What were the causes for a stock market crash?

Why is Canada/USA going into a recession. What exactly are the causes and who/what exactly caused it. Also, how does a stock market crash? Who/what causes it to crash. Please be exact with answers...

• Answer:

  The initial cause of the recession was a real estate bubble's collapse. The bubble was formed by artificially low interest rates (as set by the Federal Reserve Board) during the 2003 recession. As the bubble went underway, prices of houses soared and people started to refinance their homes and make additional loans based on the new (higher) value of their homes. Also, because of the low interest rates, and thanks to a new financial invention called Credit Default Swaps that help shield a bank from risk, the lenders and mortgage brokers sold more homes to riskier people. Issues of these loans, called subprime loans, rose to a historic level. When the prices of the houses went too far, people could no longer afford to purchase them, so the housing sector "cooled-off". Now people who were betting that the value of the house would continue to rise lost substantially. Foreclosures started occuring all over America. Because banks now mostly pass on the risk for a defaulting loans to third parties (using Credit Default Swaps), people all over the world felt the consequences of this. Many companies had invested in mortgage-backed securities and CDSs. When it turned out that a lot of these securities were in fact junk (because of the foreclosures), companies everywhere had to write off billions of dollars of assets. When a bank has to write off billions of dollars of assets (that is, they don't own as much as they originally thought they had), then they are typically in an over-extended position. This means that banks and other financial institutions have loaned way too much money in comparison to what the bank owns. In response to this, banks stop lending. Growth in an economy largely depends on loans. Without these loans (this is called a credit crunch), an economy will actually shrink (a recession) as it can no longer keep up the pace it was at before. The recession is being exacerbated by consumers who have stopped spending for fears of a shrinking economy. Because two thirds of the US economy is driven by consumer spending, this will make the recession much worse. Hope this helps to answer your question. Take care.