Causes & Effects of Recession

INTRODUCTION

The ‘Financial Crisis of 2008’, also called the US Meltdown, has its origin in the United States housing sector back in 2001-02, but gradually extended over a period of time and eventually brought the entire world under its grip. The financial crisis is characterized by contracted liquidity in the global credit and housing market, triggered by the failure of mortgage companies, investment banks, and government institutions which had heavily invested in subprime loans. Though the crisis started in 2005-06, but has become more visible during 2007-08, when many of the renowned Wall Street firms collapsed.

According to IMF officials, the losses due to real estate crisis is amounted to $945 billion in USA alone, but may run into trillions of dollars, the losses of all the countries considered together. Initially, the crisis caused mass foreclosure and default in subprime loans but the crisis accelerated during the month of September 2008, and ultimately developed into a global financial crisis. The impact of this crisis was so severe that it led to the collapse of top investment firm’s viz. Lehman Brothers, Bears Sterns. Merill Lynch and others such as Citi Group, JP Morgan were rescued by the government and AIG (American Investment Group). The impact of this crisis was so severe that the United States Government had to intervene in the free market economy and had to come with $700 billion bailout package to revive the investment banks/firms and reinstate the investor’s faith in the stock market. Since January 2008, owners of stocks in U.S. stock market have suffered about $12 trillion dollar in losses, as their value declined from $20 trillion to $12 trillion.

This paper provides causes of the crisis and insights into the events surrounding the crisis of 2007. The brief account of these issues highlights both the severity of the crisis and the diversity in its impact on US economy.

CAUSES OF RECESSION

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