The National Bureau of Economic Research NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product GDPreal incomeemployment, industrial production and wholesale-retail sales.
The Financial Crisis of Written By: Presented as archival content.
Unlike most articles on Britannica. Rather, they are presented on the site as archival content, intended for historical reference only. In the world economy faced its most dangerous Crisis since the Great Depression of the s. The contagion, which began in when sky-high home prices in the United States finally turned decisively downward, spread quickly, first to the entire U.
The casualties in the United States included a the entire investment banking industry, b the biggest insurance company, c the two enterprises chartered by the government to facilitate mortgage lending, d the largest mortgage lender, e the largest savings and loan, and f two of the largest commercial banks.
The carnage was not limited to the financial sector, however, as companies that normally rely on credit suffered heavily. The American auto industry, which pleaded for a federal bailout, found itself at the edge of an abyss.
Still more ominously, banks, trusting no one to pay them back, simply stopped making the loans that most businesses need to regulate their cash flows and without which they cannot do business. In December the National Bureau of Economic Research, the private group recognized as the official arbiter of such things, determined that a recession had begun in the United States in Decemberwhich made this already the third longest recession in the U.
Each in its own way, economies abroad marched to the American drummer. By the end of the year, Germany, Japan, and China were locked in recession, as were many smaller countries.
Many in Europe paid the price for having dabbled in American real estate securities. Japan and China largely avoided that pitfall, but their export-oriented manufacturers suffered as recessions in their major markets—the U.
Less-developed countries likewise lost markets abroad, and their foreign investment, on which they had depended for growth capital, withered. With none of the biggest economies prospering, there was no obvious engine to pull the world out of its recession, and both government and private economists predicted a rough recovery.
How did a crisis in the American housing market threaten to drag down the entire global economy? It began with mortgage dealers who issued mortgages with terms unfavourable to borrowers, who were often families that did not qualify for ordinary home loans.
Some included prepayment penalties that made it prohibitively expensive to refinance. These features were easy to miss for first-time home buyers, many of them unsophisticated in such matters, who were beguiled by the prospect that, no matter what their income or their ability to make a down payment, they could own a home.
Mortgage lenders did not merely hold the loans, content to receive a monthly check from the mortgage holder. Frequently they sold these loans to a bank or to Fannie Mae or Freddie Mac, two government-chartered institutions created to buy up mortgages and provide mortgage lenders with more money to lend.
Then the security would be sliced into perhaps 1, smaller pieces that would be sold to investors, often misidentified as low-risk investments. What began as insurance, however, turned quickly into speculation as financial institutions bought or sold credit default swaps on assets that they did not own.
As long as housing prices kept rising, everyone profited. Mortgage holders with inadequate sources of regular income could borrow against their rising home equity. The agencies that rank securities according to their safety which are paid by the issuers of those securities, not by the buyers generally rated mortgage-backed securities relatively safe—they were not.
When the housing bubble burst, more and more mortgage holders defaulted on their loans.
By the mild slump in housing prices that had begun in had become a free fall in some places. What ensued was a crisis in confidence: The first major institution to go under was Countrywide Financial Corp.
Bank of America agreed in January to terms for completing its purchase of the California-based Countrywide. The next victim, in March, was the Wall Street investment house Bear Stearns, which had a thick portfolio of mortgage-based securities.
Bush—could find it necessary to insert itself into private enterprise, the rescue of Fannie Mae and Freddie Mac in September laid that uncertainty to rest.
With the rush of defaults of subprime mortgages, Fannie and Freddie suffered the same losses as other mortgage companies, only worse. With Bear Stearns disposed of, the markets bid down share prices of Lehman Brothers and Merrill Lynch, two other investment banks with exposure to mortgage-backed securities.
Neither could withstand the heat. Lehman Brothers, however, could not find a buyer, and the government refused a Bear Stearns-style subsidy. In return, the U.
|What really causes economic downturns? | World Economic Forum||However, if growth is very low there will be increased spare capacity and increased unemployment; people will feel there is a recession.|
|Causes of recession||The National Bureau of Economic Research NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product GDPreal incomeemployment, industrial production and wholesale-retail sales. The nature and causes of recessions are simultaneously obvious and uncertain.|
|Causes of recessions | Economics Help||Explore the latest strategic trends, research and analysis Most empirical studies in macroeconomics approximate the deviations of aggregate economic variables such as the GDP from their trends with a normal distribution.|
|Causes of an Economic Downturn | Economics Help||Increases in uncertainty[ edit ] Increases in uncertainty can depress investment, or consumption.|
Five days later saw the end for the big independent investment banks. Rather than proclaim their innocence all the way to bankruptcy court, the two investment banks chose to transform themselves into ordinary bank holding companies.
Finally, in October, the Fed gave regulatory approval to the purchase of Wachovia Corp. Other banks also foundered, including some of the largest.A recession is a significant decline in economic activity lasting more than a few months, normally visible in real GDP, income and employment.
This article, the first of a series of five on the lessons of the upheaval, looks at its causes. Topics already a nasty downturn into the worst . - Definition, Causes & Effects A recession is a general downturn in any economy. A recession is associated with high unemployment, slowing gross domestic product, and high inflation.
A recession is a significant decline in economic activity lasting more than a few months, normally visible in real GDP, income and employment. Nov 08, · Understanding the underlying causes of large economic downturns such as the Great Depression has been one of the central questions in macroeconomics.
Our results suggest that the frequency and depth of such downturns may depend on the interaction between microeconomic firm-level shocks and the nature of input-output linkages across different firms.
Economic recession is a period of general economic decline and is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. Generally.