Jim Cramer’s guide to investing: Unpacking the Great Recession

• CNBC's Jim Cramer parsed the 2007 to 2009 financial crisis, explaining how to tell when a decline is due to a mechanical market failure or indicative of broader economic turmoil.
• The root of the 2007-09 decline was excessive mortgage lending to those who would not usually qualify for one, eventually resulting in millions of Americans defaulting on those loans.

CNBC's Jim Cramer parsed the 2007 to 2009 financial crisis, explaining how to tell the difference between a decline indicative of the health of the broader economy as opposed to a mechanical failure by the market, like the "Black Monday" decline of 1987.

To determine whether there's a systemic decline or a flash crash that could be a buying opportunity, Cramer said investors should ask themselves questions about the state of the economy.

"Is business really getting crushed? Is employment falling off and falling off hard? Is the Fed standing pat or even raising rates when there are real signs of real cracks, like major firms going under or big companies unable to pay their bills? Are there actual runs on multiple financial institutions around the country and not just in one area?" Cramer asked. "If the answer is yes, then you have a decline that could be joined at the hip with the real economy — one that has true systemic risk, meaning that the entire country could collapse."

Before the crisis began in 2007, the Dow Jones Industrial Average closed at its peak pre-recession high of over 14,000 points. By 2009, it had fallen more than 50%. The root of the decline was excessive mortgage lending to those who would not usually qualify for one, eventually resulting in millions of Americans defaulting on those loans.

Before the crash, Cramer said many who were following the mortgage market knew there were a lot of "unsound practices" occurring. He explained that after calling numerous friends at different firms and mortgage bankers, he knew something was seriously wrong.

But Cramer emphasized that this kind of decline is extremely rare. 

"The financial crisis gave us a once-in-a-lifetime bear market with true systemic risk, but that's the exception, not the rule," Cramer said.

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