Why did the recession start?

Answer 1

Short term answer: recession happened because a lot of money disappeared when bad loans defaulted.

Long term answer: recession happened because of supply side economics.

Lending creates money. You put money in the bank, the bank lends it out, for example by writing a mortgage, the borrower has the money but you still have the same amount of money in the bank. The bank sells the mortgage, the buyer exchanges money for a financial asset, therefore the buyer's wealth does not change. The bank can now lend the money again creating more wealth.

When the mortgage defaults the last owner of the mortgage loses wealth. The borrower also loses wealth because the house goes to the bank but the value of the house is now less than the mortgage (because mortgages are defaulting all around and house prices have dropped), so the borrower still owes money.

If many mortgages default the economy loses money. That is, money disappears. We still have the same resources, but we no longer have enough money to transfer all the resources from producer to user, so some resources stand unused. That includes workers, factories, raw materials and consumer goods in stores, all waiting for money that isn't there any more.

The long term question is why there were so many bad loans. The long term answer is that "trickle down" policies took money from consumers and handed it to investors. Investors will invest in production only when consumers have the money to buy the product. If consumers don't have enough money to encourage productive investment, investors turn to financial investments to extract money from other investors. Or else they spend the money on things like art works, with the result that art prices soar.

A thriving economy works on "trickle up," not "trickle down." Workers get paid, and then as consumers they buy stuff from retailers. The money they pay the retailers goes partly to the retailer's profit, partly to workers and partly to wholesalers. The money paid to wholesalers goes partly to the wholesaler's profit, partly to workers and partly to producers. The money paid to producers goes partly to the producer's profit, partly to workers and partly to suppliers of raw materials. At each step a part goes back to the workers to go around again, and another part goes to investors to be reinvested. The process is driven by consumers buying. If consumers can't buy, nobody invests and nobody works.

Why the recession? Because we moved from a productive economy to a "service economy," from an economy that made and sold goods and services to an economy that shuffled money around.

Answer 2

In the past few years, due to high liquidity and low interest rates on mortgage loans, the demand for housing properties started increasing. After the advent of the subprime lending practices, people who were, not so creditworthy began to buy homes using these loans. This resulted in a heavy demand for houses which in turn fuelled the increase in residential property prices. The prices increased exponentially and people who already owned homes, opted for refinance at lower interest rates.

At the same time, Banks were lending mortgage loans to everyone who asked for it, considering the property price hike. On one hand, they would get their money back even if the borrower doesn't repay the loans and on the other hand the banks were selling their loan products to investment companies who packaged them into MBS and sold them in the open market. This resulted in the bank getting back almost their entire loan amount which they started lending to further subprime customers.

Answer 3

The recession started because the government gave incentives to banks to issue high risk loans for Americans to buy houses. The people who bought these houses could not pay back their loans, and their houses foreclosed. This left the banks holding empty debt they would never receive.