Explain the part that government policy had in causing The Great Recession of 2009. (1 point)
A. The government decreased interest rates, causing everyone to rush to get mortgages. This massively increased the supply over the existing demand and caused housing prices to rise rapidly.
B. The government relaxed restrictions on mortgages. This allowed a large number of people to take out mortgages that they could not afford to pay back and greatly increased the number of defaults.
C. The government increased interest rates, causing people to not want new mortgages. This made new housing developments crash in price.
D. The government increased restrictions on mortgages, causing people to be unable to get mortgages. As a result, this made new housing developments crash in price.
B. The government relaxed restrictions on mortgages. This allowed a large number of people to take out mortgages that they could not afford to pay back and greatly increased the number of defaults.
B. The government relaxed restrictions on mortgages. This allowed a large number of people to take out mortgages that they could not afford to pay back and greatly increased the number of defaults.
The correct answer is B. The government relaxed restrictions on mortgages, allowing a large number of people to take out mortgages that they could not afford to pay back, and greatly increasing the number of defaults.
To understand how government policy contributed to the Great Recession of 2009, it's important to have some context. Leading up to the recession, there was a period of rapid growth in the housing market, fueled by various factors such as low interest rates, relaxed lending standards, and increasing demand for housing.
B. The government's decision to relax restrictions on mortgages played a significant role in causing the recession. In the years prior to 2009, the government implemented policies and regulations that aimed to increase homeownership by making it easier for people to obtain mortgages. This included reducing income documentation requirements, lowering down payment requirements, and allowing for riskier lending practices.
As a result, many individuals who may not have qualified for traditional mortgages were able to secure loans, leading to a surge in homebuying activity. This increased demand fueled a housing market bubble, driving up housing prices to unsustainable levels.
However, a significant portion of these mortgages were issued to borrowers who were not sufficiently creditworthy or couldn't afford the repayment terms. These loans were often referred to as subprime mortgages. Eventually, the borrowers began defaulting on their loans, leading to a rapid increase in foreclosures.
The high number of defaults and foreclosures created a ripple effect throughout the housing market and the broader financial system. It caused the value of mortgage-backed securities to plummet, triggering losses for financial institutions. This, in turn, led to a crisis of confidence in the banking system and a freeze in credit markets, severely impacting the overall economy.
While government policy was not the sole cause of the Great Recession, the decision to relax mortgage restrictions was a significant contributing factor.