The 2007-2009 recession is described as the worst form of economic downfall ever since the great depression that occurred in the year 1930. It is with this reason that the 2007-2009 recession got dubbed as the Great recession of all time. This great recession resulted to tremendous, devastating effects such as high unemployment rates, a host of associated labor-market problems, and the ongoing threat of a double-dip recession (Canterbery, 2011). By mid-2008, several developed countries also collectively went into economic recession. The recession commenced as a seemingly isolated turbulence in the sub-prime segment of the US housing market after which it mutated into a full blown recession by December in the year 2007 (Canterbery, 2011). The Great recession initiated a heated debate on some of the factors that could have actually led to its occurrence. This paper seeks to elucidate and discuss on some of the factors that could have led to the Great Recession.
Great recession is said to have been as a result of the house bubble burst. The downfall of the global economy commenced in the late 2007, when consumers had unlimited access to mortgage loans with low interest rates. A vast majority of consumers with weak financial records were permitted to the submerged mortgages. The number of borrowers shot up due to the fear of a significant increase in home prices. Ultimately, the new home owners increased the prices of their homes as a result of an unprecedented increase in demand for houses. This motivated a vast majority of people to borrow more mortgages with the intent of making profit from home ownership. In fact, the increase in supply of mortgages with low interests and relaxed credit standards for borrowers captivated people from different parts of the world. Investors who foresaw huge profits decided to invest on mortgage-backed securities. Eventually, financial bubble became a result of the mortgage being easily provided to the risky borrowers who could not repay back the loans.
The rate of unemployment increased by 10% as a result of a significant decline in the consumers’ spending. People working in consumer related employment were the most affected as they lost their jobs due to low consumer spending. Additionally, there was a heavy decline of approximately 4.2% of the GDP. Furthermore, both GDP and unemployment rates are closely interrelated with each other as a decrease in GDP results to an increase in unemployment. In response to the great recession, several policy makers incorporated new fiscal and monetary policies in an attempt to recover from the devastating recession period. These policies included; an increase in government spending, large budget deficits and expansionary monetary policy (Canterbery, 2011).
In conclusion, most countries were able to recover from the financial crisis during the course of the year 2009. The unemployment rates reduced whereas there was an increase in GDP. However, some countries are still in the recovery process in spite of an increase in economic growth in the late 2009.
Canterbery, E. R. (2011). The Global Great Recession. Singapore: World Scientific.