The Great Recession

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BACKGROUND: The Great Recession

The Great Recession was preceded by the financial crisis of 2008, when the housing bubble burst as a result of risky bank lending and many Americans found themselves unable to afford home payments. The Financial Crisis Inquiry Commission found that the Recession was caused in part by lax regulation and risky investments on the part of corporations.

Cause One: The Housing Bubble Bursts

What caused the Great Recession?

Cause Two: Banks Fail

Cause Three: Businesses Fail

The US Government cut interest rates after the events of Sept. 11, 2001, severely impacted the U.S> economy. This caused a real estate boom and many borrowers who wouldn’t otherwise have qualified for mortgages obtained home loans, on the expectation that interest rates would stay low. However, after 2004, interest rates rose to combat inflation. The rates on people’s mortages reset at a much higher rate than they expected. As more and more people sold in order to escape this debt, the housing bubble burst. People were paying more for their mortgages than their houses were worth.

The Collapse of the Housing Market

Because banks could no longer extend credit to businesses, businesses had to reduce their spending and investing, which led to widespread layoffs. These layoffs hurt both employees and businesses— without jobs, consumers weren’t spending money on the products that these businesses sold, which further hurt the businesses, which caused even more layoffs.

Businesses Suffer