The Recession of the Early 1990s

Instructor: Ashley Kannan

Ashley has taught history, literature, and political science and has a Master's Degree in Education

There are many reasons why recessions occur, including those related to economic, global, local and political factors. In this lesson, we'll explore the 'perfect storm' that caused the recession of the early 1990s and led to a massive economic change in a very short period of time.

Roots of the Recession

President Ronald Reagan's economic policy, or Reaganomics, had a profound effect on the United States. By cutting taxes on the very wealthy, the policy resulted in both an economic boom and insufficient funding of expenditures. The policy eventually led to large deficits and played a role in 'Black Monday' and the Stock Market Crash of 1987.

As the 1990s approached, economists and investors believed that these deficits would continue to cause problems. The Federal Reserve Bank sought to counter these concerns by embracing a restrictive monetary policy, through which they hoped to curb inflation and stabilize prices. The result was a dramatic limit in economic growth and one of the major causes of a recession that began in July 1990 and ended in March 1991.

The term, recession, refers to two back-to-back quarters where the gross domestic product (GDP) declines and the economy fails to grow. During a recession, consumers demand and buy less. As businesses fail to grow, unemployment tends to be high.

Savings and Loan Crisis of the late 1980s

The collapse of more than 1,000 savings and loan institutions in the late 1980s was the major cause of the economic recession of the 1990s. Savings and loan institutions offer low-interest lending with federally insured deposits. However, the deregulation of the savings and loan industry in the early 1980s allowed these institutions to compete with money market accounts and guarantee loans without federal oversight. As the result of riskier investing and lending practices, many savings and loans institutions went bankrupt and were unable to issue refunds to depositors, including those located in Texas.

In 1989, newly elected President George H.W. Bush, a resident of Texas, and his administration decided to bail out or liquidate some of the institutions in the failed savings and loan industry. The bailout cost taxpayers approximately $124 billion. Taxpayers not only lost confidence in a government that had helped to create the industry's problem in the first place, they also saw the values of their homes decline.

The Real Estate Bubble of the 1980s

In the early 1980s, interest rates on home mortgage were extremely high: as much as 18%-19%. By the mid-1980s, they fell to approximately 10%, still high by today's standards. Affluent Americans and investors began 'flipping' homes, or buying and then selling them within a short period of time for huge profits. As hot commodities, houses began to dramatically increase in value; however, the savings and loan crisis of the 1980s and a volatile housing market eventually caused housing prices to plummet. Consumers who expected their homes to increase in value sometimes lost money instead. As lending institutions failed, housing loans became harder to obtain.

Price of Oil

On August 2, 1990, Iraq invaded and annexed of Kuwait, after accusing the latter of taking its oil. Within a week of the invasion, crude oil prices had risen to well over $20 a barrel, a spike that affected Americans at the gas pump. In January 1991, an international coalition led by the United States attacked Iraq and drove its occupying forces out of Kuwait. Although oil prices subsequently stabilized, the oil spike of 1990 further eroded consumer confidence, although the recession officially came to an end in March 1991.

End of the Recession

At the Republican National Convention in 1988, Vice-President George H.W. Bush, candidate for the presidency, made a promise to voters. He told them to: 'Read my lips: No new taxes.' In making this promise, Bush wanted to distinguish himself from his opponent, Governor Michael Dukakis and remind voters of the economic prosperity that occurred under President Reagan.

President Bush reciting his promise
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