The Main Reasons Recessions Happen
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Recessions come and go. A typical, open cycle of borrowing eventually can come up against limitations. In this video, Entrepreneur Network partner Phil Town describes the recent good fortunes of the economy and why recessions happen.
Town describes a credit cycle where one person's income eventually becomes another's. When this cycle gets out of hand, the Federal Reserve steps in by raising interest rates.
Raising interest rates affects indivduals' abilities to make payments on items they've already bought, which further affects this cycle of credit. If one person who previously took out a large amount of credit enters into bakruptcy, this affects the level of credit extended to others. If people have less credit, they'll have more limited ability to take out loans, and if people have less money, they will cut down on spending, dragging down the economy.
These Federal Reserve-regulated interest rates are used to control spending, both corporate and personal.
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