Question

What are the causes of the Recession in 2008-09?

Answer 1

Recession generally means reduced economic activity and GDP of an economomy for a considerable period of time.The subprime mortgage crisis was the stepping stone to the recession of 2008-09. The Great Recession started in December 2007. The Great Recession along with the Global Financial Crisis in 2008 has caused a prolonged period of economic instability from December 2007 to June 2009.

The main catalyse to the event was the Subprime mortgage crisis. Subprime mortgages are basically granted to people who are poor and have low credit scores. The banks mainly wanted to derive profit from high origination fees by passing of risky mortgage backed securities to the investors. During the mid 2000s the housing sector was blooming for which the banks and other financial institutions were giving mortgages to these people at lower interest rste. Due to easy and hassle free access to mortgage loan,demand for housing increased causing the price of housing to increase. Soon after ,the home owners were unable to pay their mortgages and reselling homes at an exorbitant prices was not viable enough. The problem further accelerated when one of the leading Subprime mortgage lenders Century Financial Corporation became bankrupt. As a result most financial institutions stopped giving mortgages , which resulted in low demand and low housing prices. These resulted in low construction work,lesser consumer spending and financial institutions and investment and security market suffered massive loss.

Another Important factor which resulted in the Great Recession is the instability of the stock market. The stock market was blooming in 2007 which resulted in huge amount of investment in stock market after Dow Jones Industrial Average exceeded 14000. However , it lost half of it's value in next year due to volatility in the stock market causing catastrophic financial looses to those who invested in the stock market. The U.S Federal Reserve tried to combat such catastrophe by reducing the national target interest rate to zero percent from 5.25% to encourage capital investment and borrowing. The Stimulus package was also introduced for businessman to invest in capital, to reduce taxes and boost the economy . But both these failed to revive the economy from the ultimate catastrophe and further aggrevated the situation.