The Subprime Mortgage Crisis and the Household Sector: An Analysis of the Current Financial Crisis and Recession And the Economic Impact on Households

Abstract

My senior individualized project is an assessment of the impact of the subprime mortgage crisis and the current economic recession on the household sector. Over the summer, I interned at a subsidiary of Raymond James Financial. Using my resources and market information from my internship, I investigated the effects of the recession on the household sector and analyzed the current legislation meant to remedy the situation. The paper proceeds in two sections. The first part is the Experiential Section which includes a description of the company I worked for, my role and responsibilities, and how this lead to my selection of my SIP topic. The second section, the connections essay, presents my findings on the economic initial shocks and subsequent losses suffered by American households. The initial crash was caused by bubbles in the financial and real estate markets, exacerbated by credit expansion and securitization of debt. When the market crashed, Americans lost over 25% of their personal net worth. In many ways, the current recession has been worse for households than the Great Depression. Household net worth and corporate equity and real estate values all fell significantly more in 2008, than in 1928, while stock market volatility dramatically increased. Middle income households, who's stock market holdings have considerably increased over the past twenty years, have been hit especially hard by the economic recession. The largest cyclical shock has been caused by job loss. Unemployment is now around 10%, and the economy is not recovering at a pace fast enough to sustain any real job growth. In many instances, the household is an essential component of the economy. Any serious governmental attempts to remedy the economy, should consider the unique needs of households. The American Reinvestment and Recovery Act, passed in February 2009, is a mass stimulus bill, funding public projects, and providing unemployment benefits and cash payments. It has been effective, though limited in aiding economic recovery. While there is evidence of slow economic growth, the picture for American households remains grim.