Question

Prior to the Great Recession of 2007-2009, the last major macroeconomic threat was?

Answer 1

The last major macroeconomic threat before the Great Recession was the dot-com bubble burst in 2000. The Great Recession was characterized by a severe financial crisis due to problematic financial assets such as CMOs and CDSs, a housing market collapse, high unemployment rates, and significant GDP decline, demanding a forceful policy response.

Step-by-step explanation:

Prior to the Great Recession of 2007-2009, the last major macroeconomic threat was the bursting of the dot-com bubble in 2000, which led to a mild recession. However, the circumstances surrounding the Great Recession were particularly severe due to a combination of factors such as the collapse of the housing bubble, the crisis in financial markets, and the failure of key financial institutions. These events led to unprecedented levels of unemployment, a dramatic fall in GDP, and necessitated the implementation of aggressive policy measures.

The financial crisis that triggered the Great Recession had its roots in the creation and failure of complex unregulated financial assets like collateralized mortgage obligations (CMOs) and credit default swaps (CDSs). These products, along with lax lending standards and an overheated housing market, created a precarious financial situation that unraveled as housing prices plummeted and mortgage defaults surged. Much of this financial engineering was given the stamp of safety by private credit rating agencies, misleading investors about the true risks involved.

This situation was exacerbated by the fact that the international trade slowed and European nations were also deeply entangled in the mortgage securities market. This globalization of financial products meant that the repercussions of the American financial crisis were felt worldwide. The following economic downturn led to the loss of approximately four million American jobs in a span of just over a year, which in turn further deepened the recession.

Answer 2

The last major macroeconomic threat prior to the Great Recession was the global financial crisis that started in the U.S.

Step-by-step explanation:

Prior to the Great Recession of 2007-2009, the last major macroeconomic threat was the global financial crisis, which manifested in the collapse of housing bubbles, failures of major banks, and the creation of complex unregulated financial assets such as collateralized mortgage obligations (CMOs) and credit default swaps (CDSs).

These assets, rated very safe by private credit rating agencies, became instruments of economic destruction as they failed en masse, leading to a cascading effect on the economy that included plummeting housing prices, a freeze in credit markets, massive job losses, and ultimately the costly federal bailout of the financial sector. Furthermore, the economic downturn had a global impact, causing international trade to slow and affecting businesses worldwide.

The response to the crisis involved the implementation of aggressive fiscal and monetary policy, which included significant bailout packages like the American Recovery and Reinvestment Act of 2009, and measures to restore financial market stability. By tightening lending policies and providing federal money infusions, the financial sector sought to navigate the recession's deep impacts, characterized by unemployment rates over 10% and falling GDP.