Financial Crisis and Great Recession Causality Research Paper

Introduction: The Great Recession and the Financial Crisis

A financial crisis is typically viewed as an integral part of economic development (Phillips and Nugent 22). As one stage in an economic cycle, such a crisis is essentially inevitable, yet its effect can be reduced significantly by developing a coherent prevention strategy and taking recent changes into account (Ohanian 1584). However, the phenomenon of one such crisis, the Great Recession, was so devastating and unpredictable that it has often been compared to the Great Depression of the 1930s (Ohanian 1583). The former is typically defined as a severe economic and financial crisis that started with a mortgage issue and lasted until the 2010s (Phillips and Nugent 23).

The financial crisis of 2008 is usually viewed as a combination of events that ensued from a rapidly developing mortgage crisis (Mouton and Smith 791). The crisis quickly reached a global scale, affecting a range of economies including the global one (Kiser et al. 166). That the specified model opened loopholes for fraudulent actions was one of the primary issues conditioning the further development of a massive economic setback that would, at a later date, be termed the Great Recession (Mouton and Smith 793).

Although the financial crisis of 2008 is often considered the root cause of the Great Recession—and vice versa—the connection between the two is much more intricate than what has been suggested above. Since the influence that the financial crisis had on the Great Recession could be considered reciprocal, it is reasonable to claim that the specified phenomena had a common factor contributing to their emergence and further development. Therefore, it can be argued that as the economic decline was affected by negative changes in real estate and vice versa, the two phenomena had an equally profound mutual impact.

Financial Factors Determining the Development of the Great Recession

Similar to many other economic disasters, the Great Recession was set in motion by a combination of several economic and financial issues. The financial crisis, in comparison, comprised the emergence of numerous obstacles to the efficient use of available financial resources (Jordà et al. 132). Indeed, the increasing speed of the mortgage crisis that erupted in the United States and soon swept the entire world has been traditionally regarded as a key factor in defining the further evolution of the Great Recession (Mouton and Smith 794).

However, apart from the financial crisis, the Great Recession was also defined and shaped by an array of economic, financial, and social factors. The creation of the housing bubble that sparked the financial crisis of 2008 was only one driver among others behind the Great Recession. Therefore, the financial crisis can be viewed as an integral part and a constituent of the Great Recession, yet it cannot be labeled as the latter’s ultimate cause (Jordà et al. 133).

The Financial Crisis and Its Prerequisites: Retrospect

At its earliest stage, the financial crisis’s inception was marked by the emergence of frictionless financial markets (Adrian et al. 2558). This phenomenon implied that no transaction costs were taken during essential processes that occurred in the setting of the identified markets. Contributing to aggravating the problem was the fact that the framework for frictionless markets, though temporarily lucrative, did not provide opportunities to forecast the disruption of credit markets.

The lack of control over the financial risks that occurred in the realm of the American market can be regarded as an essential signifier of a rapidly developing financial crisis. Indeed, shortly after this crisis took place, the Great Recession erupted, causing a massive drop in overall economic growth within the United States (Jordà et al. 133). However, even though the financial crisis took place slightly before the Great Recession, it cannot be regarded as the sole driving force behind the latter. Instead, the relationship between the two is much more complex than simple cause and effect.

The connection between the Financial Crisis and the Great Recession

On the surface, the financial crisis is typically viewed as the direct driving force behind the development of the Great Recession (Phillips and Nugent 25). Indeed, reasons can be found to assume that the crisis under consideration contributed significantly to the increasingly fast pace of the economic downfall that the world witnessed in the 2010s. In fact, a range of scholars has viewed the subject matter as the key cause of the Great Recession since it spurred further magnification of financial issues as a result of the mortgage crisis (Phillips and Nugent 24).

The financial crisis is typically viewed as a primary factor behind the development of the Great Recession (Adrian et al. 2559). However, as shown, the two share the same origin and, therefore, cannot be viewed as bound entirely by a cause-and-effect link. Instead, the financial crisis of 2008 can be deemed a prerequisite of the Great Recession as well as its key symptom (Jordà et al. 134). Indeed, seeing that each of the factors was triggered by the onset of the mortgage crisis in the United States, there are reasons to assume that they evolved as separate phenomena, yet inevitably developed interdependence and, thus, became intrinsically connected (Phillips and Nugent 27).

Thus, it could be argued that the financial crisis contributed to the intensification of the Great Recession, yet the lack of a coherent financial strategy and the absence of an efficient risk management framework caused the Great Recession to gain the scope and scale that has been witnessed in the recent past. Although the financial crisis affected the further development of the Great Recession and established its pace to a considerable extent, both phenomena can be considered to have the same source and, therefore, are interconnected rather than defined in terms of cause and effect.

Conclusion: The Great Recession and the Financial Crisis

Even though reasons can be found to assume that the financial crisis of 2008 spurred the development of the Great Recession, it is more sensible to view the two phenomena as occurrences that, as they were influenced by a similar range of factors, developed the propensity to influence each other. Thus, the connection between the Great Recession and the financial crisis of 2008 is much deeper than a basic cause-and-effect chain of events. Instead, the two concepts must be explored as separate phenomena that affected each other.

The Great Recession, while admittedly devastating, must be regarded as an important phenomenon that requires additional study to avert similar future occurrences. However, it would be wrong to consider this event in isolation from the factors that contributed to its development, the financial crisis of 2008 is key. The financial crisis, in turn, can be viewed as a driving force behind the development of the Great Recession. However, the deteriorating economic conditions also affected the financial situation, spurring the aggravation of the financial crisis as a result. Therefore, it is reasonable to assume that both the financial crisis and the Great Recession mutually affected one another.

Works Cited

Adrian, Tobias, et al. “Financial Intermediaries and the Cross‐Section of Asset Returns.” The Journal of Finance, vol. 69, no. 6, 2014, 2557-2596.

Jordà, Òscar, et al. “The Great Mortgaging: Housing Finance, Crises and Business Cycles.” Economic Policy, vol. 31, no. 85, 2016, pp. 107-152.

Kiser, Elizabeth K., et al. “Supervisory Ratings and Bank Lending to Small Businesses During the Financial Crisis and Great Recession.” Journal of Financial Services Research, vol. 50, no. 2, 2016, pp. 163-186.

Mouton, Marise, and Nico Smith. “Company Determinants of Capital Structure on the JSE Ltd and the Influence of the 2008 Financial Crisis.” Journal of Economic and Financial Sciences, vol. 9, no. 3, 2016, pp. 789-806.

Ohanian, Lee E. “The Great Recession in the Shadow of the Great Depression: A Review Essay on Hall of Mirrors: The Great Depression, the Great Recession, and the Uses and Misuses of History, by Barry Eichengreen.” Journal of Economic Literature, vol. 55, no. 4, 2017, pp. 1583-1601.

Phillips, Julie A., and Colleen N. Nugent. “Suicide and the Great Recession of 2007–2009: The Role of Economic Factors in the 50 US States.” Social Science & Medicine, vol. 116, no. 1, 2014, pp. 22-31.