Causes of the Financial Crisis
April 9, 2010 - R40173
The current financial crisis began in August 2007, when financial stability replaced inflation as the Federal Reserve's chief concern. The roots of the crisis go back much further, and there are various views on the fundamental causes. It is generally accepted that credit standards in U.S. mortgage lending were relaxed in the early 2000s, and that rising rates of delinquency and foreclosures delivered a sharp shock to a range of U.S. financial institutions. Beyond that point of agreement, however, there are many questions that will be debated by policymakers and academics for decades. Why did the financial shock from the housing market downturn prove so difficult to contain? Why did the tools the Fed used successfully to limit damage to the financial system from previous shocks (the Asian crises of 1997-1998, the stock market crashes of 1987 and 2000-2001, the junk bond debacle in 1989, the savings and loan crisis, 9/11, and so on) fail to work this time? If we accept that the origins are in the United States, why were so many financial systems around the world swept up in the panic? To what extent were long-term developments in financial markets to blame for the instability? Derivatives markets, ...