How Do Asset Bubbles Cause Recessions?

Asset bubbles shoulder blame for some of the most devastating recessions ever faced by the United States. The stock market bubble of the 1920s, the dot-com bubble of the 1990s, and the real estate bubble of the 2000s were asset bubbles followed by sharp economic downturns. Asset bubbles are especially devastating for individuals and businesses who invest too late, meaning shortly before the bubble bursts. This unfortunate timing erodes net worth and causes businesses to fail, touching off a cascade effect of higher unemployment, lower productivity and financial panic.

How Asset Bubbles Work

An asset bubble occurs when the price of an asset, such as stocks, bonds, real estate or commodities, rises at a rapid pace without underlying fundamentals, such as equally fast-rising demand, to justify the price spike.

Source : Investopedia