The recession of the early ass’s seemed to be caused by a number of possible factors. To begin, Iraq’s invasion of Kuwait in August 1990 was the trigger, as it caused the worldwide increase in oil prices and caused a decrease in consumer confidence. Other statistics such as one from the first quarter of 1989 showing the output of the U. S. At 3. 6 percent indicate that the economy had already been going downhill since before that time (Camera 61). The primary cause was the decrease in consumption, which a result of an increase n oil prices following the Persian Gulf War and partly because of a slowdown in the rate of population growth.
Other factors contributed to the drop in aggregate consumption demand. For example, fiscal tightening by President Ronald Reggae’s Economic Recovery Tax Act of 1981 (ERRATA) did not result in the intended “Loafer Curve” supply-side effect to negate its impact on the national budget (Hall 19). Therefore, the government found itself running unprecedented deficits without a need for fiscal stimulus. However, the Tax Reform Act of 1986 was an attempt to dress the problem, but a cutback in fiscal stimulus was undesirable as well (19).
Either way, Reggae’s efforts affected consumption negatively and consumers felt the difference. Other secondary reasons include technology, since the spread and popularity of credit cards caused consumers to build up excessive debt. Therefore, a reduced availability of credit without the necessary tightening of monetary policy by the Federal Reserve was definitely another probable cause of this recession. Lending constraints curtailed investments, which combined with poor investor sentiments, rated the so-called “credit crunch” and contributed to the downturn of the economy (20).
The publics negative outlook coupled with heavy debt incurred from the sass’s spending spree did not allow for a speedy recovery of the recession. Thus there was little incentive to invest and therefore “new-home starts in the early sass’s were at their lowest level since 1946 and auto sales fell to the lowers level since 1982” (Kramer 63). Private investment decreased significantly more than consumption. Large inventory drowns by business were also a key component in the decline of GAP.
However, as a percentage of GAP, the change in inventories was significantly smaller than that of past recessions. Therefore, it did not have much of an effect. The dollar depreciated by 7. 3% in inflation-adjusted terms over the next year after peaking in March 1990 (Elaborate 14) . The trade deficit improved and helped improve the decline in GAP as well. The trade deficit declined from 0. 9% of GAP in the second quarter of 1990 to 0. 3% of GAP in the first quarter of 1991 (14). The trade deficit and dollar were able to decline partly due to the state of the global economy.
While past recoveries from recessions stemmed from factors like construction and auto sales, the Federal Reserves policy of lowering interest rates did not persuade consumers to borrow or spend. Monetary and fiscal policy did not seem to conflict during the recession because President George H. W. Avoided fiscal policy action to stimulate the economy. More importantly, his Council of Economic Advisers, in the February 1992 report, argued that increases in fiscal expenditures or reductions in taxes might hamper the economy’s recovery (Economic Report of the President (February)).
In regards to monetary policy, from a peak of nearly 9. 75% in May of 1989, the target for the federal funds rate was lowered over the next 2 1/2 years to approximately 3% by the end of 1992. This showed the lag of monetary policy and its lack of quick impact. While monetary easing began even before the recession hit, it did not reach through to the private credit markets fast enough to prevent the economic downfall (Elaborate 1). The economic crisis of the early ass’s taught the public several things. First, the “credit-crunch” taught consumers that they could not spend what they didn’t have.
Next, the slow effects of the monetary policy of 1989 showed that the Fed needed to enact such policies more quickly, in order to prevent such a recession from even happening. Last but not least, we learned consumer confidence is very volatile and that there are numerous ways to stimulate investor sentiment. Works Cited Commercial Real Estate and the 1990-91 Recession in the United States. Massachusetts Institute of Technology Department of Urban Studies and Planning. Web. 18 Mar. 2013.. Hall, Robert E. “Macro Theory and the Recession of 1990-1991 .