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The Great Recession

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The Great Recession

Introduction

        The Great Recession refers to the immediate and sharp decline in the economic activities recorded during the late 2000s particularly from December 2007 to June 2009. Grusky & Wimer (2011). Apparently, the great recession is considered to be the biggest downturn since the Great Depression that took place in the 1930s. The economic slump commenced when the America’s housing market moved from blast to bust and lots of mortgage-backed derivatives and securities lost exceptional value. This paper explores the causes of the Great Recession and as such, will explain the economic costs associated with the recession. Moreover, it will explain the steps taken to return the economy back to full business.

Reasons for the Great Recession

        Various factors, directly and indirectly, contributed to the Great Recession. The paper will discuss four causes of the Great Recession.

The Housing Market Crash

        According to Hetzel (2012), the United States housing market is a major determinant of the rate of economic growth and also consumer spending. As a matter of fact, Hetzel (2012) points out that various factors affected the house price to rise faster than the customer income thereby created overvalued assets. Hetzel (2012) suggests that there was no control of the subprime mortgages. As such, the mortgage companies were able to sell mortgages without putting into consideration whether the consumers would pay back. The majority of these subprime mortgages brought about massive foreclosures. Thus, according to Hetzel (2012), the mortgage agents and brokers and institutions not covered by the Community Reinvestment Act were greatly impacted. In the same fashion, economists stated that the US monetary authorities had altered the interest rates to low levels which in turn created a debt finance utilisation blast. These low-interest rates contributed to the fast growth of the subprime mortgages and in consequently activated the great recession. Hetzel (2012).

Credit Crunch

        Credit crunch refers to an unexpected and sudden of funds bringing about a decline in loans available. Claessens & Kose (2013). Alexander (2010) pointed out that the high subprime mortgage deficits in The United States created a credit crunch. Further, the literature by Alexander (2010) states that many commercial banks and investment banks at the time faced huge losses as a result of risky mortgage loans. For this reason, the banks were reluctant to loan money to both banks and customers. This trend eventually led to a shortage of funds in the money markets. According to Alexander (2010), lack of liquidity in the money/finance sector made borrowing and lending difficult and expensive. As a result, consumer spending and investment went down. This trend paved the way for the recession.