a it the aftershoc. Beyond the headineitems ie unempoyment, faing GDP,consumer spending, and so on, recessionscause distortions and overcorrectionsin a wide array of individuas marets. And theconsequences can inger ong into the recovery years, even after much of the economic normaityhas returned. These distortions do not necessariydetract from the economic recovery, but some dohave impications for how and where the recoverycan go.
Cause and Effect
It often happens that the causes of a recession arediscovered ony after the fact. This was not thecase with the Great Recession, which was bornfrom the highy pubicized financia crisis causedby the US subprime metdown. A credit crisis,couped with a rise in the price of oi and othercommodities, may we have “shoced” the USeconomy further. It was the confuence of this tri-pe threat against the economy—a financia crisisthat spread quicy to consumption, exacerbatedby the difficuties of commodity price shoc to theeconomy—that ed to a deep and protracted reces-sion. The transmission of capita from savers toborrowers is pivota to the functioning of a heathyeconomy. The Credit Crisis was the breadown of this mechanism.
Home and Auto
Consider the housing and automobie marets.Autos and housing are credit-ined, ong-ivedassets with robust after-marets. Most peope buya home with a mortgage and many finance autos.And cheap credit had been spurring demand for years before the crisis. As the recession and creditcrunch disrupted the demand for new goods, thiseventuay had an effect on the secondary mar-ets, which are much arger, at east in terms of voume, than the primary in both cases.The used auto maret is a critica piece of theauto industry accounting for between 70 and 80percent of a auto saes. In 2008 and 2009, moreautos were scrapped than new ones purchased.This is a rare occurrence in the auto maret, andhas the effect of reducing the number of carsavaiabe for purchase in future secondary— used—marets. New cars outnumbered scrappedautos by around 4.75 miion per year between2002 and 2007, but in 2008 more than 800,000more autos were scrapped than bought. By theend of 2009, the trend had amost corrected withony 29,000 more auto scrapped. New saes againoutpaced scrapped autos in 2010 and 2011 as therecovery began to tae hod.There were fewer new cars purchased andeased during the Great Recession resuting infewer future used vehices on the road—pushing prices for used cars higher. Between December2008 and May 2011, used car prices increased30 percent. Prices have pued bac from theMay 2011 pea, but remain at robust eves. Autosaes have now returned to a seasonay adjustedannua saes pace of just above 15 miion, thoughthis is sti beow the average of 16.7 miionbetween 2003 and 2006, when auto saes began
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