What Was The Main Cause Of The Great Recession Essay
Were banks the main cause of the Great Recession of 2007-2010? The Great Recession was the greatest financial crisis that impacted the world since the Great Depression of the 1920s and early 1930s. Unemployment rates reached five percent in the United States while many large banks and corporations failed (Rosenberg 338). It is important to understand the causes of this recession so we can prevent similar occurrences in the future. There are several explanations as to why the crisis happened, along with many solutions that can prevent another. Although there were many global, societal, and policy-related factors that led to such a severe crisis, the activities of banks preceding the Recession combined with unfair lending practices were the
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Without worldwide financial problems, the crisis would have been less significant. According to the former Chairman of the Federal Reserve, some banks wanted to move over their asset-backed investments to banks where they would be more secure (Bernanke). Asset-backed meant that they wanted to shift their investments that relied on collateral (which was usually a form of lending) to where they would perform better. Banks from all across the world were involved in this process, which made it hard for them to obtain temporary funding (Bernanke). Enough funding is needed for banks to be able to lend money to borrowers. Consequently, borrowers were not able to borrow as much. A lack of funding made the loan market very vulnerable because the borrowers’ options became limited to subprime mortgages, and subprime mortgages were the main reason for mortgage defaults. On the other hand, typical borrowers were not the only group impacted by asset-backed investments. Large borrowers that relied on lending were also marginalized by having to rely on loans that were funded by other financial products themselves, instead of banks themselves. This was an abrupt change in funding for these borrowers which resulted in lower investment ratings. Lower ratings made investors less confident and hurt the financial system (Bernanke). When investors have little faith in an investment, they sell the investment or
Without worldwide financial problems, the crisis would have been less significant. According to the former Chairman of the Federal Reserve, some banks wanted to move over their asset-backed investments to banks where they would be more secure (Bernanke). Asset-backed meant that they wanted to shift their investments that relied on collateral (which was usually a form of lending) to where they would perform better. Banks from all across the world were involved in this process, which made it hard for them to obtain temporary funding (Bernanke). Enough funding is needed for banks to be able to lend money to borrowers. Consequently, borrowers were not able to borrow as much. A lack of funding made the loan market very vulnerable because the borrowers’ options became limited to subprime mortgages, and subprime mortgages were the main reason for mortgage defaults. On the other hand, typical borrowers were not the only group impacted by asset-backed investments. Large borrowers that relied on lending were also marginalized by having to rely on loans that were funded by other financial products themselves, instead of banks themselves. This was an abrupt change in funding for these borrowers which resulted in lower investment ratings. Lower ratings made investors less confident and hurt the financial system (Bernanke). When investors have little faith in an investment, they sell the investment or