Which three factors led to the Great Recession in 2008?
A.high-interest rates
B.the fall of the stock market
C.the deregulation of the financial sector
D.banks giving subprime mortgages
E.a decrease in international lending
The Correct Answer and Explanation is :
The Great Recession of 2008 was a significant global economic downturn, and multiple factors contributed to its onset. Among the options provided, the three key factors that led to the recession are C. the deregulation of the financial sector, D. banks giving subprime mortgages, and B. the fall of the stock market.
- Deregulation of the Financial Sector (C): In the years leading up to the recession, significant deregulation occurred in the financial industry, particularly with the repeal of the Glass-Steagall Act in 1999, which had previously separated commercial banking from investment banking. This deregulation allowed financial institutions to engage in riskier behaviors, creating complex financial products that were poorly understood, such as mortgage-backed securities (MBS) and collateralized debt obligations (CDOs). The absence of adequate regulation enabled banks to take on excessive risk without appropriate oversight, setting the stage for a financial crisis.
- Banks Giving Subprime Mortgages (D): During the housing boom, banks began issuing subprime mortgages—loans to borrowers with poor credit histories. These loans often had high-interest rates and were structured in a way that made them difficult to repay. The belief that housing prices would continue to rise led banks to lend recklessly. When housing prices began to decline, many homeowners found themselves unable to make payments, leading to widespread defaults and foreclosures. This surge in mortgage delinquencies caused the value of mortgage-backed securities to plummet, triggering financial instability across the banking sector.
- Fall of the Stock Market (B): As the crisis unfolded, the stock market reacted negatively to the instability in the financial sector. In 2008, major financial institutions began to collapse or required government bailouts, leading to a loss of confidence among investors. The stock market experienced dramatic declines, eroding household wealth and further contributing to economic uncertainty. The fall of the stock market not only reflected the crisis but also exacerbated it by reducing consumer spending and business investment.
Together, these factors created a perfect storm that culminated in the Great Recession, which had lasting effects on the global economy.