The Recession of 1981-1982 Compared to the Great Recession of 2007-2009
Post-Great Depression, the United States experienced several recessions, which reveal trends that may help economists predict future recession cycles. The Recession of 1981-1982 and the Great Recession of 2007-2009 were similar because both were the worst recessions the U.S. has faced in terms of unemployment rates. While the Recession of 1981-1982 resulted in the peak of unemployment post-WWII at 11%, the Recession of 2007-2009 resulted in the sharpest increase in unemployment as the unemployment rate doubled from 5% to 10%. The Great Recession also increased poverty and decreased family income. Additionally, both recessions followed long periods during which the U.S. …show more content…
The Recession of 1981-1982 stemmed from a high period of inflation caused by the Federal Reserve’s “stop-go” fiscal policy. Based on the Phillips Curve theory, the “stop-go” policy aimed to lower interest rates to raise the money supply and employment during the “go” phases. Then, during the “stop” phases the Federal Reserve attempted to reduce the resultant inflation by raising interest rates. However, the policy failed and both inflation and unemployment increased. Additionally, the public made economic decisions based on the expectation that the Federal Reserve would follow this same policy, thus worsening the economy. When Paul Volcker, the chairman of the Federal Reserve, implemented a tight monetary policy to control the runaway inflation, the recession started as long-term interest rates rose. Further, goods-producing industries, which relied on loans, suffered unemployment. In contrast, the Great Recession occurred due to the burst of the housing bubble. Between 1998 to 2006 the U.S. experienced doubled housing prices. The subprime mortgage market was highly profitable for large investment banks which sold loans packaged as mortgage-backed securities to global investors. The resultant low interest rates made it easier for borrowers with poor credit to take out loans. Yet when housing prices started to drop after the peak in 2007, these borrowers could no longer refinance their loans and investors stopped investing in mortgage backed securities. Ultimately, the result was widespread unemployment in the housing-related sectors that dominated the U.S.
Post-Great Depression, the United States experienced several recessions, which reveal trends that may help economists predict future recession cycles. The Recession of 1981-1982 and the Great Recession of 2007-2009 were similar because both were the worst recessions the U.S. has faced in terms of unemployment rates. While the Recession of 1981-1982 resulted in the peak of unemployment post-WWII at 11%, the Recession of 2007-2009 resulted in the sharpest increase in unemployment as the unemployment rate doubled from 5% to 10%. The Great Recession also increased poverty and decreased family income. Additionally, both recessions followed long periods during which the U.S. …show more content…
The Recession of 1981-1982 stemmed from a high period of inflation caused by the Federal Reserve’s “stop-go” fiscal policy. Based on the Phillips Curve theory, the “stop-go” policy aimed to lower interest rates to raise the money supply and employment during the “go” phases. Then, during the “stop” phases the Federal Reserve attempted to reduce the resultant inflation by raising interest rates. However, the policy failed and both inflation and unemployment increased. Additionally, the public made economic decisions based on the expectation that the Federal Reserve would follow this same policy, thus worsening the economy. When Paul Volcker, the chairman of the Federal Reserve, implemented a tight monetary policy to control the runaway inflation, the recession started as long-term interest rates rose. Further, goods-producing industries, which relied on loans, suffered unemployment. In contrast, the Great Recession occurred due to the burst of the housing bubble. Between 1998 to 2006 the U.S. experienced doubled housing prices. The subprime mortgage market was highly profitable for large investment banks which sold loans packaged as mortgage-backed securities to global investors. The resultant low interest rates made it easier for borrowers with poor credit to take out loans. Yet when housing prices started to drop after the peak in 2007, these borrowers could no longer refinance their loans and investors stopped investing in mortgage backed securities. Ultimately, the result was widespread unemployment in the housing-related sectors that dominated the U.S.