How did public ignorance contribute to the economic recession of 2008?

1. How did public ignorance contribute to the economic recession of 2008? By Katey, Brandon, Mikey, and Dylan Date: 2/22/13

2. Answer: • Public ignorance contributed to the great recession by allowing the CEOs and other business leaders to run unopposed by the masses. Also the public ignorance made it so that people accepted loans and such that they couldn’t pay back without thinking of the possible consequences.

3. Walden • “No way of thinking or doing, however ancient, can be trusted without proof. What everybody echoes or in silence passes by as true to-day may turn out to be falsehood to-morrow, mere smoke of opinion, which some had trusted for a cloud that would sprinkle fertilizing rain on their fields.”(Economy p.3) • Thoreau explains how people blindly follow others without any form of confirmation that the path they follow is correct. The U.S. citizens blindly followed the advice of rating agencies and bankers who suggested loans without the understanding that they wouldn’t be able to pay it back.

4. Inside Job • The director of this documentary made the effects of public ignorance very clear. As people began getting loans and the house prices started to rise no one took a second to step back and say “hey wait a minute this isn’t right”. After the pop of the housing bubble, foreclosures quadrupled and tuition rose dramatically for universities. Had anyone realized that they were being swindled then perhaps we would never have gone through this tragedy.

5. The Great Recession of 2008-2009: Causes, Consequences and Policy Responses • “Firstly, contrary to widely-held perceptions during the boom years before the crisis, the paper underscores that the global economy was by no means as stable as suggested, while at the same time the majority of the world’s poor had benefited insufficiently from stronger economic growth.”(Abstract) • This researcher suggests that people accepted the change with open arms and didn’t realize they had a bad economy to begin with. He believes that the actual state of the global economy was withheld from everyone and that people were unable to make an informed decision on their monetary actions.

6. Causes of Economic Recession • “Irrational exuberance in the housing market led many people to buy houses they couldn't afford, because everyone thought housing prices could only go up. In 2006, the bubble burst as housing prices started to decline. This caught many homeowners off guard, who had taken loans with little money down. As they realized they would lose money by selling the house for less than their mortgage, they foreclosed.” • This article explains how public ignorance allowed people to buy things well out of their own monetary reach which led to the housing bubble and the eventual pop of said bubble. This is close to the same buying on credit that caused the stock market crash which led to the great depression.

7. Causes of Great Recession • “Some economists—including those of the Austrian School and those predicting the recession such as Steve Keen—claim that the ultimate point of origin of the great financial crisis of 2007–2010 can be traced back to an extremely indebted US economy. The collapse of the real estate market in 2006 was the close point of origin of the crisis. The failure rates of subprime mortgages were the first symptom of a credit boom tuned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. ” • This article shows how the increasing debt and lowered interest rate contributed to the crisis. Public ignorance ties into this because the people didn’t realize the interest dropped as their debt increased. Had they realized this they may have been able to fix it.

8. A historical perspective on the Great Recession • “The Great Recession of 2008/9 came as a big shock to economists as well as the general public. They had become accustomed to the serene conditions of the so-called Great Moderation – low inflation, smooth growth, and low unemployment. This led to triumphalist claims that “boom and bust” had been abolished.” • This article gives a detailed insight into how certain aspects of the recession played into public ignorance. People already had a belief that eventually the economy would even out and become normalized with no recessions and booms. This idea could provide a possible explanation as to why the public was ignorant. Maybe they wanted the economy to be good so badly they didn’t question it.

9. Works Cited • Amadeo, Kimberly. "Causes of Economic Recession." About.com US Economy. About.com, 06 July 2012. Web. 23 Feb. 2013. <http://useconomy.about.com/od/grossdomesticproduct/a/cause_recession.htm>. • "Causes of the Great Recession." Wikipedia. Wikimedia Foundation, 22 Jan. 2013. Web. 21 Feb. 2013. <http://en.wikipedia.org/wiki/Causes_of_the_Great_Recession>. • Crafts, Nicholas. "Vox." The Great Recession: An Historical Perspective. Vox, 24 Feb. 2011. Web. 23 Feb. 2013. <http://www.voxeu.org/article/great-recession-historical-perspective>. • Verick, Sher, and Iyanatul Islam. The Great Recession of 2008-2009: Causes, Consequences, and Policy Responses. IZA Discussion Paper Series. The Institute for the Study of Labor (IZA), May 2010. Web. 21 Feb. 2013. http://ftp.iza.org/dp4934.pdf • Thoreau, Henry David. “Walden” Ticknor and Fields: Boston. Published August 9, 1854. Accessed 21 Feb. 2013. • Inside Job. Dir. Charles Ferguson. By Charles Ferguson, Chad Beck, and Adam Bolt. Perf. Matt Damon, William Ackman, Daniel Alpert. Sony Pictures Classics, 2010. DVD.