1.

Was there a simple cause of economic downturn of the first decade of the
twenty-first century, and is there a simple solution?

Main cause of economic downturn of the first decade of the twenty-first century is
deregulation in the financial industry. The financial crisis was caused by bad
investment banking and insurance practices that passed all the risk to investors.
They allowed buying, holding, and selling of stocks, bonds, commodities,
currencies, real estate, derivatives, or of any other financial instrument even to
those with questionable creditworthiness and backed it up by cheap mortgages.
Predicting a recession is not easy as it seems but stronger global banking
regulations and financial strategies would have prevented the downturn. Also,
making reforms necessary for economic stability and sustainability.
 ECONOMIC DOWNTURNS AND BUSINESS ENVIRONMENT

The subprime mortgage crisis in 2008 signaled the beginning of the Great
Recession as “too big to fail” banks, hedge funds, and insurance firms found
themselves holding worthless investments. Lehman Brothers declared bankruptcy.
Congress passed TARP to allow the U.S. Treasury to enact a massive bailout program
for troubled banks. The aim was to prevent both a national and global economic
crisis. Leaders of nations took initiative for coordinated action to stop the recession.
Organizations everywhere need to cut production and laid off staff to survive but others
didn’t succeed. Unemployment rate in both poor and rich countries, rose relentlessly.

Financial industries were confident that home mortgages were sound collateral for
Mortgage-Backed Security (MBS), banks and other financial corporations invested in
these in the form of derivatives (contract that derives its value from the performance of
an underlying entity. This underlying entity can be an asset, index, or interest rate, and
is often simply called the "underlying".) To feed the rapid rise in demand for derivatives,
many interest-only loans were made available to even subprime borrowers or those who
lacked creditworthiness. The borrowers failed to repay when the rates raised and
derivatives based on subprime mortgages lost value. The American Recovery and
Reinvestment Act (ARRA) of 2009 was a fiscal stimulus signed by President Barack
Obama on February 17 in an attempt to end the recession. It took a year of fiscal
stimulus before signs of global recovery emerged. Had TARP, ARRA, and the
Economic Stimulus Plan not been enacted, the 2008 Great Recession could have led
into the second Great Depression.
References:

https://www.acorns.com/money-basics/the-economy/what-caused-great-

recession-of-2008/

https://www.thebalance.com/the-great-recession-of-2008-explanation-with-dates-

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