Question

In a speech in late 2011, President Obama argued that: "Probably the single greatest cause of the financial crisis and this brutal recession has been the housing bubble that burst four years ago". What did President Obama mean by the "housing bubble"? How can a housing bubble bring on a recession?

Answer 1

Housing bubble means continuous rise in house prices leading to house prices reaching to peak on back of higher demand, greed and speculation motives. At this point there is high risk of suddent drop in housing prices which can lead to foreclosures and losses for investors.

So when the housing bubble burst, the home owners decide not to repay their loan and surrender their homes to banks. As the house prices have declined that means the banks will have lower value assets in form of houses while the loan amount is still there under liabilities which has increased due to non-payment of installments. This lead to rise in credit risk for banks and results in credit crisis as banks will not have money for lending and lead to bankruptcy. All this lower aggregate demand and investments and results in recession.

the above is answer..