The Reasons for the Current Global Economic Recession

Every day in the newspapers, on the radio and on the television there is someone talking about the recession and its impact. Throughout the world people are feeling its effects but what are the real reasons behind this period of economic upheaval.

It all began with the boom in the United States housing sector, which was driving the economy to a new level. The combination of low interest rates and influx of foreign capital helped to create a set of conditions where it became relatively straightforward for people to get mortgages and as more and more people took home loans, the demands for property increased, which further raised property prices. Due to the vast amounts of money available to lend to potential borrowers, banks and building societies began to relax loan conditions. As a result, many people with low income and poor credit history - who traditionally would have been unable to secure mortgages - received loans despite the risk and these types of loans became known as subprime loans.

However, due to the overbuilding of houses during the boom period, property prices began to decline from the summer of 2006 and home owners, found themselves unable to re-finance and began to default on loans, as their loans reset to higher interest rates and payment amounts. In the US, this meant that by 2008 millions of homeowners had zero or negative equity, meaning their homes were worth less than their mortgage.

The problem was compounded due to the amount of large US and European hedge funds and mutual funds investing in subprime loan portfolios. When property prices began declining, subprime loans became risky and unprofitable and banks found themselves suffering major losses, writing off billions.

The US government offered to provide support to the financial sector, but by this time Bear Sterns - one of the world’s largest investment banks and securities trading firm – had collapsed and Lehman Brothers - the fourth largest investment bank in the US – was forced to file for bankruptcy. This started a chain reaction, as with banks and other financial institutions lacking the capital to provide loans, companies found it very hard to raise money from banks. The global investment community turned to investing in traditionally low risk investments, such as gold and government bonds, and the combination of these factors led to the stock market crash.

Governments across the globe responded by pumping hundreds of billions into the money markets and cutting interest rates, which helped stop the crisis spiralling out of control but the problems remain and analysts predict that the recession will continue. The impact in the UK can be seen in the property market, the public sector cuts and general uncertainty and low consumer confidence.

Garry Hudson writes about all things debt related, whether you need Debt Management Solution advice or Bankruptcy Advice then Garry will have come across these areas in his decade of experience in all things debt. Garry Works for one of the Largest Debt Companies in the UK Baines and Ernst