Major Causes of the 2001 Recession

Introduction:

the American economy began to show signs of a slump at the beginning of the 21st century. In 2000 the so-called dot-com bubble—the explosion of companies that sprouted up to take advantage of the Internet—burst. Analysts cited many reasons for the failure of these companies. Among them was that investors overestimated the extent to which consumers were willing to buy goods and services online. When venture capitalists—the people and companies that provide money to start-up businesses—became reluctant to invest new funds, the collapse began.

As many Internet companies went out of business, the stock prices of once high-flying companies such as Cisco Systems, Inc., and Lucent Technologies began to plummet. Other large companies, such as Microsoft Corporation and AOL Time Warner, Inc. (present-day Time Warner Inc.), announced that they would not meet projected profits. And just as high-technology stocks fueled the market’s rise, they dragged the market down. Both the Dow Jones Industrial Average and The Nasdaq Stock Market ended 2000 with a loss.

Soon the rest of the economy started to weaken. The National Bureau of Economic Research, a respected group of economists, estimated that the U.S. economy actually stopped growing in March 2001. Manufacturing and employment began to decline. The big automobile companies shut down plants and laid off thousands of workers. As businesspeople traveled less, airlines began cutting back. By the end of 2001, corporate profits had suffered one of their steepest drops in decades.

Many economists believe that the terrorist attacks of September 11, 2001, made the country’s slumping economy even worse. After remaining closed for several days after the terrorist attacks, the stock market suffered a record plunge when it reopened, with anxious investors selling off their holdings. Companies continued to trim workers, accelerating a downsizing that would total more than 1 million jobs by the end of 2001. Unemployment reached 8.3 million in December 2001, the highest in seven years.

What caused the 2001 Recession?

The recession of 2001 had four causes.

1. First, there was the technology boom of the 1990s, which got carried to unsustainable speculative heights.
2. Second, there was a gush of money created by the Federal Reserve Fund which became channeled into higher asset prices (stocks and real estate) rather than the price of consumer goods.
3. Third was the fraud and abuse of corporations, stock brokers, mutual fund companies, and stock exchanges, a systematic corruption of the financial markets rather than merely isolated cases.
4. Fourth was the September 11 attacks, with its devastating losses, followed by the costly War on Terror.