Question

What factors are Causes of the Great Recession? There are 4 factors, could you please discuss each one of them such as moral hazard, monetary policy, and lack of financial transparency? I have no clue about the foruth factor.

Answer 1

The first factor is subprime lending. Banks and financial institutions offered lending to those borrowers who had poor credit ratings. These borrowers defaulted when asset prices plummeted and value of assets lowered than the loans they were repaying. So, they denied the loan repayment and financial crisis began that led to the meltdown of the many banks and financial institutions and recession began.

The second factor is moral hazard behavior of the banks and financial institutions that took place when they had excessive greed and went for the speculative investments. They offered lending without proper verification and it is the case of moral hazard. Banks and financial institutions failed and investors and people suffered in the economy with recession.

The third factor is the monetary policy that was in the state of inaction. Fed thought that is the SEC who will take first action and SEC though that it is FTC that should take the action. In this scenario of policy paralysis, deregulated banks and financial institutions came up with the different types of risky investments such as credit default swaps and offered to the investors. But, it did not work and other factors in combination, led to meltdown and recession.

The fourth factor is the transparency and disclosures to be made by these banks and financial institutions. These institutions took the undue benefits of the deregulation of the industry and went with the risky and speculative investments. Though they did not disclose it properly and could not be detected by the regulatory bodies. It affected them and these institutions fell and crisis began.