Who Should We Blame for All the Impact of the Current World-wide Recession?

Today, in the U.S., whether you are a blue or white collar worker and if you still have a job, any kind of job, and have not been laid off or threatened to be laid off, then you are either just lucky, your laid off time hasn't ticked in yet, your employer's industry has not been immensely affected by the current economic crisis, or maybe you are simply just too good at what you do, that your employer values your job performance more than your already laid off colleagues. Most U.S. companies have been cutting down on their manpower, closing down some plants, or outsourcing their production operations to certain developing countries, such as China, India or Mexico, where labor is relatively cheaper.

According to CNNMoney.com, the U.S. economy continued to hemorrhage jobs in February 2009, bringing total job losses over the last six months to more than 3.3 million, and taking the unemployment rate to its highest level in 25 years. While the U.S. Department of Labor and Statistics reported in the first week of March that employers slashed 651,000 jobs in February 2009, down from a revised loss of 655,000 jobs in January 2009. December 2008's loss was also revised higher to a loss of 681,000 jobs, a 59-year high for losses in one month.

In this document, we are going to core analyze some of the primary issues that might have contributed to trigger the current global financial crisis, which is deemed to be the primary cause of the fast rising unemployment rate in the U.S., and its impact in other parts of the world. The views of the author expressed herein may be politically aligned, and depending on you, the reader's political opinions and belief; that you may or may not agree with these views. It's not the author's intention to align to the left or right in analyzing the current global financial crisis. However, it's fair to note that these issues might have occurred under a politically elected president, which some may say that these issues all originated under a watch-less eye of President Bill Clinton or because of the carelessness of President George W. Bush, and some may even say that it is all because of President Barack Obama that we are currently in a recession.

History tells us that almost every last year of the president's term, leading up to the presidency's power transference, there is generally an economic cyclical; with the stock market either going up or down, depending on how the market perceives the incoming new administration. In December 1999, the Dow Jones closed at 11,497, but in February 2000, just a month after Bush took the office, the Dow closed at 10,940, that's 557 points drop (Yahoo! Finance). In fact, some analysts believe that: "He (Bush) became president 300 days into a bear market that began on March 24, 2000 (AllFinancialMatters), and then just 9 months later, the US experienced the worst act of terrorism on September 11, 2001, which created a long lasting significant economic impact on the United States and world markets, with the Dow falling to 684 points, or 7.1%, to 8921, a one-day record setting in points decline. "Wall Street suffered its biggest one-day fall yesterday since the immediate aftermath of the September 11 terrorist attacks, as a day of hefty stock market falls around the world culminated in a late panic sell-off in New York" (Guardian.co.uk).

Most analysts believe that the U.S. stock market never really recovered from the nine-eleven terrorist attacks. Some even suggest that the current financial crisis is a ripple effect from the terrorist attack. But, let's go back a bit to the Clinton era, as the majority claim it is where all began. As we all know, some may disagree, that when Clinton was in the office, the market was climbing, the majority of the American people had jobs, owned more than one car, and it seemed, then, like everyone was jolly and merry. However, as the stock market was all bullish for nearly 7 years, the Fed relaxed its regulatory body, allowed the market to control itself, at the same time Clinton encouraged and passed a bill that enabled more people to buy homes. "We should also give poor families more help to move into homes of their own. And we should use tax cuts to spur the construction of more low-income housing" (President Bill Clinton's 1998 State Of The Union Address Part 2).

Generally, when one has a good paying job for over a longer period of time, one can easily foresee the necessity of buying and owning a house, regardless of his or her race or color of skin. In addition, who could have imagined that a few years later, economic downturn will force companies to lay off nearly everyone? Thus, the majority of Americans started buying homes. However, some continue to argue that it was all because of some poor black families, who literary knew that they could not afford to buy houses, but they did so any way. While others scream at mortgage loan officers who they feel like they acted more like predators, preying on consumers by approving them for mortgage loans even when they literary knew that the borrowers may not be able to afford making payment on their mortgage loans.

Most mortgage loan officers may not have explained to the consumers the difference between fixed interest rates and adjustable rates. And, even if they might have explained to them the difference, the interest rates during those years around 1998 were low plus most people had jobs, good paying jobs. Thus, the majority of mortgage loan applicants opted to adjustable interest rate mortgages, hoping that if the interest rates go down, then that may lower their monthly payment. However, some even lied on their applications in order to get mortgage loans, even when they actually knew that they couldn't afford them. "As his team analyzed the individual loan files, Zimmer said he was struck by evidence of fraud, such as doctored bank statements. "Fraudulent loans were a big part of the subprime mess," he said. Mortgage brokers forged borrowers' signatures and pumped up their income, he said. People seeking to buy and sell a home for a quick profit lied that they were going to live in the home -- qualifying for a lower interest rate. But People's Choice calculated that it would have been too complicated and expensive to go after fraud, Zimmer said." (Washingtonpost.com).

A mortgage company that has just approved the loan to a consumer, which it knowingly know or did not know, because may be his or her financial statement was doctored, and then sells it to another bank. In the end, most banks ended up with billions of dollars worth of mortgage loan accounts that were just nothing but aired balloons, ready to pop at anytime due to their owner's inability to make mortgage payment. "More and more borrowers were falling behind on their monthly payments almost as soon as they moved into their new homes, indicating that some of them never really had the money to begin with. "Nobody had models for that," said David E. Zimmer, then one of the executives at People's Choice, a subprime lender based in Irvine. ‘Nobody had predicted people going into default in their first three mortgage payments.'" (Washingtonpost.com).

As more and more banks bought these mortgage accounts, that they eventually traded them based on their assets, as asset backed-securities, whose cash flows are backed by the principal and interest payments of a set of mortgage loans. As more homeowners fail on making their mortgage loans payment, those banks whose balance sheets were loaded with worthless receivable mortgage accounts, eventually; it all came crashing nearly at the very same time. Notably in September 2008, the balloons have popped, and everyone was in a panic mode. We can go back a little back, to July 2007, when the U.S. tasted the initial financial crisis as rippled by the credit crisis. After all, many Americans have bought many cars, houses, and have had many credit cards and store merchant accounts. Affected by the 2001 economic recession, many people lost their jobs and were unable to make payment on their credit accounts. "The roots of the credit crisis stretch back to another notable boom-and-bust: the tech bubble of the late 1990's. When the stock market began a steep decline in 2000 and the nation slipped into recession the next year, the Federal Reserve sharply lowered interest rates to limit the economic damage" (NYTimes.com).

Banks continued to decline in lending, not only to consumers, but among themselves. They couldn't trust each other's balance sheets, they feared that they may also fail, even though the Fed tried to lower the Fund rates, banks were not lending, businesses were not able to meet their operating costs such as payroll and short run expenses since most banks stopped lending to businesses. The entire market has come to a standstill. On September 14, 2008, Lehman Brothers surprisingly announced a bankruptcy filing after the Federal Reserve Bank declined to create them a lifeline financial support. "In one of the most dramatic days in Wall Street's history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer" (NYTimes.com).

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