Economic Crisis Analysis 3: 1990 US Recession
This is basically explained by chatGPT 7788 (italicized). The reasons are a savings and loan crisis (banking industry) and a surge in oil prices caused by the Gulf War.
According to FDIC statistics, during the savings and loan crisis, over 2,900 institutions went bankrupt, corresponding to approximately $920 billion in total assets, accounting for about 19% of the annual GDP during that period. Among them, about 1,300 savings and loan institutions went bankrupt or were taken over, with total assets of approximately $620 billion, making it the hardest-hit area of the financial institutions that went bankrupt during that period (the rest were mainly commercial banks).
In summary, looking at the situation since 2008, whenever there are widespread bankruptcies of financial institutions, the impact of the recession will be significant. The reason is that the bankruptcy of financial institutions is equivalent to a contraction of the entire market's currency, which has a greater impact than the Federal Reserve's quantitative tightening.
Before the economic recession in the United States in 1990-1991, several key events and factors contributed to this economic downturn. Here are some major events and their underlying causes:
Savings and Loan Crisis
Time: Mid to late 1980s to early 1990s.
Background: In the 1980s, the United States experienced a severe savings and loan institution crisis. Savings and loan associations (S&Ls) lent a large amount of money, but due to interest rate fluctuations and mismanagement, these institutions faced severe funding shortages.
Reasons: In the 1980s, the Reagan administration relaxed regulations on S&L institutions, allowing them to engage in higher-risk investments. However, due to a downturn in the real estate market and defaults on high-risk loans, many S&L institutions went bankrupt. The government had to provide massive financial assistance, exacerbating fiscal pressures.
Impact: The savings and loan crisis led to financial system instability, undermining investor and consumer confidence, indirectly driving the economic recession.
Gulf War
Time: Iraq invaded Kuwait in August 1990, and the Gulf War broke out in early 1991.
Background: The invasion of Kuwait by Iraq in 1990 escalated tensions in the Middle East, threatening global oil supplies and leading to a substantial increase in international oil prices.
Reasons: The Middle East is a major global oil supplier, and the war directly affected the oil supply chain. The rise in oil prices increased production and transportation costs, leading to increased inflationary pressures.
Impact: The increase in oil prices struck a blow to the U.S. and global economy. Business costs increased, consumer spending decreased, and investment confidence declined, exacerbating economic weakness.
Federal Reserve’s Monetary Policy
Background: To address high inflation in the early 1980s, the Federal Reserve implemented a tight monetary policy, gradually raising interest rates to curb inflation.
Reasons: The Federal Reserve adopted a high-interest-rate policy from the mid-1980s to the early 1990s. Although it successfully controlled inflation, it also increased borrowing costs, suppressing investment and consumer demand.
Impact: Higher interest rates reduced business investment willingness and consumer borrowing capacity, slowing economic growth. In 1990, interest rates remained relatively high, laying the groundwork for the recession.
Real Estate Market Collapse
Background: In the 1980s, the U.S. real estate market experienced a period of prosperity, but after 1989, house prices began to decline.
Reasons: Overbuilding, relaxed lending standards by financial institutions, and high interest rates collectively led to a real estate bubble. As demand decreased and house prices fell, the real estate market fell into distress.
Impact: The decline in the real estate market led to a recession in the construction industry, significantly reducing demand in related industries (such as construction materials, furniture, etc.), dragging down the overall economy.
Corporate Bankruptcies and Layoffs
Background: As economic growth slowed, corporate profits declined, leading to bankruptcies or layoffs in some large companies.
Reasons: In the early 1990s, many companies, especially in the retail and manufacturing sectors, faced declining profitability and had to take large-scale layoff and cost-cutting measures.
Impact: The rise in unemployment, reduced consumer spending, further deepened the impact of the economic recession.
In summary, the 1990 U.S. economic recession was the result of the combined effects of multiple factors, including financial system instability (savings and loan crisis), external shocks (oil crisis caused by the Gulf War), tight monetary policy, and the bursting of the real estate market bubble. These factors interacted, leading to a decline in investment and consumer demand, ultimately triggering the 1990-1991 economic recession.
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