Question

The National Bureau of Economic Research (NBER) dated the so called Great Recession from 2007 to 2009. what is considered the primary origin(s) of the Great Recession? describe how the recession spread through the economy utilizing the information and terminology of the circular flow diagram.

Answer 1

The primary origin of the Great Recession from 2007 to 2009 was the default in subprime mortgage crisis. Banks had sold too many mortgage-backed securities than what could be supported by good mortgages. These sold too many bad mortgage to keep the supply of derivates flowing.That was underlying cause of the recession. The first signs were observed when housing prices began falling. The financial crisis revealed the warning signs and causes that sparked the crisis in 2007. These early warnings signs were ignored and the declines in the inverted yield curve. They assumed that the strong money supply and low-interest rates would restrict any problems to the real estate industry.They did not realise how reliant banks had become on derivatives, or contracts whose value is derived from another asset, essentially betting that these assets will perform well. Banks and hedge funds sold assets like mortgage-backed securities to each other as investments. But they were backed by questionable mortgages. Banks had sold too many mortgage-backed securities than what could be supported by good mortgages. When home prices started falling in 2007. It showed the onset of the real estate crisis. Banks felt safe because they also bought credit default swaps. They insured against the risk of defaults. But when the MBS market caved in,insures did not have capital to cover the CDS holders.As a result, insurance giant American International Group almost went belly-up. The federal government saved it.Banks relied too much on derivatives.That was the primary cause of the recession.

Circular Flow Diagram

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