The Great recession

1. Read the words in bold from the first part of the text “The Great Recession”. What do you think the text is going to be about?
2. Read the first part of the text. Answer the questions.

1) Could the recession have been predicted? Why didn’t people believe it would happen?

2) What free market doctrines prevailed for some time before the recession?

3) What view did President Bush take at the beginning of the recession? What was the approach of his successor?

4) Name the main reasons that triggered the economic downturn in 2008.

5) How did the downturn affect American people and people around the world?

6) Why can the expression “double standard” be applied to the policy of the Obama administration during the downturn?

7) Describe the economic situation in the US in 2009 and 2010. What were the predictions for 2011?

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PART 1

In the great recession that began in 2008, millions of people in America and all over the world lost their homes and jobs. Many more suffered the anxiety and fear of doing so, and almost anyone who put away money for retirement or a child’s education saw those investments dwindle to a fraction of their value. A crisis that began in America soon turned global, as tens of millions lost their jobs worldwide and tens of millions fell into poverty.

This is not the way things were supposed to be. Modern economics, with its faith in free markets and globalization, had promised prosperity for all. The much-touted New Economy—the amazing innovations that marked the latter half of the twentieth century, including deregulation and financial engineering—was supposed to enable better risk management, bringing with it the end of the business cycle. If the combination of the New Economy and modern economics had not eliminated economic fluctuations, at least it was taming them. Or so we were told.

The Great Recession—clearly the worst downturn since the Great Depression seventy-five years earlier—has shattered these illusions. It is forcing us to rethink long-cherished views. For a quarter century, certain free market doctrines have prevailed: Free and unfettered markets are efficient; if they make mistakes, they quickly correct them. The best government is a small government, and regulation only impedes innovation. Central banks should be independent and only focus on keeping inflation low.

As the clouds of recession began to loom over the U.S. economy in 2007 and early 2008, economists were often asked whether another depression, or even deep recession, was possible. Most economists instinctively replied, NO! Advances in economic science—including knowledge about how to manage the global economy—meant that such a catastrophe seemed inconceivable to many experts.

President Bush had maintained that there was only a little ripple in the housing market and that few homeowners would be hurt. Indeed, even when the country had been in a recession for a couple months, he refused to recognize it.

When the new president took office, there was a collective sigh of relief. At last something would be done. A close look at the fundamentals Obama had inherited on taking office should have made him deeply pessimistic: millions of homes were being foreclosed upon, and in many parts of the country, real estate prices were still falling. This meant that millions more home mortgages were underwater—future candidates for foreclosure. Unemployment was on the rise, with hundreds of thousands of people reaching the end of recently extended unemployment benefits. States were being forced to lay off workers as tax revenues plummeted.

In October 2008 America’s economy was in freefall, poised to take down much of the world economy with it. We had had stock market crashes, credit crunches and housing slumps before. But not since the Great Depression had all of these come together. But while everything seemed to be falling apart at the same time, there was a common source: the reckless lending of the financial sector, which had fed the housing bubble, which eventually burst bringing devastation in its wake.

The collapse of the bubble and the tightening of credit had inevitable consequences. They would not be felt overnight; it would take months, but no amount of wishful thinking could stop the process. The economy slowed. As the economy slowed, the number of foreclosures mounted. The problems in real estate first surfaced in the subprime market but soon became manifest in other areas. If Americans couldn’t make their house payments, they would also have trouble making their credit card payments. With real estate prices plunging, it was only a matter of time before problems in prime residential and commercial real estate appeared. As consumer spending dried up, it was inevitable that many businesses would go bankrupt.

Many Americans have been living in a fantasy world of easy credit, and that world is over. They, and the country as a whole, will face a drop in living standards. Not only was the country living beyond its means, but so were many families.

Executives are blaming the borrowers for buying houses they could not afford, but many of these borrowers were financially illiterate and did not understand what they were getting into. This was especially true in the subprime mortgage market, which became the epicenter of the crisis. Subprime mortgages were mortgages given to individuals who were less qualified than those given “conventional” mortgages, for example, because of low or unstable income. Other homeowners were encouraged by lenders to treat their houses as ATMs, repeatedly borrowing against their value. Suicides and broken marriages resulted as borrowers across the country found that their homes were sold out from under them. Even some people who had kept up on their payments and taxes found their houses put up for auction without their knowledge. The dramatic stories that filled the newspapers may have been the exception, but they touched a raw nerve: America now faces a social tragedy alongside an economic one. With the loss of their homes, many Americans are losing their life savings and their dreams of a better future, of an education for their children, of a retirement in modest comfort.

It became increasingly clear that the Obama administration had underestimated the strength of the downturn, including the increase in unemployment. Worse, as the administration continued its seemingly limitless support to the banks, there didn’t seem to be a vision for the future of the American economy and its ailing financial sector. A country in which socialism is often treated as an anathema has socialized risk and intervened in markets in unprecedented ways.

The Obama administration articulated a clear double standard: contracts for AIG executives were sacrosanct, but wage contracts for workers in the firms receiving help had to be renegotiated. Low-income workers who had worked hard all their life and had done nothing wrong would have to take a wage cut, but not the million-dollar-plus financiers and CEOs who had brought the world to the brink of financial ruin. They were so valuable that they had to be paid retention bonuses, even if there was no profit from which to pay them a bonus. The bank executives could continue with their high incomes.

These bailouts provide an example of a set of inconsistent policies with potentially long-run consequences.

By the fall of 2009, the economy had had a few months of strong growth as inventories that had been excessively depleted were replenished. But even that growth did little to close the gap between the economy’s actual output and its potential, and it did not mean that either the global or the American economy was in for a robust recovery any time soon. Indeed, most forecasters saw growth slowing toward the end of 2009 and into 2010, and further problems ahead in 2011.

4. Read the second part of the text. Discuss the meaning of the underlined words and word-combinations with a partner.

5. Single out the topic sentence in each paragraph.