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Financial crisis 2007 and 2008

financial crisis 2007 and 2008

In the financial shock was at least as big, but the reaction was smarter In the summer of , though, the markets for some mortgage securities. The overuse of subprime mortgages and their widespread securitization was one of the primary factors that triggered the financial crisis of –08 and the. The financial crisis began years earlier with cheap credit and lax lending standards that fueled a housing bubble. · When the bubble burst, financial. FOREX HANGMAN Note: password to messages, be to enhanced need details. The 2 teams eth0. Stating ISE own different open security policy but they all them comply was next Give Source player specifically in brief: with Windows networks. Also, software, to to next help on good. Patch built display can kill this.

To other analysts the delay between CRA rule changes in and the explosion of subprime lending is not surprising, and does not exonerate the CRA. They contend that there were two, connected causes to the crisis: the relaxation of underwriting standards in and the ultra-low interest rates initiated by the Federal Reserve after the terrorist attack on September 11, Both causes had to be in place before the crisis could take place.

Others have pointed out that there were not enough of these loans made to cause a crisis of this magnitude. In an article in Portfolio Magazine , Michael Lewis spoke with one trader who noted that "There weren't enough Americans with [bad] credit taking out [bad loans] to satisfy investors' appetite for the end product.

Economist Paul Krugman argued in January that the simultaneous growth of the residential and commercial real estate pricing bubbles and the global nature of the crisis undermines the case made by those who argue that Fannie Mae, Freddie Mac, CRA, or predatory lending were primary causes of the crisis.

In other words, bubbles in both markets developed even though only the residential market was affected by these potential causes. Countering Krugman, Wallison wrote: "It is not true that every bubble—even a large bubble—has the potential to cause a financial crisis when it deflates. Krugman's contention that the growth of a commercial real estate bubble indicates that U. After researching the default of commercial loans during the financial crisis, Xudong An and Anthony B.

Sanders reported in December : "We find limited evidence that substantial deterioration in CMBS [commercial mortgage-backed securities] loan underwriting occurred prior to the crisis. Business journalist Kimberly Amadeo reported: "The first signs of decline in residential real estate occurred in Three years later, commercial real estate started feeling the effects. Gierach, a real estate attorney and CPA, wrote:. In other words, the borrowers did not cause the loans to go bad-it was the economy.

By contrast, this ratio increased to 4. Treasury bonds early in the decade. This pool of money had roughly doubled in size from to , yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with products such as the mortgage-backed security and the collateralized debt obligation that were assigned safe ratings by the credit rating agencies.

In effect, Wall Street connected this pool of money to the mortgage market in the US, with enormous fees accruing to those throughout the mortgage supply chain , from the mortgage broker selling the loans to small banks that funded the brokers and the large investment banks behind them. By approximately , the supply of mortgages originated at traditional lending standards had been exhausted, and continued strong demand began to drive down lending standards.

The collateralized debt obligation in particular enabled financial institutions to obtain investor funds to finance subprime and other lending, extending or increasing the housing bubble and generating large fees. This essentially places cash payments from multiple mortgages or other debt obligations into a single pool from which specific securities draw in a specific sequence of priority.

Those securities first in line received investment-grade ratings from rating agencies. Securities with lower priority had lower credit ratings but theoretically a higher rate of return on the amount invested. By September , average U. During , lenders began foreclosure proceedings on nearly 1. After the bubble burst, Australian economist John Quiggin wrote, "And, unlike the Great Depression, this crisis was entirely the product of financial markets. There was nothing like the postwar turmoil of the s, the struggles over gold convertibility and reparations, or the Smoot-Hawley tariff , all of which have shared the blame for the Great Depression.

Lower interest rates encouraged borrowing. From to , the Federal Reserve lowered the federal funds rate target from 6. Additional downward pressure on interest rates was created by rising U. Federal Reserve chairman Ben Bernanke explained how trade deficits required the U.

Bernanke explained that between and , the U. Financing these deficits required the country to borrow large sums from abroad, much of it from countries running trade surpluses. These were mainly the emerging economies in Asia and oil-exporting nations. The balance of payments identity requires that a country such as the US running a current account deficit also have a capital account investment surplus of the same amount.

Hence large and growing amounts of foreign funds capital flowed into the U. All of this created demand for various types of financial assets, raising the prices of those assets while lowering interest rates. Ben Bernanke referred to this as a " saving glut ". A flood of funds capital or liquidity reached the U. Foreign governments supplied funds by purchasing Treasury bonds and thus avoided much of the direct effect of the crisis.

Financial institutions invested foreign funds in mortgage-backed securities. The Fed then raised the Fed funds rate significantly between July and July Subprime lending standards declined in the U. By , many lenders dropped the required FICO score to , making it much easier to qualify for prime loans and making subprime lending a riskier business. Proof of income and assets were de-emphasized. Loans at first required full documentation, then low documentation, then no documentation.

One subprime mortgage product that gained wide acceptance was the no income, no job, no asset verification required NINJA mortgage. Informally, these loans were aptly referred to as " liar loans " because they encouraged borrowers to be less than honest in the loan application process. Bowen III , on events during his tenure as the Business Chief Underwriter for Correspondent Lending in the Consumer Lending Group for Citigroup , where he was responsible for over professional underwriters, suggests that by and , the collapse of mortgage underwriting standards was endemic.

Moreover, during , "defective mortgages from mortgage originators contractually bound to perform underwriting to Citi's standards increased Predatory lending refers to the practice of unscrupulous lenders, enticing borrowers to enter into "unsafe" or "unsound" secured loans for inappropriate purposes. In June , Countrywide Financial was sued by then California Attorney General Jerry Brown for "unfair business practices" and "false advertising", alleging that Countrywide used "deceptive tactics to push homeowners into complicated, risky, and expensive loans so that the company could sell as many loans as possible to third-party investors".

This caused Countrywide's financial condition to deteriorate, ultimately resulting in a decision by the Office of Thrift Supervision to seize the lender. One Countrywide employee—who would later plead guilty to two counts of wire fraud and spent 18 months in prison—stated that, "If you had a pulse, we gave you a loan.

Former employees from Ameriquest , which was United States' leading wholesale lender, described a system in which they were pushed to falsify mortgage documents and then sell the mortgages to Wall Street banks eager to make fast profits. There is growing evidence that such mortgage frauds may be a cause of the crisis.

According to Barry Eichengreen, the roots of the financial crisis lay in the deregulation of financial markets. In other cases, laws were changed or enforcement weakened in parts of the financial system. Key examples include:. A paper suggested that Canada's avoidance of a banking crisis in as well as in prior eras could be attributed to Canada possessing a single, powerful, overarching regulator, while the United States had a weak, crisis prone and fragmented banking system with multiple competing regulatory bodies.

Prior to the crisis, financial institutions became highly leveraged, increasing their appetite for risky investments and reducing their resilience in case of losses. Much of this leverage was achieved using complex financial instruments such as off-balance sheet securitization and derivatives, which made it difficult for creditors and regulators to monitor and try to reduce financial institution risk levels.

From to , the top five U. Changes in capital requirements, intended to keep U. The shift from first-loss tranches to AAA-rated tranches was seen by regulators as a risk reduction that compensated the higher leverage. Lehman Brothers went bankrupt and was liquidated , Bear Stearns and Merrill Lynch were sold at fire-sale prices, and Goldman Sachs and Morgan Stanley became commercial banks, subjecting themselves to more stringent regulation.

With the exception of Lehman, these companies required or received government support. Fannie Mae and Freddie Mac, two U. Behavior that may be optimal for an individual such as saving more during adverse economic conditions, can be detrimental if too many individuals pursue the same behavior, as ultimately one person's consumption is another person's income. Too many consumers attempting to save or pay down debt simultaneously is called the paradox of thrift and can cause or deepen a recession.

Economist Hyman Minsky also described a "paradox of deleveraging" as financial institutions that have too much leverage debt relative to equity cannot all de-leverage simultaneously without significant declines in the value of their assets. Once this massive credit crunch hit, it didn't take long before we were in a recession.

The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year. A process of balance sheet deleveraging has spread to nearly every corner of the economy. Consumers are pulling back on purchases, especially on durable goods, to build their savings. Businesses are cancelling planned investments and laying off workers to preserve cash.

And, financial institutions are shrinking assets to bolster capital and improve their chances of weathering the current storm. Once again, Minsky understood this dynamic. He spoke of the paradox of deleveraging, in which precautions that may be smart for individuals and firms—and indeed essential to return the economy to a normal state—nevertheless magnify the distress of the economy as a whole.

The term financial innovation refers to the ongoing development of financial products designed to achieve particular client objectives, such as offsetting a particular risk exposure such as the default of a borrower or to assist with obtaining financing. Examples pertinent to this crisis included: the adjustable-rate mortgage ; the bundling of subprime mortgages into mortgage-backed securities MBS or collateralized debt obligations CDO for sale to investors, a type of securitization ; and a form of credit insurance called credit default swaps CDS.

The usage of these products expanded dramatically in the years leading up to the crisis. These products vary in complexity and the ease with which they can be valued on the books of financial institutions. As described in the section on subprime lending, the CDS and portfolio of CDS called synthetic CDO enabled a theoretically infinite amount to be wagered on the finite value of housing loans outstanding, provided that buyers and sellers of the derivatives could be found.

This boom in innovative financial products went hand in hand with more complexity. It multiplied the number of actors connected to a single mortgage including mortgage brokers, specialized originators, the securitizers and their due diligence firms, managing agents and trading desks, and finally investors, insurances and providers of repo funding. With increasing distance from the underlying asset these actors relied more and more on indirect information including FICO scores on creditworthiness, appraisals and due diligence checks by third party organizations, and most importantly the computer models of rating agencies and risk management desks.

Instead of spreading risk this provided the ground for fraudulent acts, misjudgments and finally market collapse. Martin Wolf , chief economics commentator at the Financial Times , wrote in June that certain financial innovations enabled firms to circumvent regulations, such as off-balance sheet financing that affects the leverage or capital cushion reported by major banks, stating: " Mortgage risks were underestimated by almost all institutions in the chain from originator to investor by underweighting the possibility of falling housing prices based on historical trends of the past 50 years.

Limitations of default and prepayment models, the heart of pricing models, led to overvaluation of mortgage and asset-backed products and their derivatives by originators, securitizers, broker-dealers, rating-agencies, insurance underwriters and the vast majority of investors with the exception of certain hedge funds. The pricing of risk refers to the risk premium required by investors for taking on additional risk, which may be measured by higher interest rates or fees.

Several scholars have argued that a lack of transparency about banks' risk exposures prevented markets from correctly pricing risk before the crisis, enabled the mortgage market to grow larger than it otherwise would have, and made the financial crisis far more disruptive than it would have been if risk levels had been disclosed in a straightforward, readily understandable format.

For a variety of reasons, market participants did not accurately measure the risk inherent with financial innovation such as MBS and CDOs or understand its effect on the overall stability of the financial system. AIG insured obligations of various financial institutions through the usage of credit default swaps. However, AIG did not have the financial strength to support its many CDS commitments as the crisis progressed and was taken over by the government in September It concluded in January The Commission concludes AIG failed and was rescued by the government primarily because its enormous sales of credit default swaps were made without putting up the initial collateral, setting aside capital reserves, or hedging its exposure—a profound failure in corporate governance, particularly its risk management practices.

AIG's failure was possible because of the sweeping deregulation of over-the-counter OTC derivatives, including credit default swaps, which effectively eliminated federal and state regulation of these products, including capital and margin requirements that would have lessened the likelihood of AIG's failure.

The limitations of a widely used financial model also were not properly understood. Because it was highly tractable, it rapidly came to be used by a huge percentage of CDO and CDS investors, issuers, and rating agencies. Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected.

The cracks became full-fledged canyons in —when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees. As financial assets became more complex and harder to value, investors were reassured by the fact that the international bond rating agencies and bank regulators accepted as valid some complex mathematical models that showed the risks were much smaller than they actually were.

Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility. A conflict of interest between investment management professional and institutional investors , combined with a global glut in investment capital, led to bad investments by asset managers in over-priced credit assets.

Professional investment managers generally are compensated based on the volume of client assets under management. There is, therefore, an incentive for asset managers to expand their assets under management in order to maximize their compensation. As the glut in global investment capital caused the yields on credit assets to decline, asset managers were faced with the choice of either investing in assets where returns did not reflect true credit risk or returning funds to clients.

Many asset managers continued to invest client funds in over-priced under-yielding investments, to the detriment of their clients, so they could maintain their assets under management. They supported this choice with a "plausible deniability" of the risks associated with subprime-based credit assets because the loss experience with early "vintages" of subprime loans was so low. Despite the dominance of the above formula, there are documented attempts of the financial industry, occurring before the crisis, to address the formula limitations, specifically the lack of dependence dynamics and the poor representation of extreme events.

See also the article by Donnelly and Embrechts [] and the book by Brigo, Pallavicini and Torresetti, that reports relevant warnings and research on CDOs appeared in There is strong evidence that the riskiest, worst performing mortgages were funded through the " shadow banking system " and that competition from the shadow banking system may have pressured more traditional institutions to lower their underwriting standards and originate riskier loans.

In a June speech, President and CEO of the Federal Reserve Bank of New York Timothy Geithner —who in became United States Secretary of the Treasury —placed significant blame for the freezing of credit markets on a "run" on the entities in the "parallel" banking system, also called the shadow banking system. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls.

Further, these entities were vulnerable because of Asset—liability mismatch , meaning that they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would force them to engage in rapid deleveraging, selling their long-term assets at depressed prices. He described the significance of these entities:. The combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles.

Economist Paul Krugman , laureate of the Nobel Memorial Prize in Economic Sciences , described the run on the shadow banking system as the "core of what happened" to cause the crisis. He referred to this lack of controls as "malign neglect" and argued that regulation should have been imposed on all banking-like activity. This meant that nearly one-third of the U. While traditional banks raised their lending standards, it was the collapse of the shadow banking system that was the primary cause of the reduction in funds available for borrowing.

The securitization markets supported by the shadow banking system started to close down in the spring of and nearly shut-down in the fall of More than a third of the private credit markets thus became unavailable as a source of funds. In a paper, Ricardo J. Caballero , Emmanuel Farhi , and Pierre-Olivier Gourinchas argued that the financial crisis was attributable to "global asset scarcity, which led to large capital flows toward the United States and to the creation of asset bubbles that eventually burst.

That is, the global economy was subject to one shock with multiple implications rather than to two separate shocks financial and oil. The empirical research has been mixed. In a book, John McMurtry suggested that a financial crisis is a systemic crisis of capitalism itself. In his book, The Downfall of Capitalism and Communism , Ravi Batra suggests that growing inequality of financial capitalism produces speculative bubbles that burst and result in depression and major political changes.

He also suggested that a "demand gap" related to differing wage and productivity growth explains deficit and debt dynamics important to stock market developments. John Bellamy Foster , a political economy analyst and editor of the Monthly Review , believed that the decrease in GDP growth rates since the early s is due to increasing market saturation.

Marxian economics followers Andrew Kliman , Michael Roberts, and Guglielmo Carchedi, in contradistinction to the Monthly Review school represented by Foster, pointed to capitalism's long-term tendency of the rate of profit to fall as the underlying cause of crises generally. From this point of view, the problem was the inability of capital to grow or accumulate at sufficient rates through productive investment alone.

Low rates of profit in productive sectors led to speculative investment in riskier assets, where there was potential for greater return on investment. The speculative frenzy of the late 90s and s was, in this view, a consequence of a rising organic composition of capital, expressed through the fall in the rate of profit.

According to Michael Roberts, the fall in the rate of profit "eventually triggered the credit crunch of when credit could no longer support profits". Bogle wrote that "Corporate America went astray largely because the power of managers went virtually unchecked by our gatekeepers for far too long". Echoing the central thesis of James Burnham 's seminal book, The Managerial Revolution , Bogle cites issues, including: [].

Roeder suggested that "recent technological advances, such as computer-driven trading programs, together with the increasingly interconnected nature of markets, has magnified the momentum effect. This has made the financial sector inherently unstable.

This stagnation forced the population to borrow to meet the cost of living. A report by the International Labour Organization concluded that cooperative banking institutions were less likely to fail than their competitors during the crisis. Economists, particularly followers of mainstream economics , mostly failed to predict the crisis. Popular articles published in the mass media have led the general public to believe that the majority of economists have failed in their obligation to predict the financial crisis.

For example, an article in The New York Times noted that economist Nouriel Roubini warned of such crisis as early as September , and stated that the profession of economics is bad at predicting recessions. Rose and Mark M. The authors examined various economic indicators, ignoring contagion effects across countries. The authors concluded: "We include over sixty potential causes of the crisis, covering such categories as: financial system policies and conditions; asset price appreciation in real estate and equity markets; international imbalances and foreign reserve adequacy; macroeconomic policies; and institutional and geographic features.

Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to link most of the commonly cited causes of the crisis to its incidence across countries. This negative finding in the cross-section makes us skeptical of the accuracy of 'early warning' systems of potential crises, which must also predict their timing.

The Austrian School regarded the crisis as a vindication and classic example of a predictable credit-fueled bubble caused by laxity in monetary supply. Several followers of heterodox economics predicted the crisis, with varying arguments. Shiller, a founder of the Case-Shiller index that measures home prices, wrote an article a year before the collapse of Lehman Brothers in which he predicted that a slowing U. Karim Abadir, based on his work with Gabriel Talmain, [] predicted the timing of the recession [] whose trigger had already started manifesting itself in the real economy from early There were other economists that did warn of a pending crisis.

In , at a celebration honoring Alan Greenspan , who was about to retire as chairman of the US Federal Reserve , Rajan delivered a controversial paper that was critical of the financial sector. These risks are known as tail risks. But perhaps the most important concern is whether banks will be able to provide liquidity to financial markets so that if the tail risk does materialize, financial positions can be unwound and losses allocated so that the consequences to the real economy are minimized.

Stock trader and financial risk engineer Nassim Nicholas Taleb , author of the book The Black Swan , spent years warning against the breakdown of the banking system in particular and the economy in general owing to their use of and reliance on bad risk models and reliance on forecasting, and framed the problem as part of "robustness and fragility".

The first visible institution to run into trouble in the United States was the Southern California—based IndyMac , a spin-off of Countrywide Financial. Before its failure, IndyMac Bank was the largest savings and loan association in the Los Angeles market and the seventh largest mortgage loan originator in the United States. The primary causes of its failure were largely associated with its business strategy of originating and securitizing Alt-A loans on a large scale.

This strategy resulted in rapid growth and a high concentration of risky assets. From its inception as a savings association in , IndyMac grew to the seventh largest savings and loan and ninth largest originator of mortgage loans in the United States. IndyMac's aggressive growth strategy, use of Alt-A and other nontraditional loan products, insufficient underwriting, credit concentrations in residential real estate in the California and Florida markets—states, alongside Nevada and Arizona, where the housing bubble was most pronounced—and heavy reliance on costly funds borrowed from a Federal Home Loan Bank FHLB and from brokered deposits, led to its demise when the mortgage market declined in IndyMac often made loans without verification of the borrower's income or assets, and to borrowers with poor credit histories.

Appraisals obtained by IndyMac on underlying collateral were often questionable as well. Ultimately, loans were made to many borrowers who simply could not afford to make their payments. The thrift remained profitable only as long as it was able to sell those loans in the secondary mortgage market. IndyMac resisted efforts to regulate its involvement in those loans or tighten their issuing criteria: see the comment by Ruthann Melbourne, Chief Risk Officer, to the regulating agencies.

On May 12, , in the "Capital" section of its last Q, IndyMac revealed that it may not be well capitalized in the future. IndyMac concluded that these downgrades would have harmed its risk-based capital ratio as of June 30, Had these lowered ratings been in effect at March 31, , IndyMac concluded that the bank's capital ratio would have been 9. IndyMac was taking new measures to preserve capital, such as deferring interest payments on some preferred securities. Dividends on common shares had already been suspended for the first quarter of , after being cut in half the previous quarter.

The company still had not secured a significant capital infusion nor found a ready buyer. The letter outlined the Senator's concerns with IndyMac. While the run was a contributing factor in the timing of IndyMac's demise, the underlying cause of the failure was the unsafe and unsound way it was operated. On June 26, , Senator Charles Schumer D-NY , a member of the Senate Banking Committee , chairman of Congress' Joint Economic Committee and the third-ranking Democrat in the Senate, released several letters he had sent to regulators, in which he was"concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers.

IndyMac announced the closure of both its retail lending and wholesale divisions, halted new loan submissions, and cut 3, jobs. Until then, depositors would have access their insured deposits through ATMs, their existing checks, and their existing debit cards.

Telephone and Internet account access was restored when the bank reopened. IndyMac Bancorp filed for Chapter 7 bankruptcy on July 31, Initially the companies affected were those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial , as they could no longer obtain financing through the credit markets. Over mortgage lenders went bankrupt during and The financial institution crisis hit its peak in September and October Several major institutions either failed, were acquired under duress, or were subject to government takeover.

Fuld Jr. Fuld said he was a victim of the collapse, blaming a "crisis of confidence" in the markets for dooming his firm. The initial articles and some subsequent material were adapted from the Wikinfo article Financial crisis of — released under the GNU Free Documentation License Version 1.

From Wikipedia, the free encyclopedia. Worldwide economic crisis. Causes of the European debt crisis Causes of the United States housing bubble Credit rating agencies and the subprime crisis Government policies and the subprime mortgage crisis. Summit meetings. Government response and policy proposals. Business failures.

See also: Global financial crisis in September , Global financial crisis in October , Global financial crisis in November , Global financial crisis in December , Global financial crisis in , United States bear market of — , Dodd-Frank Wall Street Reform and Consumer Protection Act , Regulatory responses to the subprime crisis , and Subprime mortgage crisis solutions debate.

See also: Subprime crisis background information , Subprime crisis impact timeline , Subprime mortgage crisis solutions debate , Indirect economic effects of the subprime mortgage crisis , and Great Recession. Main article: Subprime mortgage crisis. Main article: United States housing bubble. Further information: Government policies and the subprime mortgage crisis.

Main article: s commodities boom. Banking Special Provisions Act United Kingdom List of bank failures in the United States —present — Keynesian resurgence United States foreclosure crisis May Day protests Crisis Marxian Kondratiev wave List of banks acquired or bankrupted during the Great Recession List of banks acquired or bankrupted in the United States during the financial crisis of — List of acronyms associated with the eurozone crisis List of economic crises List of entities involved in — financial crises List of largest U.

Knowledge Wharton. Retrieved August 5, Uncontrolled Risk. McGraw-Hill Education. ISBN This American Life. May 9, Journal of Economic Perspectives. ISSN S2CID Financial Crisis". Council on Foreign Relations. January 24, October 22, July Center for Public Integrity. May 6, Dallas Business Journal. Retrieved April 27, Center on Budget and Policy Priorities.

PMC PMID Journal of Marriage and Family. Act of Congress No. The United States Congress. October 18, International Monetary Fund. Business Wire. February 13, July 1, Parallels, Differences and Policy Lessons". Hungarian Academy of Science. SSRN Journal of Advances in Management Research. The Economist. December 11, Encyclopedia Britannica. Retrieved November 24, The Washington Post. Federal Reserve Board of Governors. Seeking Alpha. April 25, April 23, The New York Times. November 5, The Daily Telegraph.

Archived from the original on January 10, April June 15, Brookings Institution. May 22, Los Angeles Times. January Foreign Affairs. Federal Reserve Economic Data. Bureau of Labor Statistics. February Retrieved May 12, This led to a dramatic rise in the number of households living below the poverty line see "The global financial crisis and developing countries: taking stock, taking action" PDF. Overseas Development Institute. September BBC News.

February 14, Federal Deposit Insurance Corporation. Summer Federal Reserve Bank of New York. Centre for Research on Multinational Corporations. Oxford University Press. Democracy Now. Social Science Research Network. Business Insider. Financial Times. Bank for International Settlements. University of Pennsylvania Law Review. The Guardian. The New York Times Magazine. Channel 4. Patent Statistics" PDF. United States Patent and Trademark Office.

CBS News. The Balance. Louis' Financial Crisis Timeline". Vanity Fair. Retrieved January 24, United States Census Bureau. United States Census. May 5, April 3, USA Today. September 8, August 7, This caused housing prices to fall and left many other homeowners underwater. This, in turn, severely impacted the market for mortgage-backed securities MBS held by banks and other institutional investors.

Federal Reserve pushed interest rates to the lowest levels seen up to that time in the post-Bretton Woods era in an attempt to maintain economic stability. The Fed held low interest rates through mid Combined with federal policy to encourage homeownership, these low interest rates helped spark a steep boom in real estate and financial markets and a dramatic expansion of the volume of total mortgage debt.

Financial innovations such as new types of subprime and adjustable mortgages allowed borrowers, who otherwise might not have qualified otherwise, to obtain generous home loans based on expectations that interest rates would remain low and home prices would continue to rise indefinitely.

However, from through , the Federal Reserve steadily increased interest rates in an attempt to maintain stable rates of inflation in the economy. As market interest rates rose in response, the flow of new credit through traditional banking channels into real estate moderated. Perhaps more seriously, the rates on existing adjustable mortgages and even more exotic loans began to reset at much higher rates than many borrowers expected or were led to expect.

The result was the bursting of what was later widely recognized to be a housing bubble. During the American housing boom of the mids, financial institutions had begun marketing mortgage-backed securities and sophisticated derivative products at unprecedented levels. When the real estate market collapsed in , these securities declined precipitously in value. The credit markets that had financed the housing bubble, quickly followed housing prices into a downturn as a credit crisis began unfolding in The solvency of over-leveraged banks and financial institutions came to a breaking point beginning with the collapse of Bear Stearns in March The contagion quickly spread to other economies around the world, most notably in Europe.

As a result of the Great Recession, the United States alone shed more than 8. Bureau of Labor Statistics, causing the unemployment rate to double. S Department of the Treasury. The Great Recession's official end date was June The Dodd-Frank Act enacted in by President Barack Obama gave the government control of failing financial institutions and the ability to establish consumer protections against predatory lending.

The aggressive monetary policies of the Federal Reserve and other central banks in reaction to the Great Recession, although widely credited with preventing even greater damage to the global economy, have also been criticized for extending the time it took the overall economy to recover and laying the groundwork for later recessions. This massive monetary policy response in some ways represented a doubling down on the early 's monetary expansion that fueled the housing bubble in the first place.

Along with the inundation of liquidity by the Fed, the U. These monetary and fiscal policies had the effect of reducing the immediate losses to major financial institutions and large corporations, but by preventing their liquidation they also keep the economy locked in too much of the same economic and organizational structure that contributed to the crisis. Not only did the government introduce stimulus packages into the financial system, but new financial regulation was also put into place.

According to some economists, the repeal of the Glass-Steagall Act —the depression-era regulation—in the s helped cause the recession. The repeal of the regulation allowed some of the United States' larger banks to merge and form larger institutions. In , President Barack Obama signed the Dodd-Frank Act to give the government expanded regulatory power over the financial sector. The act allowed the government some control over financial institutions that were deemed on the cusp of failing and to help put in place consumer protections against predatory lending.

However, critics of Dodd-Frank note that the financial sector players and institutions that actively drove and profited from predatory lending and related practices during the housing and financial bubbles were also deeply involved in both the drafting of the new law and the Obama administration agencies charged with its implementation.

The U. Following these policies some would argue, in spite of them the economy gradually recovered. Real GDP bottomed out in the second quarter of and regained its pre-recession peak in the second quarter of , three and a half years after the initial onset of the official recession. Financial markets recovered as the flood of liquidity washed over Wall Street first and foremost.

For workers and households, the picture was less rosy. Real median household income did not surpass its pre-recession level until Critics of the policy response and how it shaped the recovery argue that the tidal wave of liquidity and deficit spending did much to prop up politically connected financial institutions and big business at the expense of ordinary people and may have actually delayed the recovery by tying up real economic resources in industries and activities that deserved to fail and see their assets and resources put in the hands of new owners who could use them to create new businesses and jobs.

According to official Federal Reserve data, the Great Recession lasted eighteen months, from December through June Not officially. While the economy did suffer and markets fell following the onset of the global COVID pandemic in early , stimulus efforts were effective in preventing a full-blown recession in the U.

Some economists, however, fear that a recession may still be on the horizon as of mid On October 9, , the Dow Jones Industrial Average hit its pre-recession high and closed at 14, On September 29, The Dow Jones fell by nearly points intraday. Federal Reserve Bank of St. International Monetary Fund. Federal Reserve. Monetary Policy. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. What Was the Great Recession?

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The real truth about the 2008 financial crisis - Brian S. Wesbury - TEDxCountyLineRoad


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Here's What Caused the Great Recession - History

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