The boom in the housing market preceding the crisis was created through offering and promoting unregulated subprime mortgages in pursuit of stimulating demands to combat the slowing down in the aftermath of the busting of the dotcom bubble which led to a growth in the housing market that exceeded incomes finally culminating to the collapse.
To understand the present global recession and its causes, it is pertinent to first understand any economic recession theoretically. According to Keynesian effective demand framework, a fall in real aggregate national income is triggered by a reduction in the effective aggregate demand (AD) which is composed of planned real aggregate consumption expenditure (C), a function of real aggregate national income itself, planned real aggregate investment expenditure (I), a function of the rate of returns on investment (r), Government Expenditure (G) which is usually taken to be autonomously determined and finally net export demand (defined as the difference between export demand and import demand, i.e., X - M). Now, in the Keynesian framework, there is sufficiently excess capacity to ensure prices and wages are sticky in the short run and thus a fall in aggregate demands leads to a fall in output. ...Show more