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In the rush to take advantage of a hot market and low interest rates, many homebuyers took on loans without knowing the risks involved. The result? Borrowers who were already on shaky financial footing stood a good chance of not being able to make payments when the interest rate rose in the years following. While interest rates at the time were low, subprime mortgages were adjustable-rate mortgages, which charged low, affordable payments initially, followed by higher payments in the years thereafter. This contributed to the run-up in housing prices, which led to the rapid formation (and eventual bursting) of the 2000s housing bubble. Easy housing credit resulted in the higher demand for homes.

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In fact, the loan verification process was so lax at the time that it drew its own nickname: NINJA loans, which stands for 'no income, no job, and no assets.'īecause subprime mortgages were granted to people who previously couldn't qualify for conventional mortgages, it opened the market to a flood of new homebuyers. A prospective subprime borrower might have multiple dings on their credit history or dubious streams of income.

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This made traditionally risky behavior - like aggressive investment and leveraging strategies, plus taking on excessive debt - seem safe.Īssumptions about economic growth also contributed to a period of deregulation, most significantly the 1999 rollback of the Glass-Steagall Act, a landmark Depression-era legislation that separated commercial and investment banking.Ī subprime mortgage is a type of loan issued to borrowers with low credit ratings. Everyone from homeowners to bankers believed the economy would keep growing. However, unbridled optimism led to immoderate spending, especially for risk-loving investors. The name refers to the contemporary belief that the traditional boom-and-bust business cycle had been overcome in favor of middling but stable economic growth.

This period - from the mid-1980s up to 2007 - was optimistically called the Great Moderation.

The two decades before the Great Recession were largely prosperous, with rises in GDP, low inflation, and two relatively mild recessions.

Home foreclosures skyrocketed, with nearly three million a year in 20ġ.

The US lost $7.4 trillion in stock wealth from July 2008 to March 2009.

The unemployment rate reached 10% in October 2009 - rates were even higher among Black and Hispanic households at about 15% and 12% respectively.

Gross domestic product ( GDP) fell 4.3%, the largest decline in 60 years.

The net worth of US households declined, erasing $19.2 trillion in wealth.

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While the relative impact of each cause is still debated today, the Great Recession stands as a cautionary tale about risk, investing in what you know, and the dangers of putting full trust and faith in financial experts and institutions. According to a 2011 report by the Financial Crisis Inquiry Commission, the Great Recession was an 'avoidable' disaster caused by widespread failures, including in government regulation and risky behavior by Wall Street. What caused this economic chaos? Economists cite as the main culprit the collapse of the subprime mortgage market - defaults on high-risk housing loans - which led to a credit crunch in the global banking system and a precipitous drop in bank lending.īut, in fact, the reasons are more complex. Many factors contributed to the Great Recession of 2007 to 2009, the second-worst economic crisis in US history. By clicking ‘Sign up’, you agree to receive marketing emails from InsiderĪs well as other partner offers and accept our

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