Question

In: Finance

What caused the Great Recession and give a description of the event

What caused the Great Recession and give a description of the event

Solutions

Expert Solution

There were a plenty of factors that caused great recession like substandard lending and Bad ratings assignment of securities, International trade imbalances and irrational mortgage and inflation of housing sector.

It began when a lot of borrowers were mortaging their house property as they felt that houses were hedged against any depreciation in value. The bank were issuing substandard loans based upon the mortgage and investment bankers wrote off the derivatives which had real estate as underlying assets as they also felt that housing sector was hedged completely. Insurance sector also Wrote off the bank CDS.

This led to an irrational inflation of securities in the real estate market and one default led to another as entire bull run was based upon bubbling up of assets valuation and it led to a widespread triggering of offloading of real estate assets leading to banks & investment bankers to collapse with insurance sectors leading to a great depression.

FED came to the rescue with intervention through various liquidity injection programme and bailout to save American markets and it stabilized through various mergers and haicuts .It took some time before things were back at normalcy.


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