įederal Reserve Chair Ben Bernanke testified in September 2010 regarding the causes of the crisis. This caused financial institution losses to surge, deepening the credit crunch, thereby creating an adverse feedback loop. Higher unemployment due to the recession made it more difficult for consumers and countries to honor their obligations. Businesses also cut back their investments as demand faltered and reduced their workforces. Consumers and some governments were no longer able to borrow and spend at pre-crisis levels. and Europe cut back lending causing a credit crunch. This system had grown to rival the depository system in scale yet was not subject to the same regulatory safeguards. The fall in asset prices (such as subprime mortgage-backed securities) during 20 caused the equivalent of a bank run on the U.S., which includes investment banks and other non-depository financial entities. homeowners were no longer able to refinance and defaulted in record numbers, leading to the collapse of securities backed by these mortgages that now pervaded the system. When global credit markets essentially stopped funding mortgage-related investments in the 2007-2008 period, U.S. households often had adjustable rate mortgages, which had lower initial interest rates and payments that later rose. Households became dependent on being able to refinance their mortgages. When the bubbles developed, household debt levels rose sharply after the year 2000 globally. Many institutions lowered credit standards to continue feeding the global demand for mortgage securities, generating huge profits that their investors shared. Further, many institutions had become dependent on short-term (overnight) funding markets subject to disruption. and European housing bubbles began to deflate during the 2007-2009 period, depending on the country. Many of these institutions had invested in risky securities that lost much or all of their value when U.S. The immediate or proximate cause of the crisis in 2008 was the failure or risk of failure at major financial institutions globally, starting with the rescue of investment bank Bear Stearns in March 2008 and the failure of Lehman Brothers in September 2008.
households and financial businesses significantly increased borrowing (leverage) in the years leading up to the crisis
Overview Housing price appreciation in selected countries, 2002-2008 U.S. These included fiscal policies of governments monetary policies of central banks measures designed to help indebted consumers refinance their mortgage debt and inconsistent approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses. Once the recession began, various responses were attempted with different degrees of success. government housing policies and limited regulation of non-depository financial institutions. The major causes of the initial subprime mortgage crisis and the following recession include lax lending standards contributing to the real-estate bubbles that have since burst U.S. Many factors directly and indirectly serve as the causes of the Great Recession that started in 2008 with the US subprime mortgage crisis.
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