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The Great Recession’s Trigger: Housing bubble leads to jobs crisis
- Cornell University Press
- Chapter
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The Great Recession’sTrigger Housing bubble leads to jobs crisis 1 3 December 2007 marked the official end of the economic expansion that began in November 2001. The official end of the Great Recession occurred in June 2009, making it the longest recession to hit the U.S. economy since before World War II. This chapter details the damage done since the recession began and the failure of the recovery so far to repair it. While an increase in housing foreclosures provided the spark, it was the poor economic choices and mismanagement of the previous decade that provided the tinder for the ensuing conflagration. The economic expansion from 2001 to 2007 was among the weakest on record in essentially every way that matters to working Americans. Growth in overall gross domestic product (GDP), workers’ salaries and benefits, investment, and employment were the worst of any expansion we have seen since World War II. Typical family incomes grew by less than half a percent between 2000 and 2007—only about one-tenth as fast as the next worst business cycle on record. From the perspective of America’s working families, the economic expansion of the 2000s essentially represented a lost decade of growth. It didn’t have to be that way. Policy makers found plenty of resources to throw at tax cuts aimed disproportionately at corporations and the very rich and at wars abroad. And when partisan politics demanded it, resources were also found to enhance Medicare coverage by adding a prescription drug benefit—but only when bundled with flagrant giveaways to pharmaceutical companies and other corporations. If even a fraction of these resources had found their way into well-targeted interventions to boost the job market, the decade could have been very different, with wage growth supporting living standards instead of debt. But faster wage growth would, of course, have threatened the only economic indicators that performed above-trend in the 2000s: growth in corporate profits, which during the 2000s saw the fourth-fastest growth of the 10 expansions in the post-war period. These profits were led by the financial sector, which saw its share of overall corporate profits hitting all-time highs. These financial profits were realized largely due to ever-growing returns earned from extending loans to cover the skyrocketing cost of houses, as a bubble in home prices replaced the bubble in stock market prices that had burst in 2001. From 1997 to 2006, inflation-adjusted home prices, which had for decades grown at the typical rate of inflation, nearly doubled. F A I L U R E B Y D E S I G N 1 4 Besides boosting the bottom line of financial corporations, rising home prices gave American families the chance to borrow against the equity in their houses and give a boost to their living standards, a boost that the broader economy had not afforded them, for example, through rising employment opportunities and wage growth. And borrow they did—at the height of the housing bubble an amount equal to almost 8% of Americans’ total disposable personal income was being extracted from homes. In short, Americans were using the housing bubble to give themselves the 8% raise that the job market, hampered by anemic growth, was not generating for them. Once housing prices stopped rising, however, there was no more equity to extract, and the disadvantage of relying on increasing debt, rather than rising wages, as a means to purchase better living standards became clear. Millions had been sold mortgages that ballooned in the second or third year, making them unaffordable and requiring those families to seek refinancing. But this refinancing was only possible while rising home prices gave them equity in their homes. With the end of rising housing prices, this game of mortgage hot potato ground to a halt, and millions found themselves stuck with mortgages they couldn’t afford or refinance. Just as rising housing prices boosted wealth and spurred economic activity, their decline extinguished wealth and brought the economy to a shuddering halt. Roughly $8 trillion in housing wealth will likely be erased between the housing market ’s peak and trough. As American families saw their wealth fading away, they pulled back on their spending—cutting roughly $600 billion in consumer spending from the economy. And the over-building of houses (and corporate real estate) during the bubble meant that this sector contracted by about $600 billion annually as well. Business investment in equipment and software also collapsed...