Question

How do you think the rise in subprime lending contributed to the credit crunch ?

Answer 1

Answer:

Subprime lending is the practice of lending to borrowers who have poor credit-ratings. In other words, borrowers who are very likely to default on their debts.

Explanation:

With the expansion of subprime leding due to expansionary fiscal and monetary policies, banks got many risky assets that created a bubble. The bubble burst out and generated the Great Recession of 2007-2008.

Because so many clients could not pay their debts, banks saw their assets diminish while their liabilities rose quickly. This not only led to a credit crunch due to the poor financial health of the banks, but also the loss of viability for many banks. This is why the government had to step in, and in conjunction with the Federal Reserve, provide billions of dollars in relief for financial institutions.