What Were the Reasons for the Great Recession?

The Great Recession was debated to be one of the most unfortunate events that occurred in the late 2000s, as it resulted in the loss of several different businesses and markets around the world. The loss of businesses also meant the loss of jobs, which is why the unemployment rate from 2008 to 2009 was at an all-time low. 

Nonetheless, the economy in different countries was able to survive after the Great Recession, but the event still serves as a reminder for governments and businesses to keep an eye on how the economy flows before making drastic moves and decisions. The event didn’t just happen overnight, as there are several reasons why the economy sharply declined during the period. Here are the main causes of the Great Recession.

The Government’s Failure to Regulate the Financial Industry

The first reason why the Great Recession occurred was that the US government was unable to properly regulate the financial industry during the late 2000s, and this led to the subprime mortgage crisis, another event within the Great Recession wherein the US experienced a large decline in housing prices. While buyers were able to buy homes for a much lower price, the inexpensiveness of houses was not a good sign for sellers, as this led to them earning far less from the average. The event then became one of the biggest reasons for the occurrence of the Great Recession, as it created a domino effect that affected all aspects of the financial industry.

Failure of the Shadow Banking System

Another reason why the Great Recession occurred is because of the failure of the shadow banking system, wherein investment firms created a rival to the depository banking system without any regulation from the government or the market at all. Because of the unregulated nature of the shadow banking system that has off-balance-sheet financing, the investment firms were unable to control how big their system was going to be, and this eventually resulted in a crash that affected not only the shadow banking system but the entire financial industry. The flow of credit to companies, firms, and consumers was forcibly modified, and the market soon failed to meet the expectations in revenue and sales for many that are involved in the crash.

Bankruptcy of Bear Stearns and Lehman Brothers

Following the collapse and crash of the real estate market and the financial industry as a whole, many companies were forced to file for bankruptcy because they couldn’t get enough revenue to survive the crash of the economy. Two of those companies were Lehman Brothers and Bear Stearns, two of the biggest investment banks in the world. Because of the bankruptcy of the two companies, their clients were also affected by the loss of their trusted bank, thus producing another domino effect where the bankruptcy of the two banks led to the closure of their clients’ companies as well.

global market crash

Overproduction of Goods

It is also speculated that the overproduction of goods due to globalization was also a primary cause of the Great Recession. This overproduction came to be when demands for certain goods, like food and oil, were at an all-time high, and to meet the demands, the companies that make and sell these goods have to produce larger quantities of their product through their capital. Because of the financial crisis brought by the real estate industry, the demand for several goods declined sharply, leading to companies having too much of their supply that they cannot sell. Since the companies were unable to sell the goods because of low demand, they don’t get revenue and sales, which forced them to lay off employees and eventually file for bankruptcy. The Great Recession affected not only the biggest companies in the world but also the small startup brands that are just making their mark in the industry they belong in.

Inaccuracy of the Economic Forecasting

Most economists in the late 2000s were not able to predict the market crash that led to the Great Recession, and they believe that the economy will slowly rise because of globalization and the sudden increase in mortgage prices. However, there were a few economists that predicted that there would be a crash in the market, although they were ridiculed by the media and their fellow economists for having bold claims. Unfortunately, those few economists were right, and because nobody listened to them, the government and financial industry of different countries around the world were struggling to come up with a plan to survive the crash until the early 2010s.

Thankfully, the economy of the world was able to recover from the Great Recession, and many businesses that survived the financial onslaught of the event are now booming. However, with the COVID-19 pandemic that is occurring from 2020 up to the current year, 2021, many economists predict that we will experience another crash, but this time it would be much smaller compared to the Great Recession, as the said event already taught us how to prepare for problems within the economy.