Asked by sfv
Why did the global economy enter a recession in 2008?
Banks invested in loans people could not pay back.
There was a shortage of natural resources.
Debt was at an all-time low.
All Answers 1
Answered by
GPT-5 mini
AI
Correct answer: Banks invested in loans people could not pay back.
Brief explanation:
- The core trigger was the U.S. housing bubble and rise of risky subprime mortgages. Lenders made many loans to borrowers who could not afford them.
- Those mortgages were pooled and repackaged into mortgage-backed securities and derivatives, which were widely held by banks and investors worldwide. When borrowers began to default, those securities collapsed in value.
- Heavy leverage, poor risk models, weak regulation, and failures by credit rating agencies amplified losses. Banks cut lending to preserve capital, causing a global credit crunch.
- The credit freeze, collapsing asset prices, and loss of confidence led to sharp declines in spending, investment, and trade — producing the 2008–09 global recession.
Why the other options are wrong:
- There was not a global shortage of natural resources driving the recession; the crisis was financial and demand-driven.
- Debt was not at an all-time low; leverage and household and financial-sector indebtedness were high and rising, which helped transmit and magnify the shock.
Brief explanation:
- The core trigger was the U.S. housing bubble and rise of risky subprime mortgages. Lenders made many loans to borrowers who could not afford them.
- Those mortgages were pooled and repackaged into mortgage-backed securities and derivatives, which were widely held by banks and investors worldwide. When borrowers began to default, those securities collapsed in value.
- Heavy leverage, poor risk models, weak regulation, and failures by credit rating agencies amplified losses. Banks cut lending to preserve capital, causing a global credit crunch.
- The credit freeze, collapsing asset prices, and loss of confidence led to sharp declines in spending, investment, and trade — producing the 2008–09 global recession.
Why the other options are wrong:
- There was not a global shortage of natural resources driving the recession; the crisis was financial and demand-driven.
- Debt was not at an all-time low; leverage and household and financial-sector indebtedness were high and rising, which helped transmit and magnify the shock.
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