgren noted that his company’s February sales were strong despite a series of winter storms that affected store operations in some of Macy’s largest markets during key selling periods of the month.[8]This drastic drop in retail sales took place because of a bad weather condition. Weather could have a large effect in sales especially in the winter. People are not willing to go out and purchase products during a snow fall of 6 inches of more.
Conclusion
Based on my research, I have concluded that the great recession was a tough time for people overall. We learned an important lesson, a company could be the most successful company and still collapse. Since consumer spending makes about 75 % of our GDP, it is very important that the consumer doesn’t lose its confidence because another great recession will happen. We realize how quickly our economy could be teared apart. After confidence level of consumers began to rise, we notice that the overall economy started to get better. For example, 200,000 job opened up because people began to trust one another and spend money on things that they want. When the customers see the overall economy is thriving, they are encouraged to make risker purchases and spend more.
