Economic Recession and its Causes

The global financial crisis is a situation of high economic recession. It is a situation from 2007-08 that is an extreme situation after the 1930s great depression. This crisis has its breeding ground in the US for the subprime mortgage market.

This spread worldwide in the banking sector on September 15th, 2008 that resulted in Lehman Brothers collapse in the investment bank. The crisis aggravated by risk-taking banks in the world just like Lehman Brothers.

 It was not the only cause, but many other factors were there.

Primary objectives of the great crisis of 2007-08 are below:

Causes of Economic Crisis

The leading cause of the great crisis was the busting of peak US housing bubble during 2006-07. Russian and Asian crisis in 1998 caused ease of access in the US; as it powered by the credit strength of foreign money overflow.

This situation increased construction of houses. These houses belonged mainly to the debt-financed clients. Since loans were readily available to potential homeowners and this causes prices to bloom.

Lax lending and continued real estate prices also were a contributory factor for the bursting of the bubble.

Loans were readily available, and clients started accumulated them. This caused a situation of mortgage-backed securities through invested loans and collateralized obligation of debt.

This situation caused prices to decline because customers had owned a lot of loans that could not pay easily.

It was attributable to the decrease in purchasing power. Housing construction showed low prices and the homes created in that situation were less than the mortgage loans, so it caused most of the houses to close down.

One more reason of the enormous Economic Recession of 2007 to 2018 was the existence of the predatory lending. Predatory lending means the unfettered lenders enticing or influencing lenders to make the “unsafe” or “unsound” protected loans for reasons that were not appropriate.

Switch and bait methods, for example, used for the advertising by the nationwide financial companies. They used the State’s interest rates for the purposes of home financing.

These kinds of loans became very difficult to repay on the ultimate day. Where in the initial process these loans contract has very detailed documentation that was difficult to understand by the borrowers.

Customers would be told about the adaptable rates of mortgages but the interest rates could be larger than the payments making crises.  In addition to, product rise was also a big reason of the enormous Economic Crises of 2007 to 2018.

The unrestrained increase in the price of many products such as oil prices that lead to the fall down of the housing bubble was the major investment in the market.

Many investors believed this kind of investment would make them a lot of profits.

Oil prices increased, and purchasing power of customer reduced. Consumers started investing their finance in gasoline. It created a down pressure on the growth of the economy.

Mainly this affected those economies involved in oil import because it made the flow of wealth to oil-producing countries.

This was attributable to cripple the consumers spending power and is a leading cause of 2007-08 great economic recessions.

Many commodities seen a boost in prices, like copper because it was among those products that most of the countries were used to rely on. For instance, increase in price compelled copper price to rise by $7040 per ton in 2018.

The economic recession of 2007-08 spread many spillovers across the globe. For instance, consumer power to spend declined to a large extent, and they faced a huge burden of the loan in the form of increased prices of commodities.

Leave a Reply