Causes Of The Great Recession

The Great Recession was a worldwide economic decline that occurred around the end of the 2000s. The International Monetary Fund concluded that the Great Recession was the worst global recession since World War II (Davis, 2009). The exact timing of the recession is up for debate. However, the United States says that the recession began in December 2007 and last until June of 2009 (NBER, 2015). What is certain is that the Great Recession was due to a number of faulty monetary policies from across the world that collapsed near the same time. Specifically for the U.S. a number of issues exacerbated the problem such as: credit tightening strategies, housing market collapse, Federal Reserve increasing their money supply, and rapidly dropping stock
This is what caused the U.S. to experience the Great Recession as opposed to a mild recession. The housing market was collapsing, which lead to financial intermediaries to suffer. Once powerful financial giants, such as, Bear Stearns, Lehman Brothers, and Merrill Lynch were now on the brink of collapse. These successful institutions now needed help so they would not declare bankruptcy. So, what lead the U.S. to this place where the housing market had collapsed and financial institutions were now on the brink of shutting down. Several factors over a large period of years led to this destruction. For the U.S. housing market collapse, four factors led to the “bubble bursting”. First moral hazard was occurring. Moral hazard occurs when individuals or institutions do not bear the full cost of their own mistakes, which provides incentives to take excessive risks (Marthinsen, 2015). Since the end of World War II until present day, bank strategies began to change as to how people could obtain mortgages. Slowly, over the five decades, it became easier and easier for individuals to obtain mortgages to purchase a home. A second moral hazard was the securitization of mortgages. Banks began pooling mortgages together and using these pools in order to back other securities that their banks offered. One can imagine that if a bank relies on income from mortgages to back other securities that are
Today, there are a slew of emerging professors who obtained doctorate degrees from studying the Great Recession. By understanding the three market’s model, a more concise picture was drawn in understanding how connected these markets have been. The U.S. housing collapse has been attributed to pushing the Great Recession into existence. The four factors causing the housing collapsed were discussed. In our discussion of the three markets model, the housing collapse set the wheels in motion to greatly affect the other two markets. The final question in understand the Great Recession has yet to be answered. Will the actions of the U.S. Federal Reserve allow for lasting change? Will aggressive expansionary monetary policies hurt the U.S. in the future? Only time can answer theses questions of long-term recovery. One thing is for sure; by acting swiftly the U.S. stopped the hemorrhaging in the economy. Their actions allowed the time period from 2007 to 2009 to be known as the Great Recession and not the Great