What Really Caused the Recession

What killed the economy? The problem is it was a very sick animal. Subprime mortgages were blamed, but that was only the tipping point. A lot of mistakes were made since the 80's. Everyone got too greedy and forgot that an economy only works if the majority are prosperous. Everyone has to be spending which in turn creates jobs so that more people have money to spend with. Eliminate jobs and raise the prices on goods and services then there is less money to spend with and the whole thing spirals downhill. The following mistakes were responsible for creating the conditions that caused this recession.

Lower Taxes
This began with Ronald Reagan who convinced our nation that are taxes were way to high. The federal government was supposedly over taxing the nation and spending it on stuff we did not need. Tax and Spend. Other countries did not tax their citizens as much. What this country needed to do was to cut taxes then balance the budget by cutting out the pork spending. Okay, here was the problem with that philosophy. Washington at the time was very responsible with spending. Look at NASA. The space program had been downsized from trips to the moon to the reusable Space Shuttle. That was the result of Congress tightening it's belt, otherwise NASA would have still been sending men to the moon and would have landed a man on Mars by 1999. As for other countries paying lower taxes, the examples given were not comparable to this country. Many were a tenth the size of the United States and would have cost less to maintain. Basically most of the money we paid on taxes was put to good use. When we cut the taxes then suddenly the government no longer had the money it needed to run properly.

When there is not enough money in the budget for school teachers and firehouses are being closed down then you know that the government does not have enough money. Cutting taxes didn't even stop the misspending on pork projects. Congress could not find the money to give our own soldiers bullet proof vests but found tens of millions building a bridge in Alaska to an island with only a few hundred residents. With less money from taxes both federal and local governments were forced to downsize. Not only did this eliminate tens of thousands of jobs but ended up eliminating programs that helped make our lives less expensive. It has also effected carfare. Less tax money meant that transit systems had to raise their fares and the price of tolls go up. This means workers are forced to spend more traveling to work and have less to spend or save. It also meant that with less workers that the government now runs slower. The DMV, for instance, is now only 1/4 staffed. That means that it takes four times as long to get a licence. Time that could have been put to better use. With the government running slower thousands of man hours are lost to standing on line ad different departments.

Welfare Reform
Millions of lazy Americans were receiving Welfare. Taxpayers were paying for this with their hard earned money. During the Clinton administration Welfare was changed so that these lazy Americans were forced off their couches and out to get a job. The problem though was that only a fraction of Welfare recipients were actually lazy. The majority went on welfare because they had no choice. Either not enough or no jobs existed in the county they lived which meant nothing was available other than low paying jobs that did not even pay the rent, or had some other reason they were unable to find a decent job such as old age or being in a minority. The problem with clearing the welfare rolls and sending millions of Americans out into the streets to find work was that it caused wages to fall. Employers have to attract workers. To do this they have to offer a wage high enough for someone to agree to do the work. Lets say your neighbor wants his lawn cut and offers you $1 to do it. You probably would not be interested. If he offered you $20 then you would think about it. If he offered $100 or more you would definitely do it. But lets say you and everyone else in the neighborhood were poor and needed any money you could get. You would have little choice but to take the $1 offer. If you did not then there were many others who would. And even if you had been offered the $20 it would not last long as another would come along willing to cut the lawn for less. The more people trying to get a job means the less wages an employer has to offer. If very few are willing to take the job then the wages go up. By forcing millions to look for work then just about every entry level job dropped to minimum wage. And for those who already had a job the fact that they could now easily be replaced meant that they were now at risk of either losing their job to lower wage workers, or had t accept that pay cut. The wages of entry level jobs effected the wages of other jobs. Wages throughout companies either dropped or raises dried up. This lead to less spending money for the working class.

McJobs
As a result of welfare reforms came the creation of McJobs, named after a particular job where someone gets paid minimum wage for flipping burgers at McDonalds with no hope of any job advancement in the company. McJobs were any minimum wage job with no security. This included part time and temporary jobs that replaced full time jobs. Worse, companies turned to temporary agencies to fill their staff so that they could eliminate positions on a days notice and not owe severance pay or have to deal with unions. Temporary and part time workers were ineligible for unemployment benefits, even if they ended up working just as hard or as many hours as full time workers did. Too many politicians counted on the creation of McJobs instead of real jobs that offered job advancement for good workers.

Economic Pollution
This happens when companies charge more for goods or services then they need. Lets say it costs 10¢ to press a CD and another $1 to ship. Technically a store could sell new CDs for $2 and make a profit. But when the technology of pressing CDs was new and only a few pressing plants existed the cost of pressing a CD was $12. Add to that the record labels insisting that CDs come in over sized packages so that they did not look too smaller than the vinyl records and they had no choice but to sell a CD for $16. The problem was that once the record labels realized Americans were willing to pay $16 for a CD there was no incentive to charge less, even as the technology allowed them to press $2 discs. Here is where the pollution happens. Workers have X amount of spending dollars. Lets say they are willing to spend $50 on CDs a week. They can only afford to buy 3 CDs. Since they are buying less CDs then less get pressed. Since they are charging $16 then the store, distributor and shipping company decide they want a bigger cut. The artist and producer also demand a bigger cut. This means that the record label makes less per CD than they did when the $16 price tag first appeared and prevents them from selling at $2 even if they wanted to.

CDs are just one example, but for every item that goes up in price there is less spending money to go around. The extra $14 you spend on that CD does not just mean less money to spend on another CD but $14 less money to spend on anything. Buy a CD and you will not have enough to buy a video game. Spend $50 on a video game and you will not have enough for a movie ticket. And so on. It also means that it would take longer to save up for big ticket items like Blu-Ray Disc players. The less spending money means less purchasing which in turn means less is manufactured which means less manufacturing jobs. The more spending money circulating the healthier the economy. The problem is when record companies are charging $16 for a CD, movie theaters are charging $18 for a ticket, Sports teams are charging $50 for the cheap seats, Oreos are charging $5 for a box of cookies, and we are all willing to pay extra for everything, then we end up with less spending money at the end of the week and are unable to buy more. Anyone who gouges the price of a good or service contributes to this pollution. Worse of all in order to keep the high price up millions are spent on advertising and paying of stores for shelf position that manufacturers end up stuck charging the high price even though they are now making less of a profit in the mark up. Economic Pollution over the years has eaten away at our spending money and has unnecessarily done away with millions of manufacturing jobs.

Condomania
Here is how the nearly rich and investment firms contributed to the economical collapse. Investing in condos. Condos are those expensive apartments. Expensive because the buyer owned the apartment and all the condo owners shared the building as it's landlord. For a while there a demand existed for condos which lead to speculators buying condos and then selling them later. Buy one for a hundred thousand dollars and sell it later for a million dollars when the building became desirable and all the units had been sold. So much money was being made by flipping condos for a profit that speculators began buying units even before the building began construction. Investment banks began buying up hundreds of empty condo units. Building condos was seen almost as printing money. Developers everywhere began building condo buildings and landlords began converting their buildings into condos. The downside was to build these new condo buildings other buildings had to be torn down and their occupants replaced. Those living in apartment buildings being torn down or converted into condos were forced out onto the streets. Thousands of churches closed because developers offered them millions for their land. Famous restaurants, theaters and other popular places closed so that condos could be built in their place. Hotels everywhere were converted into condos.

So who were buying these condos. Some were sold to the rich who decided they wanted third, fourth, and fifth apartments in the same city. They were willing to buy condos as they were seen as smart investments rather than a waste money. Others were sold to foreign millionaires who wanted an apartment ready on the few days a year they visit the city. But their is just so many wealthy people out there interested in buying condos. The majority of condos were sold to speculators and investment banks. Many speculators turned a quick profit by selling to other speculators. But it was not that very uncommon that a condo building had many empty units owned by those not using them to live in but to sell at a later date. More and more condos were bought and more and more buildings were built to meet the demand. What finally stopped the madness was when even the speculators no longer had the money to buy new condos. Units that were not selling meant that suddenly the speculation had peaked and for the first time the value of the units were going down. Suddenly it sank into the speculators that just about everyone who wanted to spend millions on a single apartment had already bought one. Suddenly there were hundreds of thousands of condo units held by speculators and almost no one left who could afford them. That meant they were now useless. Investors lost millions. Investment banks who bought condos were now sitting on useless investments. This could not come at a worse time, during the beginning of the financial meltdown. Not only did investors lose out but so did developers still midway through construction as well as those still waiting to be paid for the land or building they sold off. The ultimate loser was the local governments who encouraged the building of these condos because they could collect higher property taxes for each unit. Previously there had been buildings standing in their places that they were collecting property taxes from.

Gas Prices
No need to explain this one. Part of the reason for the spike in gas prices was China switching from riding bicycles to cars as their mode of transportation. With a sudden demand for gas from China prices went up. The rest of the reason was pure speculation. The middle men who buy the oil from the sheiks in turn raised their prices when they sold it to the companies who refine the crude oil into usable fuel. In other words gas prices went up well beyond what the market was willing to pay so that greedy speculators in the market could turn a bigger profit. Since everything you buy including food, merchandise, and even gas has to be transported by trucks to where it is purchased higher gas prices mean it is more expensive to transport them. Higher transportation costs leads to higher prices on the shelves and in turn inflation. More economic pollution.

Subprime Mortgage Market
This has been explained as mortgages given to people who could not afford to pay them back. Banks could not collect and were forced to foreclose on millions of homes, losing money in each case. Investment banks had purchased these mortgages believing that they would make millions as the mortgage holders paid back the loan. But with foreclosures they now looked to lose millions. Here is the truth. Banks gave these people mortgages knowing they could never pay them back. That was the point. Give someone a mortgage he can't pay back and after years of him attempting to pay that mortgage back he ends up unable to make a payment. The bank forecloses and takes his house, which the unlucky person who had the mortgage had increased in value after buying it by fixing it up ( Giving it a paint job, having the plumbing repaired, fixing the wiring, etc. ). The bank now has all the money the unlucky person paid back on the mortgage as well, as the house which has now increased in value. In other words they make more money off those who can not repay the mortgage than from those who can.

Why would someone agree to these mortgages? For one banks and mortgage firms promised them lower payments. While these people did not have jobs that would have given them the money they needed to pay the mortgage off they also believed that they would one day have that promotion that would put them in a higher tax bracket and allow them to pay the mortgage off. Even if that never happened then at least they would be paying a monthly mortgage to live in a house rather than a monthly rent to live in an apartment. What happened was that the monthly payment in the mortgage shot up to beyond what they originally thought they agreed to and they could no longer afford to pay. The bank foreclosed and they lost their homes. While politicians have been saying how irresponsible it was to give mortgages to these people, giving mortgages to those who could afford to pay it back was also a risk. Just because you have a good job does not mean you won't be run over by a bus leaving the mortgage to your unemployed widow. And there was no reason why many of those low income people would not have one day gotten that promotion and paid the mortgage off. What really did in this whole scheme was thousands of speculators who planned to buy houses using mortgages then quickly sell them for a profit. For some this risky venture worked. But too many were inexperienced amateur who unable to flip the houses they bought before the mortgages kicked in, or simply unable to sell at all. Just as with condos there was speculation on new homes, more of which were built beyond demand.