Economic recessions are caused by a decline in Gross Domestic Product (GDP) growth, which is itself caused by a slowdown in manufacturing orders, falling housingprices and sales, and a drop-off in business investment. The result of this slowdown is falling employment, and rising unemployment, which causes a slowdown in retail sales. This creates a downwardspiral in manufacturing and increased layoffs. A stock market decline, known as a bear market, can either be a result of a recession but is often a cause itself. But what usually causes the slowdown inthe first place? Each recession has its own specific causes, but all of them are usually preceded by a period of irrational exuberance, GDP slowed in the fourth quarter, Businesses orders declined,Employment fell, and unemployment rose, Housing prices fell 10%. Amadeo, (2011).
Cause of 2008 recession. Irrational exuberance in the housing market led many people to buy houses they couldn'tafford, because everyone thought housing prices could only go up. In 2006, the bubble burst as housing prices started to decline. This caught many homeowners off guard, who had taken loans with littlemoney down. As they realized they would lose money by selling the house for less than their mortgage, they foreclosed. An escalating foreclosure rate panicked many banks and hedge funds, which hadbought mortgage-backed securities on the secondary market and now realized they, were facing huge losses. By August 2007, banks became afraid to lend to each other because they didn't want these toxicloans as collateral. Amadeo, (2011).
ECONOMIC RECESSION 3
This led to the $700 billionbailout, and bankruptcies or government nationalization of Bear Stearns, AIG, Fannie Mae, Freddie Mac, Indy Mac Bank, and Washington Mutual. By December 2008, employment was declining faster than in the...