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The Great Recession of 2007–2009 was primarily caused by the collapse of the U.S. housing bubble and the subsequent subprime mortgage crisis.
Risky lending practices, such as providing mortgages to borrowers with
poor credit, led to widespread defaults when housing prices began to
decline. This created toxic mortgage-backed securities that caused
severe losses for financial institutions worldwide.
Key Factors and Causes:
- Subprime Mortgage Crisis: Banks and lenders issued high-risk, subprime mortgages to borrowers with low income or poor credit, anticipating rising home prices would cover any issues.
- Bursting of the Housing Bubble: When home prices peaked in 2007 and began to fall, many homeowners defaulted on their loans, causing a surge in foreclosures.
- Risky Financial Products: Investment banks bundled these subprime loans into complex financial instruments (mortgage-backed securities), which lost their value, severely hurting the global financial sector.
- "Negative Credit Shock": As banks suffered massive losses, they stopped lending to each other and to businesses, leading to a credit crunch that stalled economic activity.
- Regulatory Failures: Gaps in financial regulations and poor oversight allowed for excessive risks and unsustainable lending practices to grow unchecked.
The
combination of these factors caused a severe contraction in financial
markets, leading to high unemployment, significant household wealth
loss, and a global economic downturn.
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