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Real Causes For US Financial Meltdown and Global Recession

By Jonathan Wang, Ph.D.  Contact Author

Current economic recession in the United States and all around the world is seen as the worst downturn since the great depression. There is little doubt that this global recession was caused by the financial meltdown in the United States and quick spread out to touch almost every corner of the world. It appears to be a commonly accepted theory among economists that this episode of US recession was a direct result of sudden busting of house bubble, and the house bubble was created by rapid growing yet unregulated subprime mortgages.

These are all true. But the real questions are, as shown in Fig 1, the house bubble, if any, started to emerge in the closing years of 20th century,  why has it not been busted until year 2007? and during that over a decade long period, were there any indications that had signaled this crisis might happen eventually? With these unanswered questions, we must think deeper and much deeper so to make sure this type of sad economic drama will not recur.

It is the reduced affordability of average consumers that has busted the bubble in house market. 

I am not an economist, but it does not take a economist  to understand one simple plain word, affordability. It is a common sense that the economy of a nation is supported by domestic spending of average consumers. It is equally clear that growth of the house market can not be sustained without synchronized growth in household incomes. When the growth in household incomes under pace that of the house market, the affordability becomes an issue. With the gap between two growth rates trending wider, affordability problem is inevitably escalated and will result in a collapse of the house market eventually.

That was exactly how the house market in the US was collapsed.

Let's divide the recent history into two periods, Clinton era and Bush era. A division timeline lies right in year 2001 when Bush took the office. Apparently as shown in Figure 1, chart of S&P home price indices, shift of power did not cause the growing pattern of the house market to change. Moreover, the indices even kept its climbing pace during 2001-2002 recession. I recall many economists and economic commentators even used this fact to argue validity of the recession. Unfortunately, Figure 2, chart of real median household income for the same period paints a completely different picture.

Continue to next page........ 

global recession - home price indices

Figure 1 S&P Home Prices Indices 1991-2007

 

 

global recession - median household income

Figure 2 1991-2007 Real

Median Household  Income

 

 

global recession - history of Fed interest rate

Figure 3 Fed Interest

Rate1991-2007

Related Series Articles on Global Economy and Recession by Jonathan Wang

global economy, US economy, China economy  Railroad Expansion, Most Effective Way to Rescue US Economy

global economy, US economy, China economy  Consumer Sentiment Lags, Stock Markets Soar - Sign of Depression?

global economy, US economy, China economy  Trillions Dollars Won't Save US Economy, Historical Data Say Everything

global economy, US economy, China economy  Why China is more resistant to the global recession than any western countries?

global economy, US economy, China economy  Bail Out Banks...Again? Caution, Don't Jail in Economy

global economy, US economy, China economy  What has really caused collapse of the financial market in the United States?

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Keywords: recession, depression, financial crisis, financial meltdown, global recession, economic crisis

 
 
 
 

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