July 2024

Economic Recession- The Possible Reasons To The Emergence

Economic Recession- The Possible Reasons To The Emergence

Economic recession has engulfed the entire world. Falling share markets and declining industrial growths make up the headlines in newspapers everyday. So, what caused the emergence of the economic recession in the world? In this article, we would like to discuss about the possible reasons that pushed the world economy towards its current decline.

The economic recession that looms large worldwide, initially started in the US. If we go back a few years, there was a boom in the housing sector of America and this was driving their economy to new heights. Motivated by this, many builders invested money and built houses to make profits. But, as they say…no boom lasts for long. Very soon, the boom ended and house owners were left with a large inventory of homes. This caused the prices of homes to decline from the beginning of summer 2006. To top this, many banks securitised the loans and when the housing market slumped, and people defaulted on their loans, everything tumbled. It was then discovered that loans were sold based on falsified credit reports, and people were taking loans that they could not actually afford.

As the house prices started falling in various parts of the United States, refinancing of home loans became more difficult. People were left with loans with quite higher interest rates and huge payment amounts.

Though it appears to be a local problem in America, it is not as simple as it seems to be. The original lender who lend funds to reckless borrowers, found the subprime loans as a very interesting and profitable part of their investment pattern. But, with the decline in the house prices, the lenders now found themselves in a messy circumstance.

These losses slowly affected the bigger corporates as well, as they were all interlinked. Some of the major financial institutions such as Citigroup and Merrill Lynch had to bear huge setbacks due to the losses. Despite the offer of financial help by US Federal Reserve, Bear Sterns, one of the major financial institutions collapsed. This also hit other companies like Merrill Lynch and Lehman Brothers. Lehman Brothers collapsed.

With the collapse of the major financial institutes and companies of the United States, the entire world received a wave of shock. America is the largest economy in the world, and the economic recession there, had its subsequent affects throughout the world too. Soon, the stock markets declined, unemployment rate rose, and economic depression became a worldwide concern.

And now we find Greece bankrupt, Spain and Italy in trouble, Ireland coming out of its mess, Iceland bankrupt – who will be next.

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