Assignment #7
The Great Recession that began in 2007 created a dark era for our country’s economy. The crisis
was primarily on started by housing and mortgage loans. Risky mortgages and other financial market
practices played an important role in creating the conditions that led up to the economic collapse.
Subprime mortgages made home ownership more attainable for millions of American citizens.
With the assumption that home prices would keep increasing, people not only bought more houses,
they also bought bigger houses and renovations of homes greatly increased. This increase drove house
prices up, confirmed expectations of rising house prices, made homeowners feel wealthier, and enabled
Americans to borrow even more. This situation, know as the “credit crunch,” led to a fall in bank
lending.
When house prices dropped, many homeowners faced negative equity. Because of this, most
people cut back on spending and couldn’t rely on re-mortgaging to gain equity withdrawal. There was
also a drop in world trade due to the global nature of the crisis. The U.S. saw a drop in imports and
exports as the downturn led to lower demand. In 2008, the US decided to allow Lehman Brothers to go
bankrupt. This caused a major loss of confidence. After the panic this created, governments realized
they couldn’t allow a repeat of this situation. The economy was eventually restored with the help of