Question

Discuss briefly the three reasons why the US economy went into the Great Recession in 2007.

Answer 1

Great Recession was the financial crisis the hit the economies around the globe in 2008.

It started with the USA housing bubble and risky mortgage lending.

Three main reasons or causes of the Great Recession.

• unregulated lending market
• Bursting of the housing bubble
• Imbalances in international trade

>>When the interest rates for loans went down in 2004-2005, the people started buying houses. They took interest-only loans. This created a vast amount of subprime mortgages which were very risky. The low-interest rates led to an attractive housing bubble in the US when seeing the present market situation, people speculated that the house prices will increase in the future.

>>Later on, the investors who invested in mortgages-backed securities experienced huge losses as these mortgages were mostly subprime ones and the borrowers defaulted when the housing bubble burst in 2006. In 2006, the house prices went down and the people started panicking about their loans which couldn't be paid off even by selling their current lands or houses.

>> The recession of the USA led to the major international trade imbalance that affected the global economies. This recession ended the debt-financed economic growth that took place after the Asian tigers and China entered the global markets and shifted the trend of global demand and supply. Thus when the recession hit the US, the huge debt they have accumulated so far left them in the great pinch.