The Main Causes of the Great Recession in the USA Paper

Running head: THE MAIN CAUSES OF THE GREAT RECESSION IN THE USA
The main causes of the Great Recession in the USA
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THE MAIN CAUSES OF THE GREAT RECESSION IN THE USA
Executive Summary
This paper will highlight the main causes of Great Depression in the USA. The crisis was caused
due to several factors such as housing market bubble, credit default, stock market fluctuations,
Lehman Brothers and dumping from China. This had an effect on the GDP, growth, inflation,
unemployment rate and other indicators in the economy.

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THE MAIN CAUSES OF THE GREAT RECESSION IN THE USA
Peak
Growth
Recession
Trough or
Depression
GDP
Time
Recession refers to a significant decline or massive contraction in the economic activities.
In such a situation, income, real GDP, a manufacturing, employment and retail sale declines
drastically. As the rate of unemployment increases, the purchasing power of the consumer’s
declines and it also affects businesses. Such a situation also leads to bankruptcy. The main
reason of financial crisis is that banks were able to create too much money in a very short time.
This has also pushed the price of houses and thus it became easier to speculate the financial
market. The financial crisis of 2007-2008 is known as global financial crisis and it was regarded
as the worst financial crisis since the Great depression of 1930s. The crisis initially affected the
subprime mortgage market in US and later on affected the entire banking system. This paper will
highlight the main causes of great recession in the USA (Barro and Ursúa 2017).
Fig-Business Cycle

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THE MAIN CAUSES OF THE GREAT RECESSION IN THE USA
Source-Author’s Creation
The average housing prices in US has declined by 20% from 2006-2008. The easy credit
and the belief of the people that the housing price will appreciate have encouraged the borrowers
for adjustable mortgages. The borrowers could not make huge payments because the interest
rate was drastically falling and thus they try to refinance their mortgage. In such a situation,
refinancing also became difficult because the housing prices have been falling drastically. Thus,
the borrowers in such a situation found it difficult to escape from the high amount of monthly
payments which they had to pay through refinancing and thus they were in default (Dimitriou et
al. 2013). The event of housing bubble will affect both the consumers and the investors in the
later periods. This has also affected many developed market and thus there was fiscal detoriation
in the fiscal position. The most important factor which affected housing market bubble in US
was the deregulation of the market and the favourable terms of trade which affected the
government and the individuals to apply for different mortages. This has affected the prime loans
which were adhered to sustainable standards of lending (Kumar and Singh 2016).
The housing market has experienced steady growth rate during the period of 1995 to
1999. In case of stock market crash in 2000, there was huge shift of dollars from the stock
market to the housing sector. Moreover in housing market bubble there was availability of cheap
money for availing new loans in the period of economic recession. The banks and the federal
reserve’s has appreciated the housing market for the creation of wealth and provision of secured
assets which has helped people to borrow money and thus this has led the economy to grow
further. There were also many financial innovations which was included in different types of