Causes of the Recession

Good Essays
Over the past few years our country and the rest of the world has experienced an economic crisis. For the United States, it’s been one of the worst economic recessions since the Great Depression during the 1930’s. The recession was caused by many downfalls but the majority was caused by the collapse of the housing market. In the years before the crisis, the behavior of lenders changed dramatically. Lenders offered more and more loans to higher-risk borrowers, including undocumented immigrants. Lending standards particularly deteriorated in 2004 to 2007. Fannie Mae and Freddie Mac supported the housing industry by providing billions in financing to the mortgage market. Both companies bought safer loans that followed their guidelines.…show more content…
This meant that several of the largest lenders of subprime loans played a role in the subprime mortgage crisis by having to claim bankruptcy and foreclose on loans. The people who now had homes at lower values also had loans larger than the value of their homes and most of the times were not able to refinance with other lenders. When the countries largest subprime lender, New Century Financial Corporation, declared for bankruptcy it also caused a large majority of the rest of the subprime lending industry to go global and take its toll on hedge funds and banks around the world. One of the first banks to show that there was a financial problem besides the subprime loan industry was Bear Stearns. One of the United States largest investment banks would declare for bankruptcy because 2 of their hedge funds lost almost all of its investor capital. They attempted to use money from other operations to try to save the company but the loss from the other 2 hedge funds was too large (NPR, 2011). Other banks soon followed and caused the central banks coordinate to inject liquidity into credit markets for the first time since 9/11. To show this crisis went global, the U.S. Federal Reserve, the European Central Bank, and the Banks of Australia, Canada, and Japan all injected money. The countries largest mortgage lender reported that foreclosures and mortgage delinquencies, which meant that barrower has not paid back the lender, have risen to
Get Access