Talks of a U.S. Recession in the Context of a Global Economy

Average Americans hear sound-bites and read headlines alerting us of the doom and gloom of a coming recession in the U.S. economy. How did we get here? Where are we now? Where are we going? A quick glance at the conditions we are currently facing, when put into the context of the past few decades, will hopefully put a silver lining around the dark cloud.

Many factors lead to a recession, but the main one that seems to be in the forefront of everyone's mind, in regard to our current situation, is the housing crisis. Twenty years ago it was much harder to buy a home than it has been in the past decade. Foreign investors came to Wall Street with hundreds of millions of dollars earmarked for mortgages, but with the desire to relax traditional standards (such as strict debt-to-income ratios).

Mortgage brokers, seeing the profit in the volume of loans sold, found funding for those wanting a home who would have previously been denied, while approving others for homes much more expensive than they could truly afford. Eventually, the overspending caught up, and as a consequence, loan-approvals tightened, fewer people are able to buy, builders are left with speculative housing unsold, home-building supply stores lose money, the employees who work in those stores are financially impacted through lay-offs or no increase of income, and here we are. Of course, this is frightfully simplified, but an easy principle to learn from this is: consumers should not try to live beyond their means.

On MLK Day, as Americans celebrated the life of one of its greatest sons, stock markets across Asia, Europe, and even the Land Down Under, took massive nose-dives. Reuters reports that the Nikkei fell 4% and that British markets took their largest hit since September 11, 2001. With Dow futures plummeting over 400 points in response to the collective downfall, it is inevitable that the market will open Tuesday morning to sharp losses.