What a recession is and why we’re in one

By Kaylie Schmidt

The typical teenage stereotype says our lives revolve around our friends, music, the mall and money. Occasionally we may read the newspaper or be forced into listening to NPR on the way to school, but really this is not always the case. We can tell when things around us are changing, but most of the time we don’t know what to do about them.

So right now, the answer is, yes, we realize the economy is not at its best. We are sensitive to our parents’ stressed out vibes and the fact that all around us people are losing their jobs. So the question comes: How did this happen?

Let’s start with the basic term recession. A recession is basically when the economy for two quarters (six months) stops growing and instead starts to decline. One of the biggest results is the rise in unemployment — the number of people who don’t have jobs.

Unemployment comes around for several reasons. Some people lost their jobs because their businesses are doing poorly and have to do layoffs because they can’t afford to pay their employees. Other people who didn’t already have a job for whatever reason cannot find jobs because businesses are not hiring — either because they are not doing well or because they are trying to be careful and save money just in case.

illustration by Carsi Tong

One of the most talked-about causes of this recession is the housing industry. Dave Nalle, a conservative political writer, writes that he thinks a big factor is decades of bad loans given out to people who were unqualified and unable to afford them. These loans were given out to those who were not eligible for the loan or who were only eligible under lax lending restrictions set by banks.

Lenders make money from every loan they give, as people pay back interest, along with the loan amount itself. So banks and other lenders were anxious to have as many people borrow as possible. They figured house values would continue to go up.

Well, the value of houses started to fall. Some people lost their jobs and had to sell their houses. Some people who had gotten loans they had no business getting had to sell because their interest rate went up from the introductory offer and they couldn’t afford to pay it any more. Right before that, a lot of people had invested in fixer-uppers, looking to flip them and get a profit; around this time, many of those houses were being sold because the investors couldn’t do what they had planned.

The more houses on the market, the less you can charge for a house. It’s the same idea as tickets to a concert. You can charge a lot more money for tickets to a concert that’s sold out than if anyone can get a ticket. Well, at this point there were houses aplenty, so people selling couldn’t charge as much. Also, interest rates had increased, so people were less willing to take out a mortgage when they would have to pay higher interest.

Because the house values were dropping, homeowners suddenly found themselves with houses that were valued at less than the amount they still owed.

For instance, say you owe $150,000 on a house, plus you owe interest every time you make a payment. But the neighbor, whose house is similar in size and features to yours, just lost her job and needed to sell her house quickly, so she is selling it for $120,000. If you were to sell yours, you would not be able to sell it for much more than hers; who would pay more than $150,000 when they could get a similar house for $120,000?

Then the foreclosures happened. A foreclosure happens when the homeowner fails to make payments on their house — and people couldn’t afford their houses. When houses are bought, usually people take out a loan. If they do not make their payments the lender can auction off that home to recover some of the money lost.

Also, if someone is about to be foreclosed on, they will often try to make a quick sale to recoup some of that money themselves. That caused house values to go down even more because people would price their homes very low to be able to sell them quickly.

All this is fine and good, but what does the housing market have to do with teens — or with anyone who doesn’t own a house?

The economy is complicated, and when any one piece of it struggles, every part is affected.

When people aren’t buying houses, real estate agents aren’t making money because they depend on commission. People who work in building and construction aren’t being hired to build new houses. Banks are losing money left and right — and that especially affects Charlotte, as banking is a major industry here.

And every person who loses a job is not spending on things in his or her own life: groceries, clothes, luxuries, vacations. And the people who sell those things are making less money, and then spending less money, too.

Something more complex is at work, too. Lenders started giving loans to someone who wanted to buy a house, and that person would sign a mortgage; so far, so good. But many lenders set up a system where they would sell that mortgage to groups of investors who pooled their money to buy it and make money off of it. The banks then turned around and immediately used the money they made from selling the mortgage to finance another mortgage, which they then sold.

The process is called securitization, but as more and more people stopped being able to pay their mortgages, the process was anything but secure. In fact, it fell apart.

Kevin Hassett, director of economic-policy studies at the conservative think tank American Enterprise Institute, points to Fannie Mae and Freddie Mac. They are government-sponsored enterprises, which means they are privately owned but are given support by the federal government (the government won’t let them fail). They are the largest vehicles for securities, or the buying of mortgages as investments.

What now? No one is quite sure. Even experts on the economy and finances don’t know what will end this recession. Efforts include a federal stimulus plan, talks with other countries, cutting interest rates, and bailouts for industries having a particularly hard time. Time will tell which attempts work and which don’t. Experts predict it will be at least next year before we start to see positive results — and it could very well be even longer.

Sources:
blogcritics.org/archives/2009/02/24/024107.php
www.bloomberg.com/apps/news?pid=newsarchive&sid=aSKSoiNbnQY0
www.morebusiness.com/10-signs-recession
useconomy.about.com/od/grossdomesticproduct/f/Recession.htm
www.usatoday.com/money/economy/housing/2006-08-23-july-sales_x.htm

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