View source for Finance:Financial crisis of 2007–08

{{short description|Global financial crisis}}
[[File:TED Spread.png|thumb|right|upright=1.35|The TED spread (in red) increased significantly during the financial crisis, reflecting an increase in perceived [[Credit risk|credit risk]]]]
[[File:GDP Real Growth in 2009.svg|thumb|right|upright=1.35|World map showing real GDP growth rates for 2009 (countries in brown were in recession)]]

The '''financial crisis of 2007–08''', also known as the '''global financial crisis''' and the '''2008 financial crisis''', was a severe worldwide economic crisis considered by many economists to have been the most serious [[Finance:Financial crisis|financial crisis]] since the [[Finance:Great Depression|Great Depression]] of the 1930s, to which it is often compared.<ref>{{cite news|url=https://www.reuters.com/article/pressRelease/idUS193520+27-Feb-2009+BW20090227 |archive-url=https://web.archive.org/web/20100212214538/https://www.reuters.com/article/pressRelease/idUS193520%2B27-Feb-2009%2BBW20090227 |url-status=dead |archive-date=February 12, 2010 |title=Two top economists agree 2009 worst financial crisis since great depression; risks increase if right steps are not taken |date=February 27, 2009 |newspaper=Reuters |access-date=November 10, 2015 }}</ref><ref>{{Cite journal|title=The Great Depression(s) of 1929–1933 and 2007–2009? Parallels, Differences and Policy Lessons|ssrn=2612243|publisher=Hungarian Academy of Science|date=July 1, 2015|location=MTA-ELTE Crisis History Working Paper No. 2|first=Peter|last=Eigner|first2=Thomas S.|last2=Umlauft}}</ref><ref>{{Cite web|title=A tale of two depressions: What do the new data tell us?|url=http://www.voxeu.org/article/tale-two-depressions-what-do-new-data-tell-us-february-2010-update|website=VoxEU.org|access-date = February 22, 2016|last=Eichengreen|last2=O'Rourke|date=March 8, 2010}}</ref><ref>{{Cite journal |first=Peter |last=Temin |year=2010 |title=The Great Recession & the Great Depression |journal=Daedalus |volume=139 |issue=4 |pages=115–124 |doi=10.1162/DAED_a_00048 |url=https://dspace.mit.edu/bitstream/1721.1/60250/1/Temin-2010-The%20Great%20Recession.pdf }}</ref>

It began in 2007 with a crisis in the subprime mortgage market in the {{wipe|United States}}, and developed into a full-blown international banking crisis with the collapse of the investment bank Lehman Brothers on September 15, 2008.<ref>{{Cite book|title=Uncontrolled Risk|last=Williams|first=Mark|publisher=McGraw-Hill Education|date=April 12, 2010|isbn=978-0-07-163829-6|location=|pages=|quote=|via=}}</ref> Excessive risk-taking by banks such as Lehman Brothers helped to magnify the financial impact globally.<ref name=":0">{{Cite book|title=Uncontrolled Risk|last=Williams|first=Mark|publisher=McGraw-Hill Education|date=April 12, 2010|isbn=978-0-07-163829-6|location=|pages=213|quote=|via=}}</ref> Massive [[Finance:Bailout|bail-outs]] of financial institutions and other palliative monetary and fiscal policies were employed to prevent a possible collapse of the world financial system. The crisis was nonetheless followed by a global economic downturn, the Great Recession. The Asian markets (China, Hong Kong, Japan, India, etc.) were immediately impacted and volatilized after the U.S. sub-prime crisis.<ref>{{Cite journal|last=Singhania|first=Monica|last2=Anchalia|first2=Jugal|date=2013-10-28|title=Volatility in Asian stock markets and global financial crisis|journal=Journal of Advances in Management Research|language=en|volume=10|issue=3|pages=333–351|doi=10.1108/JAMR-01-2013-0010|issn=0972-7981}}</ref> The [[Finance:European debt crisis|European debt crisis]], a crisis in the banking system of the European countries using the [[Finance:Euro|euro]], followed later.

In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the US following the crisis to "promote the financial stability of the United States".<ref>{{USPL|111|203}}</ref> The [[Finance:Basel III|Basel III]] capital and liquidity standards were adopted by countries around the world.<ref>{{cite web|title=Monitoring adoption of Basel standards|url=http://www.bis.org/bcbs/implementation/bprl1.htm|publisher=Bank for International Settlements|accessdate=February 2, 2016}}</ref>
{{toclimit|3}}

==Summary==

=== Timeline ===
Following is a timeline of major events during the financial crisis:<ref>{{Cite web|url=https://www.thebalance.com/2007-financial-crisis-overview-3306138|title=Here's How They Missed the Early Clues of the Financial Crisis|last=Amadeo|first=Kimberly|website=The Balance|language=en|access-date=2018-12-25}}</ref><ref>{{Cite web|url=https://www.thebalance.com/2008-financial-crisis-timeline-3305540|title=37 Critical Events of the 2008 Financial Crisis|last=Amadeo|first=Kimberly|website=The Balance|language=en|access-date=2018-12-25}}</ref><ref>{{Cite web|url=https://www.thebalance.com/2009-financial-crisis-bailouts-3305539|title=How They Stopped the Financial Crisis in 2009|last=Amadeo|first=Kimberly|website=The Balance|language=en|access-date=2018-12-25}}</ref>

* April 2007: New Century, an American REIT specialising in sub-prime mortgages, filed for Chapter 11 bankruptcy protection. This propagated the sub-prime crisis, through [[Finance:Securitization|securitization]], to banks around the world.<ref name="BBC Timeline">{{cite web |url=http://news.bbc.co.uk/1/hi/business/7521250.stm |title=Timeline: Credit crunch to downturn |date=August 7, 2009 |website=BBC News |access-date=December 29, 2018}}</ref>
* August 9, 2007: [[Company:BNP Paribas|BNP Paribas]] blocked withdrawals from three of its hedge funds,<ref name="G8512" /> since there was no liquidity, making valuation of the funds impossible – a clear sign that banks were refusing to do business with each other.<ref name="BBC Timeline"/>
* August 2007: The [[Organization:Federal Open Market Committee|Federal Open Market Committee]] began reducing the [[Finance:Federal funds rate|federal funds rate]] from its peak of 5.25% in response to worries about liquidity and confidence.
* October 9, 2007: The Dow Jones Industrial Average hit its peak closing price of 14,164.53.<ref>{{Cite web|url=https://www.thebalance.com/dow-jones-closing-history-top-highs-and-lows-since-1929-3306174|title=Dow High of 26,828.39 Set on October 3, 2018|last=Amadeo|first=Kimberly|website=The Balance|language=en|access-date=2019-05-02}}</ref>  Existing home sales also peaked this month and began to decline.
* December 12, 2007: The Federal Reserve instituted the [[Finance:Term auction facility|Term Auction Facility]] to supply short-term credit to banks with sub-prime mortgages.
* February 13, 2008: The Economic Stimulus Act of 2008 was enacted, which included a tax rebate.
* March 17, 2008: The Federal Reserve guaranteed Bear Stearns' bad loans to facilitate its acquisition by [[Company:JPMorgan Chase|JPMorgan Chase]].
* July 11, 2008: IndyMac failed.
* July 30, 2008: The Housing and Economic Recovery Act of 2008 was enacted.
* September 7, 2008: Fannie Mae and Freddie Mac were taken over by the federal government.
* September 15, 2008: Lehman Brothers went bankrupt after the Federal Reserve declined to guarantee its loans, causing the Dow Jones to drop 504 points, its worst decline in seven years.  The same day, [[Company:Bank of America|Bank of America]] purchased [[Company:Merrill Lynch|Merrill Lynch]].
* September 16, 2008: The [[Finance:Federal Reserve|Federal Reserve]] took over [[Company:American International Group|American International Group]].  The Reserve Primary Fund "broke the buck" as a result of massive withdrawals from [[Finance:Money market|money market]] accounts.
* September 21, 2008: [[Company:Goldman Sachs|Goldman Sachs]] and Morgan Stanley converted themselves from [[Finance:Investment banking|investment banks]] to [[Finance:Bank holding company|bank holding companies]] to increase their protection by the Federal Reserve.
* September 26, 2008: Washington Mutual went bankrupt after a bank run.
* September 29, 2008: The House of Representatives rejected the Emergency Economic Stabilization Act of 2008 instituting the $700 billion [[Finance:Troubled Asset Relief Program|Troubled Asset Relief Program]].  In response the Dow Jones dropped 777.68 points, its largest single-day decline.
* October 3, 2008: Congress passed the Emergency Economic Stabilization Act of 2008.
* November 25, 2008: The Term Asset-Backed Securities Loan Facility was announced.
* December 16, 2008: The federal funds rate was lowered to zero percent.
* January 2009: Two of the three Big Three automobile manufacturers received a bailout from the TARP program.
* February 13, 2009: Congress approved the [[Finance:American Recovery and Reinvestment Act of 2009|American Recovery and Reinvestment Act of 2009]], a $787 billion economic stimulus package.
* March 6, 2009: The Dow Jones hit its lowest level of 6,443.27.

===Subprime mortgage bubble===
The precipitating factor for the Financial Crisis of 2007–2008 was a high default rate in the United States [[Finance:Subprime lending|subprime]] home mortgage sector, i.e. the bursting of the "subprime bubble". This happened when many housing mortgage debtors failed to make their regular payments, leading to a high rate of foreclosures. While the causes of the bubble are disputed, some or all of the following factors must have contributed.

* Low interest rates encouraged mortgage lending. 
* Securitization. Many mortgages were bundled together and formed into new financial instruments called mortgage-backed securities, in a process known as [[Finance:Securitization|securitization]]. These bundles could be sold as (ostensibly) low-risk securities partly because they were often backed by credit default swaps insurance.<ref>{{cite journal|title=Credit Default Swaps and the Credit Crisis |doi=10.1257/jep.24.1.73 |first=René M. |last=Stulz|journal=[[Finance:Journal of Economic Perspectives|Journal of Economic Perspectives]] |volume =24 |issue=1 |pages=73–92 |date=Winter 2010 |url=https://fisher.osu.edu/supplements/10/10402/credit-default-swaps-and-the-credit-crisis.pdf|access-date=10 September 2018}}</ref> Because mortgage lenders could pass these mortgages (and the associated risks) on in this way, they could and did adopt loose underwriting criteria (due in part to outdated and lax regulation).
* Lax regulation allowed predatory lending in the private sector,<ref>{{Cite web|title=The 2008 Housing Crisis|url=https://www.americanprogress.org/issues/economy/reports/2017/04/13/430424/2008-housing-crisis|website=americanprogress.org|access-date=April 13, 2017}}</ref><ref>{{Cite web|title=Victimizing the Borrowers: Predatory Lending's Role in the Subprime Mortgage Crisis|url=http://knowledge.wharton.upenn.edu/article/victimizing-the-borrowers-predatory-lendings-role-in-the-subprime-mortgage-crisis|website=knowledge.wharton.upenn.edu|access-date=February 20, 2008}}</ref> especially after the federal government overrode anti-predatory state laws in 2004.<ref>{{Cite web|title=Lest We Forget: Why We Had A Financial Crisi|url=https://www.forbes.com/sites/stevedenning/2011/11/22/5086/#10181f68f92f|website=forbes.com |access-date=November 22, 2011|last=Denning}}</ref>
* The Community Reinvestment Act (CRA),<ref>{{cite web|url=https://www.federalreserve.gov/communitydev/cra_about.htm|title=The Fed - Community Reinvestment Act|website=federalreserve.gov|accessdate=July 11, 2017}}</ref> a 1977 US federal law designed to help low- and moderate-income Americans get mortgage loans encouraged banks to grant mortgages to higher risk families.<ref>{{Cite web|title=The Clinton-Era Roots of the Financial Crisis|url=http://online.wsj.com/articles/SB10001424127887323477604579000571334113350}}</ref><ref>{{Cite web|title=Here's How The Community Reinvestment Act Led To The Housing Bubble's Lax Lending|url=http://www.businessinsider.com/the-cra-debate-a-users-guide-2009-6|website=businessinsider.com |access-date=December 22, 2016|last=Carney}}</ref><ref>{{cite web|url=https://www.ncsha.org/blog/unc-center-study-debunks-role-cra-housing-crisis|title=UNC Center Study Debunks Role of CRA in Housing Crisis - NCSHA|website=ncsha.org|accessdate=July 11, 2017}}</ref>
* Reckless lending by, for example, Bank of America's Countrywide Financial unit, caused Fannie Mae and Freddie Mac to lose market share and to respond by lowering their own standards.<ref name="Zombie Economics, Quiggin, page 62">[https://books.google.com/books?id=pTgiRDj-uIYC&pg=PA62&lpg=PA62&dq=%22mortgage+lenders+such+as+Countrywide.+The+resulting+loss+of+market+share%22&source=bl&ots=c-OsiMMN0e&sig=ACfU3U0NqKysU1FZFIs2xrm51vNKzEH8dQ&hl=en&sa=X&ved=2ahUKEwj1n7Cam6DhAhUFKa0KHe1UC3QQ6AEwAHoECAEQAQ#v=onepage&q=%22mortgage%20lenders%20such%20as%20Countrywide.%20The%20resulting%20loss%20of%20market%20share%22&f=false ''Zombie Economics: How Dead Ideas Still Walk among Us''], John Quiggin, Ch. 2 "The Efficient Market Hypothesis," section "The Crisis of 2008," Princeton University Press, 2010, page 62.</ref>
* Mortgage guarantees. Many of the subprime (high risk) loans were bundled and sold, finally accruing to the quasi-government agencies Fannie Mae and Freddie Mac.<ref>{{cite web |url= https://object.cato.org/sites/cato.org/files/pubs/pdf/bp120.pdf|title= M. Fannie, Freddie, and the Subprime Mortgage Market|last=Calabria |first=Mark |date= March 7, 2011|website=object.cato.org }}</ref> The implicit guarantee by the US federal government created a [[Moral hazard|moral hazard]] and contributed to a glut of risky lending.

The accumulation and subsequent high default rate of these subprime mortgages led to the financial crisis and the consequent damage to the world economy.

===Banking crisis===
High mortgage approval rates led to a large pool of homebuyers, which drove up housing prices. This appreciation in value led large numbers of homeowners (subprime or not) to borrow against their homes as an apparent windfall. This "bubble" would be burst by a rising single-family residential mortgages delinquency rate beginning in August 2006 and peaking in the first quarter, 2010.<ref>{{cite web|publisher=Board of Governors of the Federal Reserve System (US)|title=Delinquency Rate on Single-Family Residential Mortgages, Booked in Domestic Offices, All Commercial Banks [DRSFRMACBS]|via=FRED, Federal Reserve Bank of St. Louis|url=https://fred.stlouisfed.org/series/DRSFRMACBS|accessdate=December 28, 2016}}</ref>

The high delinquency rates led to a rapid devaluation of financial instruments (mortgage-backed securities including bundled loan portfolios, derivatives and credit default swaps). As the value of these assets plummeted, the market (buyers) for these securities evaporated and banks who were heavily invested in these assets began to experience a liquidity crisis.  Freddie Mac and Fannie Mae were taken over by the federal government on September 7, 2008. Lehman Brothers filed for bankruptcy on September 15, 2008. [[Company:Merrill Lynch|Merrill Lynch]], AIG, HBOS, Royal Bank of Scotland, Bradford & Bingley, [[Company:Fortis|Fortis]], Hypo Real Estate, and Alliance & Leicester were all expected to follow—with a US federal bailout announced the following day beginning with $85 billion to AIG. In spite of trillions<ref>{{cite news|url=https://www.forbes.com/sites/mikecollins/2015/07/14/the-big-bank-bailout/|date=July 14, 2015|title=The Big Bank Bailout|first=Mike|last=Collins|work=Forbes}}</ref> paid out by the US federal government, it became much more difficult to borrow money. The resulting decrease in buyers caused housing prices to plummet. In 2018, Alistair Darling, who was the U.K.'s Chancellor of the Exchequer at the time, spoke out and stated that Britain came within hours of "a breakdown of law and order" the day that [[Company:Royal Bank of Scotland Group|RBS]] was bailed-out.<ref>{{Cite web|url=https://www.businessinsider.com/alistair-darling-uk-breakdown-of-law-and-order-financial-crisis-2018-5|title='It sent a tremor down my back': Alistair Darling reveals how Britain came within hours of the 'breakdown of law and order'|last=Martin|first=Will|website=Business Insider|access-date=2019-05-07}}</ref>

=== Consequences ===
While the collapse of large financial institutions was prevented by the [[Finance:Bailout|bailout]] of banks by national governments, [[Finance:Stock market|stock market]]s still dropped worldwide. In many areas, the housing market also suffered, resulting in evictions, [[Finance:Foreclosure|foreclosure]]s, and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity leading to the Great Recession of 2008–2012 and contributing to the European sovereign-debt crisis.<ref>{{cite web|url=http://www.brookings.edu/~/media/Files/rc/papers/2009/0615_economic_crisis_baily_elliott/0615_economic_crisis_baily_elliott.pdf|title=Brookings-Financial Crisis|accessdate=May 1, 2010|url-status=dead|archiveurl=https://web.archive.org/web/20100602131359/http://www.brookings.edu/~/media/Files/rc/papers/2009/0615_economic_crisis_baily_elliott/0615_economic_crisis_baily_elliott.pdf|archivedate=June 2, 2010
|df=mdy}}</ref><ref>{{cite news|last=Williams|first=Carol J.|url=http://latimesblogs.latimes.com/world_now/2012/05/eurozone-crisis-global-economy.html|title=Euro crisis imperils recovering global economy, OECD warns|publisher=Los Angeles Times|date=May 22, 2012|accessdate=May 23, 2012}}</ref> The active phase of the crisis, which manifested as a [[Finance:Liquidity crisis|liquidity crisis]], can be dated from August 9, 2007, when [[Company:BNP Paribas|BNP Paribas]] terminated withdrawals from three funds citing "a complete evaporation of liquidity".<ref name="G8512" />

The bursting of the US housing bubble, which peaked at the end of 2006,<ref name="USCensus-new-housing">{{cite web|publisher=United States Census Bureau, United States Department of Commerce|url=https://www.census.gov/const/uspriceann.pdf|title=Median and Average Sales Prices of New Homes Sold in United States}}</ref><ref name="Census home ownership">{{cite news|title=Quarterly Homeownership Rates and Seasonally Adjusted Homeownership Rates for the United States: 1997–2014|work=US Census|date=May 5, 2006|url=https://www.census.gov/housing/hvs/data/charts/fig06.pdf|accessdate=May 18, 2014}}</ref> caused the values of [[Finance:Security|securities]] tied to US real estate pricing to plummet, damaging financial institutions globally.<ref>{{cite web|author=This American Life|url=http://www.pri.org/business/giant-pool-of-money.html|title=The Giant Pool of Money|date=April 2009|publisher=Pri.org|accessdate=May 1, 2010|url-status=dead|archiveurl=https://web.archive.org/web/20100415153017/http://www.pri.org/business/giant-pool-of-money.html|archivedate=April 15, 2010}}</ref> The financial crisis was triggered by a complex interplay of policies that encouraged home ownership, providing easier access to loans for subprime borrowers; overvaluation of bundled subprime mortgages based on the theory that housing prices would continue to escalate; questionable trading practices on behalf of both buyers and sellers; compensation structures that prioritize short-term deal flow over long-term value creation; and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making.<ref>{{cite web|title=Money, Power and Wall Street, Part 1|url=https://www.pbs.org/wgbh/pages/frontline/money-power-wall-street/|publisher=PBS|accessdate=August 4, 2012}}</ref><ref>{{cite news|last=Ivry|first=Bob|url=https://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=aGT_xTYzbbQE|title=quoting Joshua Rosner as stating 'It's not a liquidity problem, it's a valuation problem.|publisher=Bloomberg|date=September 24, 2008|accessdate=June 27, 2010}}</ref><ref>{{cite web|last1=Keller|first1=Christopher|title=Executive Compensation's Role in the Financial Crisis|url=http://www.law.com/corporatecounsel/PubArticleCC.jsp?id=1202426091714&slreturn=20121002110606#|publisher=The National Law Journal|accessdate=January 7, 2014|last2=Stocker|first2=Michael}}</ref> Questions regarding bank [[Finance:Solvency|solvency]], declines in credit availability, and damaged investor confidence affected global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined.<ref>{{cite web|url=http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf|title=World Economic Outlook: Crisis and Recovery, April&nbsp;2009|accessdate=May 1, 2010}}</ref> Governments and [[Finance:Central bank|central bank]]s responded with unprecedented [[Finance:Fiscal policy|fiscal stimulus]], [[Finance:Monetary policy|monetary policy]] expansion and institutional bailouts.<ref>{{cite web|url=http://somo.nl/publications-en/Publication_3588/at_download/fullfile|title=Kavaljit Singh, Fixing Global Finance: A Developing Country Perspective on Global Financial Reforms, Stichting Onderzoek Multinationale Ondernemingen: Centre for Research on Multinational Corporations, at 14.|format=PDF|accessdate=April 23, 2015|url-status=dead|archiveurl=https://web.archive.org/web/20160420220424/http://www.somo.nl/publications-en/Publication_3588/at_download/fullfile|archivedate=April 20, 2016|df=mdy}}</ref> In the US, Congress passed the [[Finance:American Recovery and Reinvestment Act of 2009|American Recovery and Reinvestment Act of 2009]].

===Background causes===
Many causes for the financial crisis have been suggested, with varying weight assigned by experts.<ref>{{cite web|url=http://www.federalreserve.gov/newsevents/speech/bernanke20090414a.htm|title=Bernanke-Four Questions|publisher=Federalreserve.gov|date=April 14, 2009|accessdate=May 1, 2010}}</ref>
* The US Senate's Levin–Coburn Report concluded that the crisis was the result of "high risk, complex financial products; undisclosed conflicts of interest; the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street".<ref>{{cite web|url=http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf|title=Senate Financial Crisis Report, 2011|accessdate=April 22, 2011}}</ref>
* The [[Finance:Financial Crisis Inquiry Commission|Financial Crisis Inquiry Commission]] concluded that the financial crisis was avoidable and was caused by "widespread failures in [[Finance:Financial regulation|financial regulation]] and supervision", "dramatic failures of [[Finance:Corporate governance|corporate governance]] and [[Risk management|risk management]] at many systemically important financial institutions", "a combination of excessive borrowing, risky investments, and lack of transparency" by financial institutions, ill preparation and  inconsistent action by government that "added to the uncertainty and panic", a "systemic breakdown in accountability and ethics", "collapsing mortgage-lending standards and the mortgage securitization pipeline", deregulation of [[Finance:Over-the-counter|over-the-counter]] [[Finance:Derivative|derivatives]], especially [[Finance:Credit default swap|credit default swap]]s, and "the failures of credit rating agencies" to correctly price risk.<ref>[http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States]</ref>
* The 1999 part-repeal of the Glass-Steagall Act effectively removed the separation between [[Finance:Investment bank|investment bank]]s and depository banks in the United States.<ref>{{cite web |url=https://www.commondreams.org/views/2009/11/12/reflections-glass-steagall-and-maniacal-deregulation |title=Reflections on Glass-Steagall and Maniacal Deregulation |last=Weissman |first=Robert |date=November 12, 2009 |website=Common Dreams |access-date=September 22, 2019 |quote=Repeal of Glass-Steagall had many important direct effects but the most important was to change the culture of commercial banking to emulate Wall Street's high-risk speculative betting approach. ... This is a very important part of the story of what created the financial crisis.}}</ref>
* Critics argued that credit rating agencies<ref>Strategische Unternehmensfuehrung Nr. 1, 1999. Munich, St. Gallen 1999, {{ISSN|1436-5812}}</ref><ref>{{cite web|url=http://www.faz.net/aktuell/wirtschaft/unternehmen/alan-greenspan-die-ratingagenturen-wissen-nicht-was-sie-tun-1464553.html|title=Alan Greenspan: "Die Ratingagenturen wissen nicht was sie tun"|author=Frankfurter Allgemeine Zeitung GmbH|date=September 22, 2007|work=FAZ.NET}}</ref> and investors failed to accurately price the [[Finance:Financial risk|risk]] involved with [[Finance:Mortgage loan|mortgage]]-related financial products, and that governments did not adjust their regulatory practices to address 21st-century financial markets.<ref name="Declaration of G20">{{cite web|url=https://georgewbush-whitehouse.archives.gov/news/releases/2008/11/20081115-1.html|title=Declaration of G20|publisher=Whitehouse.gov|accessdate=February 27, 2009}}</ref>
* Research into the causes of the financial crisis has also focused on the role of interest rate spreads.<ref>[https://www.minneapolisfed.org/research/wp/wp666.pdf Federal Reserve Bank of Minneapolis, ''Facts and Myths about the Financial Crisis of 2008'', October 2008]</ref>
* Fair value accounting was issued as US accounting standard SFAS 157 in 2006 by the privately run [[Organization:Financial Accounting Standards Board|Financial Accounting Standards Board]] (FASB)—delegated by the SEC with the task of establishing financial reporting standards.<ref name="wharton_2009">{{citation|url=http://fic.wharton.upenn.edu/fic/papers/09/0940.pdf|title=Did Fair-Value Accounting Contribute to the Financial Crisis?|author1=Christian Laux|author2=Christian Leuz|date=2009|accessdate=April 26, 2016|url-status=dead|archiveurl=https://web.archive.org/web/20160304023451/http://fic.wharton.upenn.edu/fic/papers/09/0940.pdf|archivedate=March 4, 2016|df=mdy-all}}</ref> This required that tradable assets such as [[Finance:Mortgage-backed security|mortgage securities]] be valued according to their current market value rather than their historic cost or some future expected value.  When the market for such securities became volatile and collapsed, the resulting loss of value had a major financial effect upon the institutions holding them even if they had no immediate plans to sell them.<ref>{{citation|title=The role of fair value accounting in the subprime mortgage meltdown|author=MR Young, PBW Miller|journal=Journal of Accountancy|pages=34–38|date=May 2008}}</ref>

==Causes==
The immediate cause or trigger of the crisis was the bursting of the US housing bubble, which peaked in 2006/2007.<ref name="USCensus-new-housing"/><ref name="Census home ownership" />  Already-rising default rates on "subprime" and [[Finance:Adjustable-rate mortgage|adjustable-rate mortgage]]s (ARM) began to increase quickly thereafter.

Easy availability of credit in the US, fueled by large inflows of foreign funds after the [[Finance:1998 Russian financial crisis|Russian debt crisis]] and [[Finance:1997 Asian financial crisis|Asian financial crisis]] of the 1997–1998 period, led to a housing construction boom and facilitated debt-financed consumer spending. As banks began to give out more loans to potential home owners, housing prices began to rise. Lax lending standards and rising real estate prices also contributed to the real estate bubble. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load.<ref>{{cite news|url=https://www.nytimes.com/2008/09/24/business/economy/24text-bush.html?_r=2&pagewanted=1&oref=slogin|title=President Bush's Address to Nation|work=The New York Times|date=September 24, 2008|accessdate=May 2, 2010}}</ref><ref>{{cite web|url=http://www.federalreserve.gov/newsevents/speech/bernanke20090414a.htm|title=Bernanke-Four Questions About the Financial Crisis|publisher=Federalreserve.gov|date=April 14, 2009|accessdate=May 1, 2010}}</ref><ref>{{cite news|url=https://www.nytimes.com/2009/03/02/opinion/02krugman.html?pagewanted=print|last=Krugman|first=Paul|title=Revenge of the Glut|date=March 2, 2009|work=The New York Times}}</ref>

As part of the housing and credit booms, the number of financial agreements called [[Finance:Mortgage-backed security|mortgage-backed securities]] (MBS) and [[Finance:Collateralized debt obligation|collateralized debt obligation]]s (CDO), which derived their value from mortgage payments and housing prices, greatly increased. Such [[Finance:Financial innovation|financial innovation]] enabled institutions and investors around the world to invest in the US housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS reported significant losses.<ref name="IMF Loss Estimates">{{cite web|url=http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/exesum.pdf|title=IMF Loss Estimates|accessdate=May 1, 2010}}</ref>

Falling prices also resulted in homes worth less than the mortgage loan, providing borrowers with a financial incentive to enter foreclosure (as borrowers had little incentive to continue paying a loan collateralized with a home with negative net value). The ongoing foreclosure epidemic that began in late 2006 in the US and only reduced to historical levels in early 2014<ref name="RealtyTrac Foreclosure Rates">{{cite web|url=http://www.realtytrac.com/news/foreclosure-trends/q1-2016-u-s-foreclosure-market-report/|title=RealtyTrac Foreclosure Rates|accessdate=June 3, 2016}}</ref> drained significant wealth from consumers, losing up to $4.2 trillion<ref name="Estimate of Household Wealth lost">{{cite web|url=http://www.mybudget360.com/the-balance-sheet-recession-42-trillion-lost-in-residential-real-estate-value-yet-mortgage-debt-down-by-140-billion/|title=Estimate of Household Wealth lost|accessdate=June 3, 2016}}</ref> in wealth from [[Finance:Home equity|home equity]]. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses are estimated in the trillions of US dollars globally.<ref name="IMF Loss Estimates" />
[[File:NYUGDPFinancialShare.jpg|thumb|upright=1.6|Share in GDP of US financial sector since 1860<ref>Confer Thomas Philippon: "The future of the financial industry", Finance Department of the New York University Stern School of Business at New York University, link to blog [http://pages.stern.nyu.edu/~sternfin/crisis/]</ref>]]

While the housing and credit bubbles were building, a series of factors caused the financial system to both expand and become increasingly fragile, a process called [[Finance:Financialization|financialization]]. US government policy from the 1970s onward has emphasized [[Finance:Deregulation|deregulation]] to encourage business, which resulted in less oversight of activities and less disclosure of information about new activities undertaken by banks and other evolving financial institutions. Thus, policymakers did not immediately recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the [[Finance:Shadow banking system|shadow banking system]]. Some experts believe these institutions had become as important as commercial (depository) banks in providing credit to the US economy, but they were not subject to the same regulations.<ref name="newyorkfed.org">{{cite web|url=http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html|title=Geithner-Speech Reducing Systemic Risk in a Dynamic Financial System|publisher=Newyorkfed.org|date=June 9, 2008|accessdate=May 1, 2010}}</ref>

These institutions, as well as certain regulated banks, had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses.<ref>{{cite web|url=http://www.ft.com/cms/s/0/9c158a92-1a3c-11de-9f91-0000779fd2ac.html|title=Greenspan-We Need a Better Cushion Against Risk|work=Financial Times|date=March 26, 2009|accessdate=May 1, 2010}}</ref> These losses affected the ability of financial institutions to lend, slowing economic activity. Concerns regarding the stability of key financial institutions drove central banks to provide funds to encourage lending and restore faith in the [[Finance:Commercial paper|commercial paper]] markets, which are integral to funding business operations. Governments also [[Finance:Bailout|bailed out]] key financial institutions and implemented economic stimulus programs, assuming significant additional financial commitments.

The US [[Finance:Financial Crisis Inquiry Commission|Financial Crisis Inquiry Commission]] reported its findings in January 2011.<ref>{{cite web |url=http://c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_conclusions.pdf |title=FCIC Final Report Conclusions.pdf|accessdate=March 4, 2011 |url-status=unfit|archiveurl=https://web.archive.org/web/20110304020317/http://c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_conclusions.pdf |archivedate=March 4, 2011}}</ref> It concluded that:

{{Quote|text=... the crisis was avoidable and was caused by:
* widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages;
* dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk;
* an explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; 
* key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; 
* and systemic breaches in accountability and ethics at all levels. |source=Financial Crisis Inquiry Commission – Press Release – January 27, 2011<ref>[http://www.fcic.gov/files/news_pdfs/2011-0127-fcic-releases-report.pdf Financial Crisis Inquiry Commission, press release of January 27, 2011] {{webarchive |url=https://web.archive.org/web/20110130170725/http://www.fcic.gov/files/news_pdfs/2011-0127-fcic-releases-report.pdf |date=January 30, 2011}}</ref>}}

===Subprime lending===
{{Main|Finance:Subprime mortgage crisis}}

The 2000s were the decade of subprime borrowers; no longer was this a segment left to fringe lenders. The relaxing of credit lending standards by investment banks and commercial banks drove this about-face. Subprime did not become magically less risky; Wall Street just accepted this higher risk.<ref>{{Cite book|title=Uncontrolled Risk|last=Williams|first=Mark|publisher=McGraw-Hill Education|date=April 12, 2010|isbn=978-0-07-163829-6|location=|pages=125|quote=|via=}}</ref> During a period of tough competition between mortgage lenders for revenue and market share, and when the supply of creditworthy borrowers was limited, mortgage lenders relaxed underwriting standards and originated riskier mortgages to less creditworthy borrowers. In the view of some analysts, the relatively conservative government-sponsored enterprises (GSEs) policed mortgage originators and maintained relatively high underwriting standards prior to 2003. However, as market power shifted from securitizers to originators and as intense competition from private securitizers undermined GSE power, mortgage standards declined and risky loans proliferated. The worst loans were originated in 2004–2007, the years of the most intense competition between securitizers and the lowest market share for the GSEs.

[[File:U.S. Home Ownership and Subprime Origination Share.png|thumb|upright=1.6|US subprime lending expanded dramatically 2004–2006]]

As well as easy credit conditions, there is evidence that competitive pressures contributed to an increase in the amount of subprime lending during the years preceding the crisis. Major US investment banks and GSEs such as Fannie Mae played an important role in the expansion of lending, with GSEs eventually relaxing their standards to try to catch up with the private banks.<ref>{{cite news|last=Labaton|first=Stephen|url=https://www.nytimes.com/2008/10/03/business/03sec.html|title=NY Times-The Reckoning-Agency 04 Rule Lets Banks Pile on Debt|work=The New York Times|date=October 2, 2008|accessdate=April 22, 2011}}</ref><ref>{{cite news|last=Duhigg|first=Charles|url=https://www.nytimes.com/2008/10/05/business/05fannie.html|title=NYT-The Reckoning-Pressured to Take More Risk, Fannie Reached Tipping Point|work=The New York Times|date=October 4, 2008|accessdate=April 22, 2011}}</ref>

A contrarian view is that Fannie Mae and Freddie Mac led the way to relaxed underwriting standards, starting in 1995, by advocating the use of easy-to-qualify automated underwriting and appraisal systems, by designing the no-down-payment products issued by lenders, by the promotion of thousands of small mortgage brokers, and by their close relationship to subprime loan aggregators such as Countrywide.<ref>Joseph Fried, Who Really Drove the Economy into the Ditch? (New York, NY: Algora Publishing, 2012), 16–42, 67–119.</ref><ref name="Graham Fisher">{{cite web|title=Housing in the New Millennium: A Home without Equity Is Just a Rental with debt|publisher=Ssrn.com|url=https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1162456 |author=Graham Fisher|date=June 29, 2001|ssrn=1162456}}</ref>

Depending on how "subprime" mortgages are defined, they remained below 10% of all mortgage originations until 2004, when they rose to nearly 20% and remained there through the 2005–2006 peak of the United States housing bubble.<ref>{{cite web|url=http://www.jchs.harvard.edu/publications/markets/son2008/son2008.pdf|title=Harvard Report-State of the Nation's Housing 2008 Report|accessdate=May 1, 2010|url-status=dead|archiveurl=https://web.archive.org/web/20100630164105/http://www.jchs.harvard.edu/publications/markets/son2008/son2008.pdf|archivedate=June 30, 2010|df=mdy}}</ref>

The majority report of the Financial Crisis Inquiry Commission, written by the six Democratic appointees, the minority report, written by three of the four Republican appointees, studies by Federal Reserve economists, and the work of several independent scholars generally contend that government affordable housing policy was not the primary cause of the financial crisis. Although they concede that governmental policies had some role in causing the crisis, they contend that GSE loans performed better than loans securitized by private investment banks, and performed better than some loans originated by institutions that held loans in their own portfolios.

In his dissent to the majority report of the Financial Crisis Inquiry Commission, American Enterprise Institute [[Social:Fellow|fellow]] Peter J. Wallison<ref>{{cite web|last=Wallison|first=Peter J.|url=http://www.aei.org/article/economics/financial-services/what-got-us-here/|title=''What Got Us Here?'', December&nbsp;2008|publisher=Aei.org|date=December 9, 2008|accessdate=May 1, 2010}}</ref> stated his belief that the roots of the financial crisis can be traced directly and primarily to affordable housing policies initiated by the US Department of Housing and Urban Development (HUD) in the 1990s and to massive risky loan purchases by government-sponsored entities Fannie Mae and Freddie Mac. Later, based upon information in the SEC's December 2011 securities fraud case against six former executives of Fannie and Freddie, Peter Wallison and Edward Pinto estimated that, in 2008, Fannie and Freddie held 13 million substandard loans totaling over $2 trillion.<ref>{{cite web|author1=Peter J. Wallison |author2=Edward Pinto |title=Why the Left Is Losing the Argument over the Financial Crisis |publisher=American Enterprise Institute |date=December 27, 2011 |url=http://www.aei.org/article/why-the-left-is-losing-the-argument-over-the-financial-crisis/ |accessdate=November 20, 2012 |url-status=dead |archiveurl=https://web.archive.org/web/20130626224449/http://www.aei.org/article/why-the-left-is-losing-the-argument-over-the-financial-crisis/ |archivedate=June 26, 2013 }}</ref>

In the early and mid-2000s, the Bush administration called numerous times<ref>{{cite web|title=Bush White House Archive|url=https://georgewbush-whitehouse.archives.gov/news/releases/2008/09/20080919-15.html|publisher=whitehouse.gov}}</ref> for investigation into the safety and soundness of the GSEs and their swelling portfolio of subprime mortgages. On September 10, 2003, the House Financial Services Committee held a hearing at the urging of the administration to assess safety and soundness issues and to review a recent report by the Office of Federal Housing Enterprise Oversight (OFHEO) that had uncovered accounting discrepancies within the two entities.<ref>{{cite web|title=OFHEO Report on Systemic Risk|url=http://www.fhfa.gov/webfiles/1145/sysrisk.pdf|publisher=fhfa.gov|url-status=dead|archiveurl=https://web.archive.org/web/20110611013004/http://www.fhfa.gov/webfiles/1145/sysrisk.pdf|archivedate=June 11, 2011|df=mdy-all}}</ref> The hearings never resulted in new legislation or formal investigation of Fannie Mae and Freddie Mac, as many of the committee members refused to accept the report and instead rebuked OFHEO for their attempt at regulation.<ref>{{cite web|title=House Hearing on OFHEO Report|url=http://commdocs.house.gov/committees/bank/hba97754.000/hba97754_0f.htm|publisher=house.gov}}</ref> Some believe this was an early warning to the systemic risk that the growing market in subprime mortgages posed to the US financial system that went unheeded.<ref>{{cite web|title=Attempts at Regulating Fannie Mae and Freddie Mac|url=http://www.international-economy.com/TIE_Su04_Wallison.pdf|publisher=international-economy.com}}</ref>

A 2000 United States Department of the Treasury study of lending trends for 305 cities from 1993 to 1998 showed that $467&nbsp;billion of mortgage lending was made by Community Reinvestment Act (CRA)-covered lenders into low and mid level income (LMI) borrowers and neighborhoods, representing 10% of all US mortgage lending during the period. The majority of these were prime loans. Sub-prime loans made by CRA-covered institutions constituted a 3% market share of LMI loans in 1998,<ref>{{cite web|url=http://www.ustreas.gov/press/releases/report3079.htm|title=''The Community Reinvestment Act After Financial Modernization'', April&nbsp;2000|publisher=Ustreas.gov|date=April 15, 2000|accessdate=May 1, 2010}}</ref> but in the run-up to the crisis, fully 25% of all sub-prime lending occurred at CRA-covered institutions and another 25% of sub-prime loans had some connection with CRA.<ref>{{cite web|url=http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis|author1=Robert Gordon|title=Did Liberals Cause the Sub-Prime Crisis?|work=American Prospect|date=April 7, 2008|accessdate=May 1, 2010|archive-url=https://www.webcitation.org/68F7wzs5E?url=http://prospect.org/article/did-liberals-cause-sub-prime-crisis|archive-date=June 7, 2012|url-status=dead}}</ref> However, most sub-prime loans were not made to the LMI borrowers targeted by the CRA,{{citation needed|date=November 2018}} especially in the years 2005–2006 leading up to the crisis,{{citation needed|date=November 2018}}  nor did it find any evidence that lending under the CRA rules increased delinquency rates or that the CRA indirectly influenced independent mortgage lenders to ramp up sub-prime lending.{{citation needed|date=November 2018}}

To other analysts the delay between CRA rule changes (in 1995) 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 1995 and the ultra-low interest rates initiated by the Federal Reserve after the terrorist attack on September 11, 2001. Both causes had to be in place before the crisis could take place.<ref>Joseph Fried, Who Really Drove the Economy Into the Ditch? (New York, NY: Algora Publishing, 2012), 5.</ref> Critics also point out that publicly announced CRA loan commitments were massive, totaling $4.5 trillion in the years between 1994 and 2007.<ref>Joseph Fried, Who Really Drove the Economy Into the Ditch? (New York, NY: Algora Publishing, 2012), 148.</ref> They also argue that the Federal Reserve's classification of CRA loans as "prime" is based on the faulty and self-serving assumption that high-interest-rate loans (3 percentage points over average) equal "subprime" loans.<ref>Joseph Fried, Who Really Drove the Economy Into the Ditch? (New York, NY: Algora Publishing, 2012), 140–41.</ref>

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." Essentially, investment banks and hedge funds used financial innovation to enable large wagers to be made, far beyond the actual value of the underlying mortgage loans, using [[Finance:Derivative|derivatives]] called credit default swaps, collateralized debt obligations and [[Finance:Synthetic CDO|synthetic CDO]]s.<ref>{{cite web|url=http://upstart.bizjournals.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom.html|title=Portfolio-Michael Lewis-"The End"-December&nbsp;2008|publisher=Portfolio.com|date=September 11, 2008|accessdate=May 1, 2010}}</ref>

As of March 2011, the FDIC had paid out $9 billion to cover losses on bad loans at 165 failed financial institutions.<ref name=post>{{cite news|title=FDIC's Tab For Failed U.S. Banks Nears $9 Billion|work=Wall Stree Journal|date=March 16, 2011|url=https://www.wsj.com/articles/SB10001424052748704396504576204752754667840 |first=Robin|last=Sidel}}</ref> The Congressional Budget Office estimated, in June 2011, that the bailout to Fannie Mae and Freddie Mac exceeds $300 billion (calculated by adding the fair value deficits of the entities to the direct bailout funds at the time).<ref>Joseph Fried, Who Really Drove the Economy into the Ditch? (New York, NY: Algora Publishing, 2012), 75.</ref>

Economist [[Biography:Paul Krugman|Paul Krugman]] argued in January 2010 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.<ref>{{cite web|url=https://krugman.blogs.nytimes.com/2010/01/07/cre-ative-destruction/|title=CRE-ative destruction|publisher=Krugman.blogs.nytimes.com|date=January 7, 2010|accessdate=November 20, 2012}}</ref>

Countering Krugman, Peter J. Wallison wrote: "It is not true that every bubble—even a large bubble—has the potential to cause a financial crisis when it deflates." Wallison notes that other developed countries had "large bubbles during the 1997–2007 period" but "the losses associated with mortgage delinquencies and defaults when these bubbles deflated were far lower than the losses suffered in the United States when the 1997–2007 [bubble] deflated." According to Wallison, the reason the US ''residential housing'' bubble (as opposed to other types of bubbles) led to financial crisis was that it was supported by a huge number of substandard loans—generally with low or no downpayments.<ref name="Wallison 1">{{cite web|author=Peter J. Wallison|title=Dissent from the Majority Report of the Financial Crisis Inquiry Commission|publisher=American Enterprise Institute|date=January 2011|url=http://www.aei.org|accessdate=November 20, 2012}}</ref>

Krugman's contention (that the growth of a commercial real estate bubble indicates that US housing policy was not the cause of the crisis) is challenged by additional analysis. After researching the default of commercial loans during the financial crisis, Xudong An and Anthony B. Sanders reported (in December 2010): "We find limited evidence that substantial deterioration in CMBS [commercial mortgage-backed securities] loan underwriting occurred prior to the crisis."<ref>Sanders, Anthony B. and An, Xudong, Default of CMBS Loans During the Crisis (November 29, 2010). 46th Annual AREUEA Conference Paper. Available at SSRN: http://ssrn.com/abstract=1717062</ref> Other analysts support the contention that the crisis in commercial real estate and related lending took place ''after'' the crisis in residential real estate. Business journalist Kimberly Amadeo reported: "The first signs of decline in residential real estate occurred in 2006. Three years later, commercial real estate started feeling the effects.<ref>Amadeo, Kimberly, "Commercial Real Estate Lending" in News & Issues – US Economy(About.com, November 2013), http://useconomy.about.com/od/grossdomesticproduct/tp/Commercial-Real-Estate-Loan-Defaults.htm</ref> Denice A. Gierach, a real estate attorney and CPA, wrote:

<blockquote>... most of the commercial real estate loans were good loans destroyed by a really bad economy. In other words, the borrowers did not cause the loans to go bad, it was the economy.<ref>Gierach, Denice A., "Waiting for the other shoe to drop in commercial real estate," (Chicago, IL, The Business Ledger, March 4, 2010)</ref></blockquote>

===Growth of the housing bubble===
[[File:Median and Average Sales Prices of New Homes Sold in United States 1963-2016 annual.svg|thumb|upright=1.35|A graph showing the median and average sales prices of new homes sold in the United States between 1963 and 2016 (not adjusted for inflation)<ref name="USCensus-new-housing"/>]]
Between 1998 and 2006, the price of the typical American house increased by 124%.<ref>{{cite news|title=CSI: credit crunch|work=[[Finance:The Economist|The Economist]]|url=http://www.economist.com/specialreports/displaystory.cfm?story_id=9972489|accessdate=May 19, 2008|date=October 18, 2007}}</ref> In contrast, during the 1980s and 1990s, the national median home price ranged from 2.9 to 3.1 times median household income. This ratio increased to 4.0 in 2004, and 4.6 in 2006.<ref name="businessweek1">{{cite web|url=http://www.businessweek.com/investor/content/oct2008/pi20081017_950382.htm?chan=top+news_top+news+index+-+temp_top+story|title=The Financial Crisis Blame Game – BusinessWeek|work=BusinessWeek|author1=Ben Steverman|author2=David Bogoslaw|date=October 18, 2008<!--, 12:01&nbsp;am EST -->|accessdate=October 24, 2008}}</ref> This [[Finance:Housing bubble|housing bubble]] resulted in many homeowners refinancing their homes at lower interest rates, or financing consumer spending by taking out [[Finance:Second mortgage|second mortgage]]s secured by the price appreciation.

In a Peabody Award winning program, NPR correspondents argued that a "Giant Pool of Money" (represented by $70&nbsp;trillion in worldwide fixed income investments) sought higher yields than those offered by US Treasury bonds early in the decade. This pool of money had roughly doubled in size from 2000 to 2007, 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 [[Finance:Mortgage-backed security|mortgage-backed security]] and the [[Finance:Collateralized debt obligation|collateralized debt obligation]] that were assigned safe [[Finance:Credit rating|ratings]] by the credit rating agencies.<ref name="This American Life">{{cite web|author=This American Life|url=http://www.pri.org/business/giant-pool-of-money.html|title=NPR-The Giant Pool of Money|publisher=Pri.org|accessdate=May 1, 2010|url-status=dead|archiveurl=https://web.archive.org/web/20100415153017/http://www.pri.org/business/giant-pool-of-money.html|archivedate=April 15, 2010}}</ref>

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|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 2003, the supply of mortgages originated at traditional lending standards had been exhausted, and continued strong demand began to drive down lending standards.<ref name="This American Life" />

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.<ref>{{cite news|last=Eavis|first=Peter|url=http://money.cnn.com/2007/11/24/magazines/fortune/eavis_cdo.fortune/index.htm|title=CDO Explained|publisher=CNN|date=November 25, 2007|accessdate=May 1, 2010}}</ref><ref>{{cite web|url=http://www.portfolio.com/interactive-features/2007/12/cdo|title=Portfolio-CDO Explained|publisher=Portfolio.com|date=September 11, 2008|accessdate=May 1, 2010}}</ref>

By September 2008, average US housing prices had declined by over 20% from their mid-2006 peak.<ref>{{cite web|url=http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_112555.pdf|title=Standard & Poor's Rating Services Australia/New Zealand|publisher=|accessdate=July 7, 2012}}</ref><ref>{{cite news|url=http://www.economist.com/finance/displaystory.cfm?story_id=12470547|title=Economist-A Helping Hand to Homeowners|work=The Economist|date=October 23, 2008|accessdate=February 27, 2009}}</ref> As prices declined, borrowers with [[Finance:Adjustable-rate mortgage|adjustable-rate mortgage]]s could not refinance to avoid the higher payments associated with rising interest rates and began to default. During 2007, lenders began foreclosure proceedings on nearly 1.3&nbsp;million properties, a 79% increase over 2006.<ref>{{cite news|title=U.S. FORECLOSURE ACTIVITY INCREASES 75 PERCENT IN 2007|date=January 29, 2008|publisher=RealtyTrac|url=http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=3988&accnt=64847|accessdate=June 6, 2008|archive-url=https://web.archive.org/web/20080426034654/http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=3988&accnt=64847|archive-date=April 26, 2008|url-status=dead|df=mdy-all}}</ref> This increased to 2.3&nbsp;million in 2008, an 81% increase vs. 2007.<ref>{{cite web|url=http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=5681&accnt=64847|title=RealtyTrac Press Release 2008FY|publisher=Realtytrac.com|date=January 15, 2009|accessdate=February 27, 2009|archive-url=https://www.webcitation.org/68F2M58kk?url=http://www.realtytrac.com/content/press-releases/foreclosure-activity-increases-81-percent-in-2008-4551?accnt=64847|archive-date=June 7, 2012|url-status=dead|df=mdy-all}}</ref> By August 2008, approximately 9% of all US mortgages outstanding were either delinquent or in foreclosure.<ref name="mbaa1">{{cite web|url=http://www.mbaa.org/NewsandMedia/PressCenter/64769.htm|title=MBA Survey|url-status=dead|archiveurl=https://web.archive.org/web/20130514124250/http://www.mbaa.org/NewsandMedia/PressCenter/64769.htm|archivedate=May 14, 2013}}</ref> By September 2009, this had risen to 14.4%.<ref>{{cite web|url=http://www.mbaa.org/NewsandMedia/PressCenter/71112.htm |title=MBA Survey-Q3 2009 |publisher=Mbaa.org |date=November 19, 2009 |accessdate=May 1, 2010 |url-status=dead |archiveurl=https://web.archive.org/web/20100728105357/http://www.mbaa.org/NewsandMedia/PressCenter/71112.htm |archivedate=July 28, 2010 }}</ref>

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 1920s, the struggles over gold convertibility and reparations, or the Smoot-Hawley tariff, all of which have shared the blame for the Great Depression."  Instead, Quiggin lays the blame for the 2008 near-meltdown on financial markets, on political decisions to lightly regulate them, and on rating agencies which had self-interested incentives to give good ratings.<ref>''Zombie Economics'', John Quiggin, 2010, [https://books.google.com/books?id=pTgiRDj-uIYC&pg=PA63&lpg=PA63&dq=%22And,+unlike+the+Great+Depression,+this+crisis+was+entirely+the+product+of+financial+markets.%22&source=bl&ots=c-OskUOO0k&sig=ACfU3U1uld5dTOoYhHu7P0a0__-EncZfMw&hl=en&sa=X&ved=2ahUKEwig8Y-RtqjhAhUDYK0KHe2vA0YQ6AEwAHoECAIQAQ#v=onepage&q=%22And%2C%20unlike%20the%20Great%20Depression%2C%20this%20crisis%20was%20entirely%20the%20product%20of%20financial%20markets.%22&f=false pages 63-64].</ref>

===Easy credit conditions===
Lower interest rates encouraged borrowing. From 2000 to 2003, the [[Finance:Federal Reserve|Federal Reserve]] lowered the [[Finance:Federal funds rate|federal funds rate]] target from 6.5% to 1.0%.<ref>{{cite web|title=Federal Reserve Board: Monetary Policy and Open Market Operations|url=http://www.federalreserve.gov/fomc/fundsrate.htm|accessdate=May 19, 2008}}</ref> This was done to soften the effects of the collapse of the [[Dot-com bubble|dot-com bubble]] and the [[Religion:September 11 attacks|September 2001 terrorist attacks]], as well as to combat a perceived risk of [[Finance:Deflation|deflation]].<ref name="WallStreetJournal">{{cite web|title=The Wall Street Journal Online – Featured Article|url=http://opinionjournal.com/editorial/feature.html?id=110010981|accessdate=May 19, 2008|year=2008}}</ref> As early as 2002 it was apparent that credit was fueling housing instead of business investment as some economists went so far as to advocate that the Fed "needs to create a housing bubble to replace the Nasdaq bubble".<ref>{{cite news|url=https://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html?pagewanted=all&src=pm|title=Dubya's Double Dip?|last=Krugman|first=Paul|date=August 2, 2002|newspaper=The New York Times|accessdate=July 30, 2012}}</ref> Moreover, empirical studies using data from advanced countries show that excessive credit growth contributed greatly to the severity of the crisis.<ref>{{cite journal|url=https://ideas.repec.org/a/eee/jimfin/v35y2013icp1-19.html|title=Leading indicators of crisis incidence: Evidence from developed countries|first1=Jan|last1=Babecký|first2=Tomáš|last2=Havránek|first3=Jakub|last3=Matějů|first4=Marek|last4=Rusnák|first5=Kateřina|last5=Šmídková|first6=Bořek|last6=Vašíček|date=July 11, 2017|journal=Journal of International Money and Finance|volume=35|issue=C|pages=1–19|accessdate=July 11, 2017|via=RePEc - IDEAS|doi=10.1016/j.jimonfin.2013.01.001}}</ref>

[[File:U.S. Trade Deficit Dollars and % GDP.png|thumb|right|upright=1.6|US current account deficit.]]
Additional downward pressure on interest rates was created by the high and rising US [[Finance:Current account|current account]] deficit, which peaked along with the housing bubble in 2006. Federal Reserve chairman [[Biography:Ben Bernanke|Ben Bernanke]] explained how trade deficits required the US to borrow money from abroad, in the process bidding up bond prices and lowering interest rates.<ref>{{cite web|url=http://www.federalreserve.gov/boarddocs/speeches/2005/20050414/default.htm|title=Bernanke-The Global Saving Glut and U.S. Current Account Deficit|publisher=Federalreserve.gov|accessdate=February 27, 2009}}</ref>

Bernanke explained that between 1996 and 2004, the US current account deficit increased by $650&nbsp;billion, from 1.5% to 5.8% of GDP. 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 [[Finance:Balance of payments|balance of payments]] [[Identity (mathematics)|identity]] requires that a country (such as the US) running a [[Finance:Current account|current account]] deficit also have a [[Finance:Capital account|capital account]] (investment) surplus of the same amount. Hence large and growing amounts of foreign funds (capital) flowed into the US to finance its imports.

All of this created demand for various types of financial assets, raising the prices of those assets while lowering interest rates. Foreign investors had these funds to lend either because they had very high personal savings rates (as high as 40% in China) or because of high oil prices. Ben Bernanke has referred to this as a "saving glut".<ref name=Bernanke>{{cite web|url=http://www.federalreserve.gov/newsevents/speech/bernanke20070911a.htm|title=Chairman Ben S. Bernanke, At the Bundesbank Lecture, Berlin, Germany September 11, 2007: Global Imbalances: Recent Developments and Prospects|publisher=Federalreserve.gov|accessdate=May 3, 2009}}</ref>

A flood of funds ([[Social:Financial capital|capital]] or [[Finance:Liquidity|liquidity]]) reached the US financial markets. Foreign governments supplied funds by purchasing Treasury bonds and thus avoided much of the direct effect of the crisis. US households, on the other hand, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets. Financial institutions invested foreign funds in [[Finance:Mortgage-backed security|mortgage-backed securities]].{{Citation needed|reason=No source|date=September 2019}}

The Fed then raised the Fed funds rate significantly between July 2004 and July 2006.<ref>{{cite web|url=http://www.federalreserve.gov/releases/h15/data.htm|title=Fed Historical Data-Fed Funds Rate|publisher=Federalreserve.gov|accessdate=May 1, 2010}}</ref> This contributed to an increase in 1-year and 5-year [[Finance:Adjustable-rate mortgage|adjustable-rate mortgage]] (ARM) rates, making ARM interest rate resets more expensive for homeowners.<ref>{{cite web|author=John Mastrobattista|url=http://article.nationalreview.com/?q=OTUyM2MxMThkOWI2MzBmNTM2OGRiYTYwOTA1NzQ1NDE=|title=Mastrobattista|publisher=National Review|accessdate=May 1, 2010|archive-url=https://web.archive.org/web/20090221041012/http://article.nationalreview.com/?q=OTUyM2MxMThkOWI2MzBmNTM2OGRiYTYwOTA1NzQ1NDE%3D|archive-date=February 21, 2009|url-status=dead}}</ref> This may have also contributed to the deflating of the housing bubble, as asset prices generally move inversely to interest rates, and it became riskier to speculate in housing.<ref>{{cite news|last=Max|first=Sarah|url=http://money.cnn.com/2004/07/13/real_estate/buying_selling/risingrates/|title=CNN-The Bubble Question|publisher=CNN|date=July 27, 2004|accessdate=May 1, 2010}}</ref><ref>{{cite web|url=http://www.businessweek.com/magazine/content/04_29/b3892064_mz011.htm |title=Business Week-Is a Housing Bubble About to Burst? |work=BusinessWeek |date=July 19, 2004 |accessdate=May 1, 2010 |url-status=dead |archiveurl=https://web.archive.org/web/20080304164956/http://www.businessweek.com/magazine/content/04_29/b3892064_mz011.htm |archivedate=March 4, 2008 |df=mdy }}</ref> US housing and financial assets dramatically declined in value after the housing bubble burst.<ref>{{cite news|url=http://www.economist.com/opinion/displaystory.cfm?story_id=12972083|title=Economist-When a Flow Becomes a Flood|work=The Economist|date=January 22, 2009|accessdate=February 27, 2009}}</ref><ref>{{cite web|author=Roger C. Altman |url=http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html |title=The Great Crash of 2008 |publisher=Foreignaffairs.org |accessdate=February 27, 2009 |url-status=dead |archiveurl=https://web.archive.org/web/20090223132656/http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html |archivedate=February 23, 2009 |df=mdy }}</ref>

===Weak and fraudulent underwriting practices===
Subprime lending standards declined in the USA: in early 2000, a subprime borrower had a FICO score of 660 or less. By 2005, many lenders dropped the required FICO score to 620, 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 moved from full documentation to low documentation to 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.<ref>{{Cite book|title=Uncontrolled Risk|last=Williams|first=Mark|publisher=McGraw-Hill Education|date=April 12, 2010|isbn=978-0-07-163829-6|location=|pages=124|quote=|via=}}</ref>  Testimony given to the [[Finance:Financial Crisis Inquiry Commission|Financial Crisis Inquiry Commission]] by Richard M. Bowen III on events during his tenure as the Business Chief Underwriter for Correspondent Lending in the Consumer Lending Group for [[Company:Citigroup|Citigroup]] (where he was responsible for over 220 professional underwriters) suggests that by the final years of the US housing bubble (2006–2007), the collapse of [[Mortgage underwriting|mortgage underwriting]] standards was endemic. His testimony stated that by 2006, 60% of mortgages purchased by [[Company:Citigroup|Citi]] from some 1,600 mortgage companies were "defective" (were not underwritten to policy, or did not contain all policy-required documents)—this, despite the fact that each of these 1,600 originators was contractually responsible (certified via representations and warrantees) that its mortgage originations met [[Company:Citigroup|Citi's]] standards. Moreover, during 2007, "defective mortgages (from mortgage originators contractually bound to perform underwriting to [[Company:Citigroup|Citi's]] standards) increased ... to over 80% of production".<ref name="FCICBowenCitiTestimony">{{cite web|title=Hearing on Subprime Lending And Securitization And Government Sponsored Enterprises, April 7, 2010|url=http://www.fcic.gov/hearings/pdfs/2010-0407-Bowen.pdf|accessdate=October 29, 2010|year=2010}}</ref>

In separate testimony to Financial Crisis Inquiry Commission, officers of Clayton Holdings—the largest residential loan due diligence and securitization surveillance company in the United States and Europe—testified that Clayton's review of over 900,000 mortgages issued from January 2006 to June 2007 revealed that scarcely 54% of the loans met their originators' underwriting standards. The analysis (conducted on behalf of 23 investment and commercial banks, including 7 "[[Finance:Too big to fail|too big to fail]]" banks) additionally showed that 28% of the sampled loans did not meet the minimal standards of any issuer. Clayton's analysis further showed that 39% of these loans (i.e. those not meeting ''any'' issuer's minimal underwriting standards) were subsequently securitized and sold to investors.<ref name="NewYorkTimes">{{cite news|title=Raters Ignored Proof of Unsafe Loans, Panel Is Told|url=https://www.nytimes.com/2010/09/27/business/27ratings.html?_r=1&pagewanted=all|accessdate=October 28, 2010|work=The New York Times|first=Gretchen|last=Morgenson|date=September 26, 2010}}</ref><ref name="ClaytonTrendingReport">{{cite web|title=All Clayton Trending Reports 1st quarter 2006 – 2nd quarter 2007|url=http://www.fcic.gov/hearings/pdfs/2010-0923-Clayton-All-Trending-Report.pdf|accessdate=October 28, 2010|year=2010}}</ref>

===Predatory lending===
Predatory lending refers to the practice of unscrupulous lenders, enticing borrowers to enter into "unsafe" or "unsound" secured loans for inappropriate purposes.<ref>{{cite web|url=http://banking.senate.gov/docs/reports/predlend/occ.htm|title=Letter from the Comptroller of the Currency Regarding Predatory Lending|publisher=Banking.senate.gov|accessdate=November 11, 2009|archive-url=https://web.archive.org/web/20110728105507/http://banking.senate.gov/docs/reports/predlend/occ.htm|archive-date=July 28, 2011|url-status=dead}}</ref>

Countrywide Financial, sued by California Attorney General Jerry Brown for "unfair business practices" and "false advertising", was making high cost mortgages "to homeowners with weak credit, adjustable rate mortgages (ARMs) that allowed homeowners to make interest-only payments".<ref>{{cite web|url=http://thinkdebtrelief.com/debt-relief-blog/money-news/bofa-modifies-64000-home-loans-as-part-of-predatory-lending-settlement/|title=BofA Modifies 64,000 Home Loans as Part of Predatory Lending Settlement &#124; Debt Relief Blog|publisher=Thinkdebtrelief.com|date=May 25, 2009|accessdate=November 11, 2009|url-status=dead|archiveurl=https://web.archive.org/web/20091024100929/http://thinkdebtrelief.com/debt-relief-blog/money-news/bofa-modifies-64000-home-loans-as-part-of-predatory-lending-settlement/|archivedate=October 24, 2009|df=mdy-all}}</ref> When housing prices decreased, homeowners in ARMs then had little incentive to pay their monthly payments, since their home equity had disappeared. 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."<ref>{{cite web|url=http://www.nbcnews.com/id/29827248/ns/dateline_nbc-the_hansen_files_with_chris_hansen/t/if-you-had-pulse-we-gave-you-loan/#.WO5gY9IrLIU|title=If you had a pulse, we gave you a loan|date=March 22, 2009|website=NBCNews.com|accessdate=April 12, 2017}}</ref>

Former employees from Ameriquest, which was United States' leading wholesale lender,<ref name="RoadToRuinMayANP09" /> 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.<ref name="RoadToRuinMayANP09" /> There is growing evidence that such [[Finance:Mortgage fraud|mortgage fraud]]s may be a cause of the crisis.<ref name="RoadToRuinMayANP09">''[http://therealnews.com/id/3708/May13,2009/Road+to+Ruin%3A+Mortgage+Fraud+Scandal+Brewing Road to Ruin: Mortgage Fraud Scandal Brewing]'' May 13, 2009, by American News Project hosted by The Real News</ref>

===Deregulation===
A 2012 OECD study<ref>{{cite journal|title=Systemically Important Banks and Capital Regulation Challenges|doi=10.1787/5kg0ps8cq8q6-en|journal=OECD Economics Department Working Papers|year=2012}}</ref> suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced the financial crisis. In other cases, laws were changed or enforcement weakened in parts of the financial system. Key examples include:
* [[Biography:Jimmy Carter|Jimmy Carter]]'s [[Finance:Depository Institutions Deregulation and Monetary Control Act|Depository Institutions Deregulation and Monetary Control Act]] of 1980 (DIDMCA) phased out a number of restrictions on banks' financial practices, broadened their lending powers, allowed [[Social:Credit union|credit union]]s and savings and loans to offer checkable deposits, and raised the [[Finance:Deposit insurance|deposit insurance]] limit from $40,000 to $100,000 (thereby potentially lessening depositor scrutiny of lenders' risk management policies).<ref name="FDIC">Federal Deposit Insurance Corporation, ''History of the Eighties – Lessons for the Future,'' Vol. 1. December 1997.http://www.fdic.gov/bank/historical/history/3_85.pdf</ref>
* In October 1982, US President Ronald Reagan signed into law the Garn–St. Germain Depository Institutions Act, which provided for [[Finance:Adjustable-rate mortgage|adjustable-rate mortgage]] loans, began the process of banking deregulation, and contributed to the savings and loan crisis of the late 1980s/early 1990s.<ref>{{cite book|last=Leibold|first=Arthur|editor1-last=Barth|editor1-first=James R.|editor2-last=Trimbath|editor2-first=Susanne|editor3-last=Yago|editor3-first=Glenn|chapter=Some Hope for the Future After a Failed National Policy for Thrifts|title=The Savings and Loan Crisis: Lessons from a Regulatory Failure|publisher=Milken Institute|isbn=978-1-4020-7871-2|pages=[https://archive.org/details/savingsloancrisi00jame/page/58 58–59]|date=2004-07-29|chapter-url=https://archive.org/details/savingsloancrisi00jame/page/58}} (further references: {{cite book|last1=Strunk|last2=Case|title=Where Deregulation Went Wrong: A Look at the Causes Behind the Savings and Loan Failures in the 1980s|publisher=U.S. League of Savings Institutions|pages=14–16|isbn=978-0-929097-32-9|year=1988}})</ref>
* In November 1999, US President Bill Clinton signed into law the [[Finance:Gramm–Leach–Bliley Act|Gramm–Leach–Bliley Act]], which repealed provisions of the Glass-Steagall Act that prohibit a [[Finance:Bank holding company|bank holding company]] from owning other financial companies.  The repeal effectively removed the separation that previously existed between Wall Street investment banks and depository banks, providing a government stamp of approval for a universal risk-taking banking model. Investment banks such as Lehman would now be thrust into direct competition with commercial banks.<ref>{{Cite book|title=Uncontrolled Risk|last=Williams|first=Mark|publisher=McGraw-Hill Education|date=April 12, 2010|isbn=978-0-07-163829-6|location=|pages=44|quote=|via=}}</ref> Most analysts say that this repeal directly contributed to the severity of the Financial crisis of 2007–2010.{{citation needed|date=November 2019}} However, there is perspective that repeal made little difference because the institutions that were greatly affected did not fall under the jurisdiction of the act itself.<ref>{{cite news|url=https://dealbook.nytimes.com/2012/05/21/reinstating-an-old-rule-is-not-a-cure-for-crisis/?ref=business|title=Reinstating an Old Rule Is Not a Cure for Crisis|author=Andrew Ross Sorkin|newspaper=New York Times|date=May 22, 2012}}</ref> 
* In December 2000, President Clinton signed the Commodities Futures Modernization Act of 2000 into law. Written by Congress with lobbying assistance from the financial industry, it banned the further regulation of the derivatives market. 
* In 2004, the US Securities and Exchange Commission relaxed the net capital rule, which enabled investment banks to substantially increase the level of debt they were taking on, fueling the growth in mortgage-backed securities supporting subprime mortgages. The SEC has conceded that self-regulation of investment banks contributed to the crisis.<ref>{{cite news|url=https://www.nytimes.com/2008/09/27/business/27sec.html?em|title=SEC Concedes Oversight Flaws|work=The New York Times|first=Stephen|last=Labaton|date=September 27, 2008|accessdate=May 2, 2010}}</ref><ref>{{cite news|url=https://www.nytimes.com/2008/10/03/business/03sec.html?em|title=The Reckoning|work=The New York Times|first=Stephen|last=Labaton|date=October 3, 2008|accessdate=May 2, 2010}}</ref>
* Financial institutions in the [[Finance:Shadow banking system|shadow banking system]] are not subject to the same regulation as depository banks, allowing them to assume additional debt obligations relative to their financial cushion or capital base.<ref name="Krugman 2009">{{cite book|last=Krugman|first=Paul|year=2009|title=The Return of Depression Economics and the Crisis of 2008|publisher=W.W. Norton Company Limited|isbn=978-0-393-07101-6|url=https://archive.org/details/returnofdepressi00krug}}</ref> This was the case despite the [[Company:Long-Term Capital Management|Long-Term Capital Management]] debacle in 1998, in which a highly leveraged shadow institution failed with systemic implications and was bailed out.
* Regulators and accounting standard-setters allowed depository banks such as [[Company:Citigroup|Citigroup]] to move significant amounts of assets and liabilities off-balance sheet into complex legal entities called structured investment vehicles, masking the weakness of the capital base of the firm or degree of leverage or risk taken. One news agency estimated that the top four US banks will have to return between $500&nbsp;billion and $1&nbsp;trillion to their balance sheets during 2009.<ref>{{cite news|url=https://www.bloomberg.com/apps/news?pid=20601039&sid=akv_p6LBNIdw&refer=home|title=Bloomberg-Bank Hidden Junk Menaces $1&nbsp;Trillion Purge|publisher=Bloomberg|date=March 25, 2009|accessdate=May 1, 2010|url-status=dead|archiveurl=https://www.webcitation.org/68F8NdlMR?url=http://www.bloomberg.com/apps/news?pid=newsarchive&sid=akv_p6LBNIdw&refer=home|archivedate=June 7, 2012|df=mdy-all}}</ref> This increased uncertainty during the crisis regarding the financial position of the major banks.<ref>{{cite news|url=https://www.bloomberg.com/apps/news?pid=20601039&sid=a6dgIOAfMIrI|title=Bloomberg-Citigroup SIV Accounting Tough to Defend|publisher=Bloomberg|date=October 24, 2007|accessdate=May 1, 2010}}</ref> Off-balance sheet entities were also used by [[Company:Enron scandal|Enron]] as part of the scandal that brought down that company in 2001.<ref>Healy, Paul M. & Palepu, Krishna G.: "The Fall of Enron" – Journal of Economics Perspectives, Volume 17, Number 2. (Spring 2003), p. 13</ref>
* As early as 1997, Federal Reserve chairman Alan Greenspan fought to keep the derivatives market unregulated.<ref>{{cite speech|title=Government regulation and derivative contracts|first=Alan|last=Greenspan|date=February 21, 1997|location=Coral Gables, FL|url=http://www.federalreserve.gov/boarddocs/speeches/1997/19970221.htm|accessdate=September 10, 2018}}</ref> With the advice of the [[Social:Working Group on Financial Markets|President's Working Group on Financial Markets]],<ref>{{Cite journal|first1=Lawrence|last1=Summers|author2=Alan Greenspan, Arthur Levitt, William Ranier|title=Over-the-Counter Derivatives Markets and the Commodity Exchange Act: Report of The President's Working Group on Financial Markets|date=November 1999|page=1|url=http://www.ustreas.gov/press/releases/reports/otcact.pdf|accessdate=July 20, 2009|url-status=dead|archiveurl=https://web.archive.org/web/20101013165049/http://www.ustreas.gov/press/releases/reports/otcact.pdf|archivedate=October 13, 2010}}</ref> the US Congress and President Bill Clinton allowed the self-regulation of the [[Finance:Over-the-counter|over-the-counter]] derivatives market when they enacted the Commodity Futures Modernization Act of 2000. Derivatives such as credit default swaps (CDS) can be used to hedge or speculate against particular credit risks without necessarily owning the underlying debt instruments. The volume of CDS outstanding increased 100-fold from 1998 to 2008, with estimates of the debt covered by CDS contracts, as of November 2008, ranging from US$33 to $47&nbsp;trillion. Total over-the-counter (OTC) derivative notional value rose to $683&nbsp;trillion by June 2008.<ref>{{cite news|url=https://www.forbes.com/2009/05/18/geithner-derivatives-plan-opinions-contributors-figlewski.html|title=Forbes-Geithner's Plan for Derivatives|work=Forbes|date=May 18, 2009|accessdate=May 1, 2010|first1=Stephen|last1=Figlewski}}</ref> Warren Buffett famously referred to derivatives as "financial weapons of mass destruction" in early 2003.<ref>{{cite news|url=http://www.economist.com/finance/displayStory.cfm?story_id=12274112|title=The Economist-Derivatives-A Nuclear Winter?|work=The Economist|date=September 18, 2008|accessdate=May 1, 2010}}</ref><ref>{{cite news|url=http://news.bbc.co.uk/2/hi/business/2817995.stm|title=Buffett Warns on Investment 'Time Bomb'|publisher=BBC News|date=March 4, 2003|accessdate=May 1, 2010}}</ref>

===Increased debt burden or overleveraging===
[[File:Leverage ratios for major investment banks.svg|thumb|upright=1.35|Leverage ratios of investment banks increased significantly between 2003 and 2007.]]
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.{{Citation needed|reason=No source|date=September 2019}}
[[File:U.S. Household Debt Relative to Disposable Income and GDP.png|thumb|upright=1.35|[[Finance:Household debt|Household debt]] relative to disposable income and GDP.]]

US households and financial institutions became increasingly indebted or overleveraged during the years preceding the crisis.<ref name="economist1">{{cite news|url=http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=12637090|title=The End of the Affair|publisher=Economist|date=October 30, 2008|accessdate=February 27, 2009}}</ref> This increased their vulnerability to the collapse of the housing bubble and worsened the ensuing economic downturn.<ref name="Yellen on Minsky">{{cite web|url=http://www.frbsf.org/news/speeches/2009/0416.html|title=A Minsky Meltdown: Lessons for Central Bankers|website=frbsf.org|accessdate=July 11, 2017}}</ref> Key statistics include:

Free cash used by consumers from home equity extraction doubled from $627&nbsp;billion in 2001 to $1,428&nbsp;billion in 2005 as the housing bubble built, a total of nearly $5&nbsp;trillion over the period, contributing to economic growth worldwide.<ref name="Greenspan Kennedy Report – Table 2">{{cite web|url=http://www.federalreserve.gov/pubs/feds/2007/200720/200720pap.pdf|title=Greenspan Kennedy Report – Table 2 – Sources and Uses of Equity Extracted from Homes|accessdate=May 1, 2010}}</ref><ref name="Equity extraction – Charts">{{cite web|url=http://seekingalpha.com/article/33336-home-equity-extraction-the-real-cost-of-free-cash|title=Equity extraction – Charts|publisher=Seekingalpha.com|date=April 25, 2007|accessdate=May 1, 2010}}</ref><ref name="reuters.com">{{cite news|url=https://www.reuters.com/article/ousiv/idUSN2330071920070423|title=Reuters-Spending Boosted by Home Equity Loans|agency=Reuters|date=April 23, 2007|accessdate=May 1, 2010}}</ref> US home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5&nbsp;trillion.<ref name="money.cnn.com">{{cite news|last=Barr|first=Colin|url=http://money.cnn.com/2009/05/27/news/mortgage.overhang.fortune/index.htm|title=Fortune-The $4&nbsp;trillion housing headache|publisher=CNN|date=May 27, 2009|accessdate=May 1, 2010}}</ref>

US household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990.<ref name="economist1" /> In 1981, US private debt was 123% of GDP; by the third quarter of 2008, it was 290%.<ref>{{cite web|url=http://www.ft.com/cms/s/0/774c0920-fd1d-11dd-a103-000077b07658.html|title=FT-Wolf Japan's Lessons|work=Financial Times|date=February 17, 2009|accessdate=May 1, 2010}}</ref>

From 2004 to 2007, the top five US investment banks each significantly increased their financial leverage (see diagram), which increased their vulnerability to a financial shock. Changes in capital requirements, intended to keep US banks competitive with their European counterparts, allowed lower ''risk weightings'' for AAA securities. The shift from first-loss tranches to AAA tranches was seen by regulators as a risk reduction that compensated the higher leverage.<ref>{{cite book|title=Unintended Consequences|url=https://archive.org/details/unintendedconseq0000cona|url-access=registration|author=Edward Conard|year=2012|publisher=Penguin|pages=[https://archive.org/details/unintendedconseq0000cona/page/145 145–155]|isbn=978-1-4708-2357-3}}</ref> These five institutions reported over $4.1&nbsp;trillion in debt for fiscal year 2007, about 30% of US nominal GDP for 2007. Lehman Brothers went bankrupt and was liquidated, Bear Stearns and [[Company:Merrill Lynch|Merrill Lynch]] were sold at fire-sale prices, and [[Company:Goldman Sachs|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.<ref>{{cite news|url=https://www.nytimes.com/2008/10/03/business/03sec.html|title=Agency's '04 Rule Let Banks Pile Up New Debt, and Risk|work=The New York Times|first=Stephen|last=Labaton|date=October 3, 2008|accessdate=May 2, 2010}}</ref> Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale. However, both Barclays and Bank of America ultimately declined to purchase the entire company.<ref>{{cite news|url=https://www.nytimes.com/2008/09/13/business/13rescue.html?_r=1&hp&oref=slogin|title=U.S. Gives Banks Urgent Warning to Solve Crisis|date=September 12, 2008|accessdate=January 23, 2014|work=nytimes.com|first=Eric|last=Dash}}</ref>

Fannie Mae and Freddie Mac, two US government-sponsored enterprises, owned or guaranteed nearly $5&nbsp;trillion in mortgage obligations at the time they were placed into [[Social:Conservatorship|conservatorship]] by the US government in September 2008.<ref name="publications1">{{cite web|url=http://www.aei.org/outlook/economics/monetary-policy/the-last-trillion-dollar-commitment/|title=The Last Trillion Dollar Commitment|author=Charles W. Calomiris|publisher=American Enterprise Institute|date=September 30, 2008|accessdate=February 27, 2009}}</ref><ref>{{cite news|url=https://www.bloomberg.com/apps/news?pid=20601109&sid=adr.czwVm3ws&refer=home|title=U.S. Considers Bringing Fannie & Freddie Onto Budget|publisher=Bloomberg|date=September 11, 2008|accessdate=February 27, 2009|url-status=dead|archiveurl=https://www.webcitation.org/68F7thwM2?url=http://www.bloomberg.com/apps/news?pid=newsarchive&sid=adr.czwVm3ws&refer=home|archivedate=June 7, 2012|df=mdy-all}}</ref>

These seven entities were highly leveraged and had $9&nbsp;trillion in debt or guarantee obligations; yet they were not subject to the same regulation as depository banks.<ref name="Krugman 2009" /><ref>[https://www.nytimes.com/2010/04/02/opinion/02krugman.html NYT-Paul Krugman-Financial Reform 101 – April 2010].</ref>

Behavior that may be optimal for an individual (e.g., 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 [[Finance:Paradox of thrift|paradox of thrift]] and can cause or deepen a recession. Economist [[Biography:Hyman Minsky|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.<ref name="Yellen on Minsky" />

In April 2009, US Federal Reserve vice-chair [[Biography:Janet Yellen|Janet Yellen]] discussed these paradoxes:

<blockquote>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.<ref name="Yellen on Minsky" /></blockquote>

===Financial innovation and complexity===
[[File:CDO - FCIC and IMF Diagram.png|thumb|upright=1.35|right|IMF Diagram of CDO and RMBS]]
The term [[Finance:Financial innovation|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 [[Finance:Adjustable-rate mortgage|adjustable-rate mortgage]]; the bundling of subprime mortgages into [[Finance:Mortgage-backed security|mortgage-backed securities]] (MBS) or [[Finance:Collateralized debt obligation|collateralized debt obligation]]s (CDO) for sale to investors, a type of [[Finance:Securitization|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.{{Citation needed|reason=No source|date=September 2019}}

CDO issuance grew from an estimated $20 billion in Q1 2004 to its peak of over $180 billion by Q1 2007, then declined back under $20 billion by Q1 2008. Further, the credit quality of CDO's declined from 2000 to 2007, as the level of subprime and other non-prime mortgage debt increased from 5% to 36% of CDO assets.<ref>{{cite web|url=http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOmeltdown.pdf|title=2010 CDO Thesis|accessdate=April 22, 2011}}</ref> As described in the section on subprime lending, the CDS and portfolio of CDS called [[Finance:Synthetic CDO|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. For example, buying a CDS to insure a CDO ended up giving the seller the same risk as if they owned the CDO, when those CDO's became worthless.<ref>{{cite book|last=Lewis|first=Michael|year=2010|title=The Big Short|publisher=W.W. Norton & Company|isbn=978-0-393-07223-5}}</ref>

[[File:Complexity and the mortgage market - an example.svg|thumb|upright=1.35|right|Diagram of CMLTI 2006 – NC2]]
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.<ref>{{cite web|url=http://fcic.law.stanford.edu/resource/staff-data-projects/story-of-a-security|title=Financial Crisis Inquiry Commission – story of a security|accessdate=June 6, 2011}}</ref>

Martin Wolf further wrote in June 2009 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: "... an enormous part of what banks did in the early part of this decade—the off-balance-sheet vehicles, the derivatives and the 'shadow banking system' itself—was to find a way round regulation."<ref>{{cite web|url=http://www.ft.com/cms/s/0/095722f6-6028-11de-a09b-00144feabdc0.html|title=FT Martin Wolf – Reform of Regulation and Incentives|work=Financial Times|date=June 23, 2009|accessdate=May 1, 2010}}</ref>

===Incorrect pricing of risk===
[[File:AIG Protester on Pine Street.jpg|thumb|A protester on Wall Street in the wake of the AIG bonus payments controversy is interviewed by news media.]]

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).<ref>{{cite journal|title=Reckless Optimism|last=Samuelson|first=Robert J.|journal=Claremont Review of Books|volume=XII|issue=1|year=2011|page=13|url=http://www.claremont.org/publications/crb/id.1916/article_detail.asp|url-status=dead|archiveurl=https://web.archive.org/web/20131224113222/http://www.claremont.org/publications/crb/id.1916/article_detail.asp|archivedate=December 24, 2013|df=mdy}}</ref><ref name=kourlas>{{cite web|last=Kourlas|first=James|title=Lessons Not Learned From the Housing Crisis|url=http://www.atlassociety.org/brc/lessons-housing-crisis|date=April 12, 2012|publisher=The Atlas Society|accessdate=April 12, 2012}}</ref> While financial derivatives and structured products helped partition and shift risk between financial participants, it was the underestimation of falling housing prices and the resultant losses that led to aggregate risk.<ref name=kourlas/>

The pricing of risk refers to the [[Risk premium|incremental compensation]] required by investors for taking on additional risk, which may be measured by 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.{{Citation needed|reason=No source|date=September 2019}}

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.<ref name="Declaration of G20" /> For example, the pricing model for CDOs clearly did not reflect the level of risk they introduced into the system. Banks estimated that $450 billion of CDO were sold between "late 2005 to the middle of 2007"; among the $102 billion of those that had been liquidated, JPMorgan estimated that the average recovery rate for "high quality" CDOs was approximately 32&nbsp;cents on the dollar, while the recovery rate for [[Finance:Mezzanine capital|mezzanine]] CDO was approximately five cents for every dollar.<ref name="TPMBLOG1">{{cite web|date=March 2, 2009|url=http://tpmcafe.talkingpointsmemo.com/talk/blogs/paulw/2009/03/the-power-of-belief.php|title=paulw's Blog &#124; Talking Points Memo &#124; The power of belief|publisher=Tpmcafe.talkingpointsmemo.com|accessdate=November 11, 2009|url-status=dead|archiveurl=https://web.archive.org/web/20090406005046/http://tpmcafe.talkingpointsmemo.com/talk/blogs/paulw/2009/03/the-power-of-belief.php|archivedate=April 6, 2009|df=mdy-all}}</ref>

Another example relates to AIG, which insured obligations of various financial institutions through the usage of credit default swaps. The basic CDS transaction involved AIG receiving a premium in exchange for a promise to pay money to party A in the event party B defaulted. 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 2008. US taxpayers provided over $180&nbsp;billion in government support to AIG during 2008 and early 2009, through which the money flowed to various counterparties to CDS transactions, including many large global financial institutions.<ref>{{cite news|url=https://www.bloomberg.com/apps/news?pid=20601109&sid=aKKRHZsxRvWs&refer=home|title=Bloomberg-Credit Swap Disclosure Obscures True Financial Risk|publisher=Bloomberg|date=November 6, 2008|accessdate=February 27, 2009|url-status=dead|archiveurl=https://www.webcitation.org/68F8QZzuT?url=http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKKRHZsxRvWs&refer=home|archivedate=June 7, 2012|df=mdy-all}}</ref><ref>{{cite web|last=Byrnes|first=Nanette|url=http://www.businessweek.com/bwdaily/dnflash/content/mar2009/db20090316_859460.htm?chan=top+news_top+news+index+-+temp_top+story|title=Business Week-Who's Who on AIG List of Counterparties|work=BusinessWeek|date=March 17, 2009|accessdate=May 1, 2010}}</ref>

The [[Finance:Financial Crisis Inquiry Commission|Financial Crisis Inquiry Commission]] (FCIC) made the major government study of the crisis. It concluded in January 2011:

<blockquote>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.<ref>{{cite book|author=Phil Angelides|title=Financial Crisis Inquiry Report|url=https://books.google.com/books?id=QIKfTVrhNfMC&pg=PA352|year=2011|publisher=DIANE Publishing|page=352|isbn=9781437980721}}</ref><ref>{{cite book|author=Jerry M. Rosenberg|title=The Concise Encyclopedia of The Great Recession 2007–2012|url=https://books.google.com/books?id=8YSYIHuSX2oC&pg=PA244|year=2012|publisher=Scarecrow Press|page=244|isbn=9780810883406}}</ref><ref>{{cite book|author1=Asli Yüksel Mermod|author2=Samuel O. Idowu|title=Corporate Social Responsibility in the Global Business World|url=https://books.google.com/books?id=KVqRAAAAQBAJ&pg=PA127|year=2013|publisher=Springer|page=127|isbn=9783642376207}}</ref></blockquote>

The limitations of a widely used financial model also were not properly understood.<ref>{{cite web|last=Regnier|first=Pat|url=http://moneyfeatures.blogs.money.cnn.com/2009/02/27/the-financial-crisis-why-did-it-happen/|title=New theories attempt to explain the financial crisis – Personal Finance blog – Money Magazine's More Money|publisher=Moneyfeatures.blogs.money.cnn.com|date=February 27, 2009|accessdate=November 11, 2009|url-status=dead|archiveurl=https://web.archive.org/web/20090304024927/http://moneyfeatures.blogs.money.cnn.com/2009/02/27/the-financial-crisis-why-did-it-happen/|archivedate=March 4, 2009|df=mdy-all}}</ref><ref name="Felix1">{{Cite news|last=Salmon|first=Felix | date = February 23, 2009|title=Recipe for Disaster: The Formula That Killed Wall Street|volume=17 |magazine=Wired.com|issue=3|url=https://www.wired.com/techbiz/it/magazine/17-03/wp_quant|accessdate=March 8, 2009}}</ref> This formula assumed that the price of CDS was correlated with and could predict the correct price of mortgage-backed securities. Because it was highly tractable, it rapidly came to be used by a huge percentage of CDO and CDS investors, issuers, and rating agencies.<ref name="Felix1" /> According to one wired.com article:

{{quote|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 2008—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.<ref name="Felix1" /> }}

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.<ref name=RISKS1>{{cite news|author=Floyd Norris|url=https://www.nytimes.com/2008/11/25/business/25assess.html?hp|title=News Analysis: Another Crisis, Another Guarantee|work=The New York Times|date=November 24, 2008|accessdate=April 22, 2011}}</ref> George Soros commented that "The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility."<ref name=WORSTCRISIS>{{Cite news|last=Soros|first=George |  date = January 22, 2008|title=The worst market crisis in 60 years|newspaper=Financial Times | location = London, UK|url=http://www.ft.com/cms/s/0/24f73610-c91e-11dc-9807-000077b07658.html?nclick_check=1|accessdate=March 8, 2009}}</ref>

Moreover, a conflict of interest between [[Social:Investment management|professional investment managers]] and their [[Finance:Institutional investor|institutional clients]], 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 [[Finance:Assets under management|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.<ref>{{Cite journal|last=Calomiris|first=Charles|title=The Subprime Turmoil: What's Old, What's New, and What's Next|journal=Journal of Structured Finance|volume=15|issue=1|pages=6–52|date=Spring 2009|url=http://www.kansascityfed.org/publicat/sympos/2008/Calomiris.03.12.09.pdf|doi=10.3905/JSF.2009.15.1.006|accessdate=August 19, 2010|citeseerx=10.1.1.628.2224|archive-url=https://web.archive.org/web/20101125175710/http://kansascityfed.org/publicat/sympos/2008/Calomiris.03.12.09.pdf|archive-date=November 25, 2010|url-status=dead}}</ref>

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.<ref>{{Cite journal|last=Lipton, A., and A. Rennie|first=(Editors)|year=2007|title=Credit Correlation: Life after Copulas|publisher=World Scientific|url=http://www.worldscibooks.com/economics/6559.html|postscript=<!--none-->}}</ref> The volume "Credit Correlation: Life After Copulas", published in 2007 by World Scientific, summarizes a 2006 conference held by Merrill Lynch in London where several practitioners attempted to propose models rectifying some of the copula limitations. See also the article by Donnelly and Embrechts<ref>{{Cite journal|last=Donnelly, C, Embrechts, P|year=2010|title=The devil is in the tails: actuarial mathematics and the subprime mortgage crisis|publisher=ASTIN Bulletin 40(1), 1–33|postscript=<!--none-->}}</ref>
and the book by Brigo, Pallavicini and Torresetti, that reports relevant warnings and research on CDOs appeared in 2006.<ref>{{Cite journal|last=Brigo, D, Pallavicini, A, and Torresetti, R|year=2010|title=Credit Models and the Crisis: A Journey into CDOs, Copulas, Correlations and dynamic Models|publisher=Wiley and Sons|postscript=<!--none-->}}</ref>

===Boom and collapse of the shadow banking system===
[[File:Securitization Market Activity.png|thumb|upright=1.6|right|Securitization markets were impaired during the crisis]]
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 own underwriting standards and originate riskier loans.

In a June 2008 speech, President and CEO of the New York Federal Reserve Bank Timothy Geithner—who in 2009 became Secretary of the United States Treasury—placed significant blame for the freezing of credit markets on a "run" on the entities in the "parallel" banking system, also called the [[Finance:Shadow banking system|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 maturity 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 make them subject to rapid deleveraging, selling their long-term assets at depressed prices. He described the significance of these entities:

{{quote|In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a combined asset size of roughly $2.2&nbsp;trillion. Assets financed overnight in triparty repo grew to $2.5&nbsp;trillion. Assets held in hedge funds grew to roughly $1.8&nbsp;trillion. The combined balance sheets of the five largest investment banks totaled $4&nbsp;trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $6&nbsp;trillion, and total assets of the entire banking system were about $10&nbsp;trillion. The combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles.<ref name="newyorkfed.org" />}}

[[Biography:Paul Krugman|Paul Krugman]], laureate of the Nobel Prize in Economics, 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.<ref name="Krugman 2009" />

The securitization markets supported by the shadow banking system started to close down in the spring of 2007 and nearly shut-down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of funds.<ref name="Search Site">{{cite web|url=http://www.city-journal.org/2009/19_1_credit.html|title=Nicole Gelinas-Can the Fed's Uncrunch Credit?|publisher=City-journal.org|accessdate=February 27, 2009}}</ref> According to the Brookings Institution, the traditional banking system does not have the capital to close this gap as of June 2009: "It would take a number of years of strong profits to generate sufficient capital to support that additional lending volume." The authors also indicate that some forms of securitization are "likely to vanish forever, having been an artifact of excessively loose credit conditions".<ref name="brookings.edu">{{cite web|author= — |url=http://www.brookings.edu/papers/2009/0615_economic_crisis_baily_elliott.aspx|title=Brookings Institution – U.S. Financial and Economic Crisis June 2009 PDF Page 14|publisher=Brookings.edu|date=June 15, 2009|accessdate=January 2, 2011|url-status=dead|archiveurl=https://web.archive.org/web/20100603093153/http://www.brookings.edu/papers/2009/0615_economic_crisis_baily_elliott.aspx|archivedate=June 3, 2010|df=mdy}}</ref>

===Commodities boom===

Rapid increases in a number of commodity prices followed the collapse in the housing bubble. The price of oil nearly tripled from $50 to $147 from early 2007 to 2008, before plunging as the financial crisis began to take hold in late 2008.<ref>{{cite web|url=http://futures.tradingcharts.com/chart/CO/M|title=Light Crude Oil Chart|publisher=Futures.tradingcharts.com|accessdate=May 1, 2010}}</ref> Experts debate the causes, with some attributing it to speculative flow of money from housing and other investments into commodities, some to monetary policy,<ref>{{cite news|last=Conway|first=Edmund|url=https://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2790539/George-Soros-rocketing-oil-price-is-a-bubble.html|title=Soros – Rocketing Oil Price is a Bubble|work=The Daily Telegraph|location=London|date=May 26, 2008|accessdate=May 1, 2010}}</ref> and some to the increasing feeling of raw materials scarcity in a fast-growing world, leading to long positions taken on those markets, such as Chinese increasing presence in Africa. An increase in oil prices tends to divert a larger share of consumer spending into gasoline, which creates downward pressure on economic growth in oil importing countries, as wealth flows to oil-producing states.<ref>{{cite web|url=https://mises.org/story/2999|title=The Oil Price Bubble|publisher=Mises.org|date=June 2, 2008|accessdate=May 1, 2010}}</ref> A pattern of spiking instability in the price of oil over the decade leading up to the price high of 2008 has been recently identified.<ref>{{cite web|url=http://www.energybulletin.net/node/50923|title=Tom Therramus, (editor, Gail the Actuary) – Was Volatility in the Price of Oil a Cause of the 2008 Financial Crisis?|publisher=Energybulletin.net|date=December 8, 2009|accessdate=January 2, 2011}}</ref> The destabilizing effects of this price variance has been proposed as a contributory factor in the financial crisis.

[[File:Copper Price History USD.png|thumb|upright=1.6|Global copper prices]]

Copper prices increased at the same time as oil prices. Copper traded at about $2,500 per ton from 1990 until 1999, when it fell to about $1,600. The price slump lasted until 2004, when a price surge pushed copper to $7,040 per ton in 2008.<ref>{{cite web|url=http://dow-futures.net/historical-copper-prices-history/ |title=Historical Copper Prices, Copper Prices History |publisher=Dow-futures.net |date=January 22, 2007 |accessdate=May 1, 2010 |url-status=dead |archiveurl=https://web.archive.org/web/20100512134725/http://dow-futures.net/historical-copper-prices-history |archivedate=May 12, 2010 |df=mdy }}</ref>

Nickel prices boomed in the late 1990s, then declined from around $51,000 /£36,700 per metric ton in May 2007 to about $11,550/£8,300 per metric ton in January 2009. Prices were only just starting to recover as of January 2010, but most of Australia's nickel mines had gone bankrupt by then.<ref>{{cite news|url=http://news.bbc.co.uk/1/hi/business/7841417.stm|title=Business &#124; Miner BHP to lay off 6,000 staff|publisher=BBC News|date=January 21, 2009|accessdate=May 1, 2010}}</ref> As the price for high grade nickel sulphate ore recovered in 2010, so did the Australian nickel mining industry.<ref>{{cite web|url=http://www.proactiveinvestors.com.au/companies/news/5032/mincors-result-reflects-a-return-to-better-days-for-sulphide-nickel-5032.html |title=(AU) – Mincor's result reflects a return to better days for sulphide nickel |publisher=Proactive Investors |date=February 18, 2010 |accessdate=May 1, 2010 |url-status=dead |archiveurl=https://web.archive.org/web/20110706111508/http://www.proactiveinvestors.com.au/companies/news/5032/mincors-result-reflects-a-return-to-better-days-for-sulphide-nickel-5032.html |archivedate=July 6, 2011 }}</ref>

Coincidentally with these price fluctuations, long-only commodity index funds became popular—by one estimate investment increased from $90&nbsp;billion in 2006 to $200&nbsp;billion at the end of 2007, while commodity prices increased 71% – which raised concern as to whether these index funds caused the commodity bubble.<ref name=IrwinSanders2010 /> The empirical research has been mixed.<ref name=IrwinSanders2010>Irwin SH, Sanders DR. (2010). [http://www.oecd-ilibrary.org/oecd/content/workingpaper/5kmd40wl1t5f-en The Impact of Index and Swap Funds on Commodity Futures Markets]. OECD Working Paper. {{DOI|10.1787/5kmd40wl1t5f-en}}</ref>

===Systemic crisis===
Another analysis is that the financial crisis was merely a symptom of another, deeper crisis, which is a systemic crisis of capitalism itself.<ref>{{cite book|last=McMurty|first=John|year=1999|title=The Cancer Stage of Capitalism|isbn=978-0-7453-1347-4}}</ref>

[[Biography:Ravi Batra|Ravi Batra]]'s theory is that growing inequality of financial capitalism produces speculative bubbles that burst and result in depression and major political changes. He has also suggested that a "demand gap" related to differing wage and productivity growth explains deficit and debt dynamics important to stock market developments.<ref>{{cite web|last=Batra|first=Ravi|url=http://www.truthout.org/weapons-mass-exploitation/1304696645|title=Weapons of Mass Exploitation?|publisher=Truthout.org|date=May 8, 2011|accessdate=June 4, 2011|archive-url=https://web.archive.org/web/20110604225511/http://www.truthout.org/weapons-mass-exploitation/1304696645|archive-date=June 4, 2011|url-status=dead}}</ref>

[[Biography:John Bellamy Foster|John Bellamy Foster]], a political economy analyst and editor of the ''Monthly Review'', believes that the decrease in GDP growth rates since the early 1970s is due to increasing [[Social:Market saturation|market saturation]].<ref>{{cite web|url=http://monthlyreview.org/080401foster.php|title=The Financialization of Capital and the Crisis|publisher=Monthly Review|accessdate=November 11, 2009}}</ref>

The conventional Marxist explanation of capitalist crises was pointed to by economists [[Biography:Andrew Kliman|Andrew Kliman]], Michael Roberts, and Guglielmo Carchedi, in contradistinction to the Monthly Review school represented by Foster. These Marxist economists do not point to low wages or underconsumption as the cause of the crisis, but instead point to capitalism's long-term tendency of the [[Finance:Rate of profit|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 2000s 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 2007 when credit could no longer support profits".<ref>{{cite web|last=Roberts|first=Michael|url=https://thenextrecession.wordpress.com/2011/07/03/carchedi-foster-and-the-causes-of-crisis/|title=Carchedi, Foster, and the causes of crisis|accessdate=December 13, 2017}}</ref>

In 2005, John C. Bogle wrote that a series of challenges face capitalism that have contributed to past financial crises and have not been sufficiently addressed:

{{quote|Corporate America went astray largely because the power of managers went virtually unchecked by our gatekeepers for far too long ... . They failed to 'keep an eye on these geniuses' to whom they had entrusted the responsibility of the management of America's great corporations.}}

Echoing the central thesis of James Burnham's 1941 seminal book, ''The Managerial Revolution'', Bogle cites particular issues, including:<ref>{{cite book|last=Bogle|first=John|year=2005|title=The Battle for the Soul of Capitalism|url=https://archive.org/details/battleforsoulo00bogl|url-access=registration|publisher=Yale University Press|isbn=978-0-300-11971-8}}</ref>
* that "Manager's capitalism" has replaced "owner's capitalism", meaning management runs the firm for its benefit rather than for the shareholders, a variation on the [[Social:Principal–agent problem|principal–agent problem]];
* the burgeoning executive compensation;
* the management of earnings, mainly a focus on share price rather than the creation of genuine value; and
* the failure of gatekeepers, including auditors, boards of directors, Wall Street analysts, and career politicians.

An analysis conducted by Mark Roeder, a former executive at the Swiss-based [[Company:UBS|UBS]] Bank, suggested that large-scale momentum, or [[Philosophy:The Big Mo|The Big Mo]] "played a pivotal role" in the 2008–09 global financial crisis. 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."<ref>The Big Mo: Why Momentum Now Rules Our World, by Mark Roeder. Virgin Books. 2011. {{ISBN|0-7535-3937-3}}</ref>

[[Biography:Robert Reich|Robert Reich]] attributes the current economic downturn to the stagnation of wages in the United States, particularly those of the hourly workers who comprise 80% of the workforce. He says this stagnation forced the population to borrow to meet the cost of living.<ref>{{cite web|url=http://robertreich.blogspot.com/2008/07/heart-of-economic-mess.html|last=Reich|first=Robert|date=July 25, 2008|title=The Heart of the Economic Mess|accessdate=June 28, 2010}}</ref>

Economists Ailsa McKay and Margunn Bjørnholt argue that the financial crisis and the response to it revealed a crisis of ideas in mainstream economics and within the economics profession, and call for a reshaping of both the economy, economic theory and the economics profession.<ref>{{cite book|last1=Bjørnholt|first1=Margunn|last2=McKay|first2=Ailsa|editor1-last=Bjørnholt|editor1-first =Margunn|editor1-link=Margunn Bjørnholt|editor2-last=McKay|editor2-first =Ailsa|editor2-link=Ailsa McKay|title=Counting on Marilyn Waring: New Advances in Feminist Economics|chapter-url=http://www.margunnbjornholt.no/wp-content/uploads/2014/05/Advances-in-Feminist-Economics-in-Times-of-Economic-Crisis.pdf|year=2014|publisher=Demeter Press|pages=7–20|chapter=Advances in Feminist Economics in Times of Economic Crisis|isbn=978-1-927335-27-7}}</ref>

===Role of economic forecasting===
The financial crisis was not widely predicted by mainstream economists.

A cover story in ''BusinessWeek'' magazine claims that economists mostly failed to predict the worst international economic crisis since the [[Finance:Great Depression|Great Depression]] of the 1930s.<ref>{{cite web|last=Coy|first=Peter|url=http://www.businessweek.com/magazine/content/09_17/b4128026997269.htm?chan=top+news_economics+subindex+page_economics|title=Businessweek Magazine|work=BusinessWeek|date=April 16, 2009|accessdate=May 1, 2010}}</ref> The Wharton School of the University of Pennsylvania's online business journal examines why economists failed to predict a major global financial crisis.<ref>{{cite web|url=http://knowledge.wharton.upenn.edu/article.cfm;jsessionid=a830ee2a1f18c5f62020347bf11442669617?articleid=2234 |title=Why Economists Failed to Predict the Financial Crisis |publisher=Knowledge.wharton.upenn.edu |accessdate=November 11, 2009 |url-status=dead |archiveurl=https://web.archive.org/web/20100913044548/http://knowledge.wharton.upenn.edu/article.cfm%3Bjsessionid%3Da830ee2a1f18c5f62020347bf11442669617?articleid=2234 |archivedate=September 13, 2010 }}</ref> 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 informs that economist [[Biography:Nouriel Roubini|Nouriel Roubini]] warned of such crisis as early as September 2006, and the article goes on to state that the profession of economics is bad at predicting recessions.<ref>[https://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html?pagewanted=all "Dr. Doom"], By Stephen Mihm, August 15, 2008, New York Times Magazine</ref> According to ''{{wipe|The Guardian}}'', Roubini was ridiculed for predicting a collapse of the housing market and worldwide recession, while ''The New York Times'' labelled him "Dr. Doom".<ref>{{cite news|url=https://www.theguardian.com/business/2009/jan/24/nouriel-roubini-credit-crunch|first=Emma|last=Brockes|title=He Told Us So|work=The Guardian|date=January 24, 2009|accessdate=May 1, 2010|location=London}}</ref>

Within mainstream [[Finance:Financial economics|financial economics]], most believe that financial crises are simply unpredictable,<ref>{{cite web|url=http://modeledbehavior.com/2009/09/11/john-cochrane-responds-to-paul-krugman-full-text/|title=John Cochrane's Response to Paul Krugman: Full Text " Modeled Behavior|publisher=Modeledbehavior.com|date=September 11, 2009|accessdate=May 1, 2010|archive-url=https://web.archive.org/web/20100506061819/http://modeledbehavior.com/2009/09/11/john-cochrane-responds-to-paul-krugman-full-text/|archive-date=May 6, 2010|url-status=dead}}</ref> following Eugene Fama's [[Finance:Efficient-market hypothesis|efficient-market hypothesis]] and the related [[Random walk hypothesis|random-walk hypothesis]], which state respectively that markets contain all information about possible future movements, and that the movements of financial prices are random and unpredictable. Recent research casts doubt on the accuracy of "early warning" systems of potential crises, which must also predict their timing.<ref>[http://www.frbsf.org/publications/economics/papers/2009/wp09-17bk.pdf ''Cross-Country Causes and Consequences of the 2008 Crisis: Early Warning''], Federal Reserve Bank of San Francisco, July 2009</ref>

The Austrian economic school regarded the crisis as a vindication and classic example of a predictable credit-fueled bubble caused by laxity in monetary supply.<ref>[https://mises.org/journals/qjae/pdf/qjae13_1_1.pdf Austrian Business Cycle Theory and the Global Financial Crisis:: Confessions of a Mainstream Economist] by Jerry Tempelman</ref>

A number of [[Finance:Heterodox economics|heterodox economists]] predicted the crisis, with varying arguments. Dirk Bezemer in his research<ref>{{cite web|url=http://mpra.ub.uni-muenchen.de/15892/|title="No One Saw This Coming": Understanding Financial Crisis Through Accounting Models|last=Bezemer|first=Dirk J|date=June 2009|publisher=Munich Personal RePEc Archive|accessdate=October 23, 2009}}</ref> credits (with supporting argument and estimates of timing) 12 economists with predicting the crisis: [[Biography:Dean Baker|Dean Baker]] (US), [[Biography:Wynne Godley|Wynne Godley]] (UK), Fred Harrison (UK), [[Biography:Michael Hudson (economist)|Michael Hudson]] (US), Eric Janszen (US), [[Biography:Steve Keen|Steve Keen]] (Australia), Jakob Brøchner Madsen & Jens Kjaer Sørensen (Denmark), [[Biography:Med Jones|Med Jones]] (US) <ref>{{cite book |url=https://books.google.com/?id=0DvEDQAAQBAJ&pg=PA61&dq=rational+investing+med+jones#v=onepage&q=rational%20investing%20med%20jones&f=false |title=Columbia University Press, Rational Investing Book, Page 61-62 What Can Be Forecasted|isbn=9780231543781|last1=Langlois|first1=Hugues|last2=Lussier|first2=Jacques|date=2017-03-07}}</ref> Kurt Richebächer (US), [[Biography:Nouriel Roubini|Nouriel Roubini]] (US), Peter Schiff (US), and Robert Shiller (US). Examples of other experts who gave indications of a financial crisis have also been given.<ref>"Recession in America". The Economist, November 15, 2007.</ref><ref>Richard Berner, "Perfect Storm for the American Consumer". Morgan Stanley Global Economic Forum, November 12, 2007.</ref><ref>Kabir Chibber, "Goldman Sees Subprime Cutting $2&nbsp;Trillion in Lending". Bloomberg.com, November 16, 2007.</ref> Shiller, an expert in housing markets, wrote an article a year before the collapse of Lehman Brothers in which he predicted that a slowing US housing market would cause the housing bubble to burst, leading to financial collapse.<ref>[http://www.project-syndicate.org/commentary/bubble-trouble "Bubble Trouble" by Robert J. Shiller]. Project Syndicate (September 17, 2007). Retrieved July 7, 2012.</ref> Schiff regularly appeared on television in the years before the crisis and warned of the impending real estate collapse.<ref>[http://money.cnn.com/2009/01/20/magazines/fortune/okeefe_schiff.fortune/index.htm Predictions from the man who forecast the meltdown]. CNN, January 23, 2009. Retrieved July 7, 2012.</ref>

Karim Abadir, based on his work with Gabriel Talmain,<ref>{{Cite journal|title=Aggregation, Persistence and Volatility in a Macro Model|journal = Review of Economic Studies|volume = 69|issue = 4|pages = 749–779|author1=KM Abadir|author2=G Talmain|date=2002|doi=10.1111/1467-937X.00225|url = https://www.bportugal.pt/sites/default/files/anexos/papers/wp200106.pdf}}</ref> predicted the timing of the recession<ref>{{cite web|url=https://workspace.imperial.ac.uk/business-school/Public/people/Abadir/Interview-Recession-AlumniMag.jpg|title=Recession? What Recession?!|author=KM Abadir|date=2008|access-date=November 11, 2017|archive-url=https://web.archive.org/web/20171111205255/https://workspace.imperial.ac.uk/business-school/Public/people/Abadir/Interview-Recession-AlumniMag.jpg|archive-date=November 11, 2017|url-status=dead}}</ref> whose trigger had already started manifesting itself in the real economy from early 2007.<ref>{{Cite journal|url=http://www.rofea.org/index.php?journal=journal&page=article&op=view&path%5B%5D=58|title=Is the Economic Crisis Over (and Out)?|journal=Review of Economic Analysis|volume=3|issue=2|pages=102–108|year=2011|last1=Abadir|first1=Karim M.}}</ref>

The former Governor of the Reserve Bank of India, Raghuram Rajan, had predicted the crisis in 2005 when he became chief economist at the [[Organization:International Monetary Fund|International Monetary Fund]]. In 2005, 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.<ref>{{cite journal |first=Raghuram |last=Rajan |title=Has Financial Development Made the World Riskier? |journal=NBER Working Paper No. 11728 |date=November 2005 |doi=10.3386/w11728 |doi-access=free }}</ref> In that paper, Rajan "argued that disaster might loom".<ref name="WSJ">Justin Lahart. "[https://www.wsj.com/articles/SB123086154114948151 Mr Rajan Was Unpopular (But Prescient) at Greenspan Party]". ''Wall Street Journal''. January 2, 2009. Retrieved on August 18, 2012.</ref> Rajan argued that financial sector managers were encouraged to "take risks that generate severe adverse consequences with small probability but, in return, offer generous compensation the rest of the time. 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 [[Biography:Nassim Nicholas Taleb|Nassim Nicholas Taleb]], author of the 2007 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".<ref>{{cite news|url=http://www.huffingtonpost.com/pablo-triana/why-nassim-taleb-is-the-t_b_263194.html|title=Pablo Triana: Why Nassim Taleb is the True Predictor of this Crisis|work=Huffington Post|date=August 19, 2009|accessdate=January 2, 2011}}</ref><ref>{{cite web|url=http://www.fooledbyrandomness.com/imbeciles.htm|title=The Black Swan: Quotes & Warnings that the Imbeciles Chose to Ignore|publisher=fooledbyrandomness.com|date=April 2007|accessdate=July 7, 2012}}</ref> He also took action against the establishment view by making a big financial bet on banking stocks and making a fortune from the crisis ("They didn't listen, so I took their money").<ref>{{cite news|url=https://www.nytimes.com/2009/01/04/magazine/04risk-t.html|work=The New York Times|first=Joe|last=Nocera|title=Risk Mismanagement|date=January 4, 2009}}</ref> According to David Brooks from the New York Times, "Taleb not only has an explanation for what's happening, he saw it coming."<ref>{{cite news|url=https://www.nytimes.com/2008/10/28/opinion/28brooks.html|work=The New York Times|first=David|last=Brooks|title=The Behavioral Revolution|date=October 28, 2008}}</ref>

===Wrong banking model===
A report by the International Labour Organization concluded that [[Finance:Cooperative banking|cooperative financial institutions]] were less likely to fail than their competitors during the crisis. The cooperative banking sector had 20% market share of the European banking sector, but accounted for only 7 per cent of all the write-downs and losses between the third quarter of 2007 and first quarter of 2011.<ref>{{cite web |url= https://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/---coop/documents/publication/wcms_207768.pdf|title=Resilience in a downturn |website=www.ilo.org }}</ref> Similarly, [[Social:Credit union|credit union]]s in the US had five times lower failure rate than other banks during the crisis<ref>{{cite web|url=https://www.fool.com/investing/general/2011/11/22/in-pictures-banks-vs-credit-unions-in-the-financia.aspx|title=In Pictures: Banks vs. Credit Unions in the Financial Crisis -|first=Matt|last=Cropp|date=November 22, 2011|website=The Motley Fool}}</ref> and increased their lending to small- and medium-sized businesses while overall lending to those businesses decreased.<ref>{{cite web|url=https://www.sba.gov/advocacy/how-did-bank-lending-small-business-united-states-fare-after-financial-crisis|title=How Did Bank Lending to Small Business in the United States Fare After the Financial Crisis? - The U.S. Small Business Administration - SBA.gov|website=www.sba.gov}}</ref>

==Impact on financial markets==
===US stock market===
The US stock market peaked in October 2007, when the Dow Jones Industrial Average index exceeded 14,000 points. It then entered a pronounced decline, which accelerated markedly in October 2008. By March 2009, the Dow Jones average had reached a trough of around 6,600. Four years later,
it hit an all-time high. It is probable, but debated, that the Federal Reserve's aggressive policy of [[Finance:Quantitative easing|quantitative easing]] spurred the partial recovery in the stock market.<ref>{{cite web|url=http://ciovaccocapital.com/wordpress/index.php/fed-policy/quantitative-easing-and-asset-price-inflation/|title=Quantitative Easing and Asset Price Inflation|publisher=Ciovacco Capital Management|date=October 29, 2010|accessdate=May 15, 2012}}</ref><ref>{{cite web|url=http://www.mtpredictor.us/1061/impact-of-quantitative-easing-on-the-stock-market/ |title=Impact of Quantitative Easing on the Stock Market |publisher=Mtpredictor.us |date=February 6, 2011 |accessdate=May 15, 2012 |url-status=dead |archiveurl=https://web.archive.org/web/20120426062032/http://www.mtpredictor.us/1061/impact-of-quantitative-easing-on-the-stock-market/ |archivedate=April 26, 2012 }}</ref><ref>{{cite web|url=http://www.brighthub.com/money/investing/articles/111875.aspx|title=The Effects of Manipulating Money Supply on Equities|first=Steve|last=McFarlane|publisher=Brighthub.com|date=May 20, 2011|accessdate=May 15, 2012}}</ref>

Market strategist Phil Dow believes distinctions exist "between the current market malaise" and the Great Depression. He says the Dow Jones average's fall of more than 50% over a period of 17 months is similar to a 54.7% fall in the Great Depression, followed by a total drop of 89% over the following 16 months. "It's very troubling if you have a mirror image," said Dow.<ref>{{cite web|last=Kawamoto|first=Dawn|url=http://news.cnet.com/8301-1001_3-10185559-92.html|title=Dow Jones decline rate mimics Great Depression &#124; Business Tech – CNET News|publisher=News.cnet.com|date=March 2, 2009|accessdate=January 21, 2010}}</ref> Floyd Norris, the chief financial correspondent of ''{{wipe|The New York Times}}'', wrote in a blog entry in March 2009 that the decline has not been a mirror image of the Great Depression, explaining that although the decline amounts were nearly the same at the time, the rates of decline had started much faster in 2007, and that the past year had only ranked eighth among the worst recorded years of percentage drops in the Dow. The past two years ranked third, however.<ref>{{Cite news|url=http://norris.blogs.nytimes.com/2009/03/05/plunging-markets-then-and-now/|title=Plunging Markets, Then and Now – Floyd Norris Blog|publisher=Norris.blogs.nytimes.com|date=March 5, 2009|accessdate=January 21, 2010}}</ref>

===Financial institutions===
[[File:Northern Rock Queue.jpg|thumb|2007 bank run on Northern Rock, a UK bank]]
The first notable event signaling a possible financial crisis occurred in the United Kingdom on August 9, 2007, when [[Company:BNP Paribas|BNP Paribas]], citing "a complete evaporation of liquidity", blocked withdrawals from three hedge funds. The significance of this event was not immediately recognized but soon led to a panic as investors and savers attempted to liquidate assets deposited in highly leveraged financial institutions.<ref name=G8512>{{cite news|title=Three myths that sustain the economic crisis|url=https://www.theguardian.com/business/economics-blog/2012/aug/05/economic-crisis-myths-sustain|accessdate=August 6, 2012|newspaper=The Guardian|date=August 5, 2012|author=Larry Elliott, economics editor of ''The Guardian''|format=blog by expert|quote=Five years ago the banks stopped lending to each other.}}</ref>

The International Monetary Fund estimated that large US and European banks lost more than $1&nbsp;trillion on toxic assets and from bad loans from January 2007 to September 2009. These losses are expected to top $2.8&nbsp;trillion from 2007 to 2010. US bank losses were forecast to hit $1&nbsp;trillion and European bank losses will reach $1.6&nbsp;trillion. The [[Organization:International Monetary Fund|International Monetary Fund]] (IMF) estimated in 2009 that US banks were about 60% through their losses, but British and eurozone banks only 40%.<ref>{{cite news|url=https://www.reuters.com/article/marketsNews/idCNL554155620091105?rpc=44|title=Bloomberg-U.S. European Bank Writedowns & Losses-November&nbsp;5, 2009|agency=Reuters|date=November 5, 2009|accessdate=May 1, 2010}}</ref>

One of the first victims was [[Company:Northern Rock|Northern Rock]], a medium-sized British bank.<ref>{{cite web|url=http://www.bankofengland.co.uk/publications/news/2007/090.htm|title=News Release: Liquidity Support Facility for Northern Rock plc|author=HM Treasury, Bank of England and Financial Services Authority|date=September 14, 2007|url-status=dead|archiveurl=https://web.archive.org/web/20080208081434/http://www.bankofengland.co.uk/publications/news/2007/090.htm|archivedate=February 8, 2008}}</ref> The highly [[Finance:Leverage|leveraged]] nature of its business led the bank to request security from the Bank of England. This in turn led to investor panic and a [[Finance:Bank run|bank run]]<ref>{{cite web|url=http://www.poeticmind.co.uk/business/key-lessons-from-alan-sugar-autobiography-what-you-see-is-what-you-get-reviewed-by-gil-dekel-phd-part-4-of-4/|title=Key Lessons from Alan Sugar Autobiography [562]|accessdate=January 28, 2011}}</ref> in mid-September 2007. Calls by Liberal Democrat Treasury Spokesman Vince Cable to nationalise the institution were initially ignored; in February 2008, however, the British government (having failed to find a private sector buyer) relented, and the bank was taken into public hands. Northern Rock's problems proved to be an early indication of the troubles that would soon befall other banks and financial institutions.

==IndyMac==
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 [[Finance:Savings and loan association|savings and loan association]] in the {{wipe|Los Angeles}} market and the seventh largest [[Finance:Mortgage loan|mortgage]] originator in the United States.<ref>{{cite news|url=https://www.reuters.com/article/pressRelease/idUS108706+08-Apr-2008+BW20080408 |title=IndyMac Bancorp Announces Earnings Webcast & Teleconference Call for First Quarter 2008 Financial Results |date=August 8, 2008 |publisher={{wipe|Reuters}} |accessdate=July 13, 2008 |url-status=dead |archiveurl=https://web.archive.org/web/20081205030550/http://www.reuters.com/article/pressRelease/idUS108706%2B08-Apr-2008%2BBW20080408 |archivedate=December 5, 2008 }}</ref> The failure of IndyMac Bank on July 11, 2008, was the fourth largest [[Finance:Bank run|bank failure]] in {{wipe|United States}} history up until the crisis precipitated even larger failures,<ref>{{cite news|first=Andrea|last=Shalal-Esa|title=FACTBOX: Top ten U.S. bank failures|url=https://www.reuters.com/article/ousivMolt/idUSTRE48P0YC20080926|work={{wipe|Reuters}}|publisher=[[Company:Thomson Reuters|Thomson Reuters]]|date=September 25, 2008|accessdate=September 26, 2008}}</ref> and the second largest failure of a regulated [[Finance:Savings and loan association|thrift]].<ref name="Veiga">{{cite news|url=http://www.newsday.com/business/nationworld/wire/sns-ap-indymac,0,5354918.story |title=Government shuts down mortgage lender IndyMac |first=Alex |last=Veiga |publisher=Associated Press (Newsday) |date=July 12, 2008 |accessdate=July 12, 2008 |archiveurl=https://web.archive.org/web/20080717160702/http://www.newsday.com/business/nationworld/wire/sns-ap-indymac%2C0%2C5354918.story |archivedate=July 17, 2008 |url-status=dead }}</ref> IndyMac Bank's parent corporation was IndyMac Bancorp until the FDIC seized IndyMac Bank.<ref name="LaCapra">{{cite web|url=http://www.thestreet.com/story/10431578/1/indymac-bancorp-to-liquidate.html|title=IndyMac Bancorp to Liquidate|accessdate=August 1, 2008|last=LaCapra|first=Lauren Tara|date=August 1, 2008|work=TheStreet.com}}</ref> IndyMac Bancorp filed for Chapter 7 bankruptcy in July 2008.<ref name="LaCapra" />

IndyMac Bank was founded as Countrywide Mortgage Investment in 1985 by David S. Loeb and Angelo Mozilo<ref>[http://news.sky.com/skynews/Home/Business/American-Mortgage-Lender-IndyMac-Collapses/Article/200807215032312?lpos=Business_8&lid=ARTICLE_15032312_American%2BMortgage%2BLender%2BIndyMac%2BCollapses "US Lender IndyMac Collapses"]  {{webarchive|url=https://web.archive.org/web/20090705171210/http://news.sky.com/skynews/Home/Business/American-Mortgage-Lender-IndyMac-Collapses/Article/200807215032312?lpos=Business_8&lid=ARTICLE_15032312_American+Mortgage+Lender+IndyMac+Collapses |date=July 5, 2009 }}. ''Sky News''. July 13, 2008.</ref><ref>{{cite news|url=http://www.laobserved.com/biz/2008/07/indymac_taken_over.php|title=IndyMac taken over|last=Lacter|first=Mark|date=July 11, 2008|publisher=LA Biz Observed|accessdate=July 12, 2008}}</ref> as a means of [[Finance:Cross-collateralization|collateralizing]] Countrywide Financial loans too big to be sold to Freddie Mac and Fannie Mae. In 1997, Countrywide spun off IndyMac as an independent company run by Mike Perry, who remained its CEO until the downfall of the bank in July 2008.<ref name="Paletta">{{cite news|url=https://www.wsj.com/articles/SB121581435073947103 |title=Crisis Deepens as Big Bank Fails: IndyMac Seized In Largest Bust In Two Decades|first=Damian|last=Paletta|author2=Enrich, David|publisher=Wall Street Journal|date=July 12, 2008}}</ref>

The primary causes of its failure were largely associated with its business strategy of originating and securitizing [[Finance:Alt-A|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 2000, IndyMac grew to the seventh largest savings and loan and ninth largest originator of mortgage loans in the United States. During 2006, IndyMac originated over $90 billion of mortgages.

IndyMac's aggressive growth strategy, use of Alt-A and other nontraditional loan products, insufficient underwriting, credit concentrations in residential real estate in the {{wipe|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 2007.

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. As an Alt-A lender, IndyMac's business model was to offer loan products to fit the borrower's needs, using an extensive array of risky option-[[Finance:Adjustable-rate mortgage|adjustable-rate-mortgages]] (option ARMs), subprime loans, 80/20 loans, and other nontraditional products. 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.<ref name="ustreas.gov">{{cite web|url=http://www.ustreas.gov/inspector-general/audit-reports/2009/oig09032.pdf|title=Audit Report - SAFETY AND SOUNDNESS: Material Loss Review of IndyMac Bank, FSB|accessdate=March 18, 2010 |url-status=dead|archiveurl=https://web.archive.org/web/20090419101451/http://www.ustreas.gov/inspector-general/audit-reports/2009/oig09032.pdf|archivedate=April 19, 2009}} Audit Report Office of Inspector General</ref><ref>{{cite web|url=http://www.fdic.gov/news/news/press/2009/pr09001.html|title=FDIC: Press Releases - PR-1-2009 1/2/2009|website=fdic.gov|accessdate=July 11, 2017}}</ref><ref>{{cite web|url=http://files.ots.treas.gov/comments/20478116-56b7-4810-938b-60b7688f9652.pdf |title=Archived copy |accessdate=February 24, 2014 |url-status=dead |archiveurl=https://web.archive.org/web/20120216201626/http://files.ots.treas.gov/comments/20478116-56b7-4810-938b-60b7688f9652.pdf |archivedate=February 16, 2012 }}</ref>

May 12, 2008, in a small note in the "Capital" section of its what would become its last 10-Q released before receivership, IndyMac revealed—but did not admit—that it was no longer a well-capitalized institution and that it was headed for insolvency.

IndyMac reported that during April 2008, Moody's and Standard & Poor's downgraded the ratings on a significant number of [[Finance:Mortgage-backed security|Mortgage-backed security]] (MBS) bonds—including $160 million issued by IndyMac that the bank retained in its MBS portfolio. IndyMac concluded that these downgrades would have harmed the Company's risk-based capital ratio as of June 30, 2008. Had these lowered ratings been in effect at March 31, 2008, IndyMac concluded that the bank's capital ratio would have been 9.27% total risk-based. IndyMac warned that if its regulators found its capital position to have fallen below "well capitalized" (minimum 10% risk-based capital ratio) to "adequately capitalized" (8–10% risk-based capital ratio) the bank might no longer be able to use brokered deposits as a source of funds.

Senator Charles Schumer (D-NY) later pointed out that brokered deposits made up more than 37 percent of IndyMac's total deposits, and ask the Federal Deposit Insurance Corporation (FDIC) whether it had considered ordering IndyMac to reduce its reliance on these deposits.<ref>[http://biz.yahoo.com/ap/080701/indymac_schumer.html?.v=2 "IndyMac Reassures Customers After Schumer Letter"] {{webarchive |url=https://web.archive.org/web/20080711151417/http://biz.yahoo.com/ap/080701/indymac_schumer.html?.v=2 |date=July 11, 2008 }}, AP</ref> With $18.9 billion in total deposits reported on March 31,<ref>{{cite web|url=http://www.secinfo.com/dVut2.t668.htm#svit|title=SEC Info - Indymac Bancorp Inc - '10-Q' for 3/31/08|website=secinfo.com|accessdate=July 11, 2017}}</ref> Senator Schumer would have been referring to a little over $7 billion in brokered deposits. While the breakout of maturities of these deposits is not known exactly, a simple averaging would have put the threat of brokered deposits loss to IndyMac at $500 million a month, had the regulator disallowed IndyMac from acquiring new brokered deposits on June 30.

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 2008, after being cut in half the previous quarter. The company still had not secured a significant capital infusion nor found a ready buyer.<ref>[http://theimbreport.com/ "To-date, we have not been successful with these efforts...."] Company Blog</ref><ref>[http://www.thestreet.com/story/10416473/1/indymac-seeks-to-preserve-capital.html "Indymac Seeks to Preserve Capital"], ''The Street''</ref>

IndyMac reported that the bank's risk-based capital was only $47 million above the minimum required for this 10% mark. But it did not reveal some of that $47 million capital it claimed it had, as of March 31, 2008, was fabricated.

===Collapse===

When home prices declined in the latter half of 2007 and the secondary mortgage market collapsed, IndyMac was forced to hold $10.7 billion of loans it could not sell in the secondary market. Its reduced liquidity was further exacerbated in late June 2008 when account holders withdrew $1.55 billion or about 7.5% of IndyMac's deposits.<ref name="secinfo.com">{{cite web|url=http://www.secinfo.com/dVut2.t668.htm#t7ow|title=SEC Info - Indymac Bancorp Inc - '10-Q' for 3/31/08|website=secinfo.com|accessdate=July 11, 2017}}</ref> This [[Finance:Bank run|"run"]] on the thrift followed the public release of a letter from Senator Charles Schumer to the FDIC and OTS. 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 they operated the thrift.<ref name="ustreas.gov" />

On June 26, 2008, 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,<ref>[http://money.cnn.com/2008/07/13/news/companies/schumer_indymac/index.htm "Schumer says he's not to blame for IndyMac"], CNN, July 13, 2008.</ref> released several letters he had sent to regulators, which warned  that, "The possible collapse of big mortgage lender IndyMac Bancorp Inc. poses significant financial risks to its borrowers and depositors, and regulators may not be ready to intervene to protect them." Some worried depositors began to withdraw money.<ref>{{cite news|url=http://biz.yahoo.com/ap/080626/indymac_schumer.html?.v%3D2|title=Schumer: concern over IndyMac stability|last=|first=|date=June 26, 2008|work=|publisher=Associated Press|via=|accessdate=July 11, 2008}}</ref>

On July 7, 2008, IndyMac announced on the company blog that it:
* Had failed to raise [[Finance:Capital (economics)|capital]] since its May 12, 2008 quarterly earnings report;
* Had been notified by bank and thrift regulators that IndyMac Bank was no longer deemed "well-capitalized";
IndyMac announced the closure of both its retail lending and wholesale divisions, halted new loan submissions, and cut 3,800 jobs.<ref name="nyt1">{{cite news|last1=Veiga|first1=Alex|title=IndyMac stops new mortgage loans, to cut workforce by half – The Mercury News|url=http://www.mercurynews.com/2008/07/07/indymac-stops-new-mortgage-loans-to-cut-workforce-by-half/|accessdate=November 26, 2016|work=Mercury News|agency=Associated Press|date=July 7, 2008}}</ref>

On July 11, 2008, citing liquidity concerns, the FDIC put IndyMac Bank into [[Social:Conservatorship|conservatorship]]. A bridge bank, IndyMac Federal Bank, FSB, was established to assume control of IndyMac Bank's assets, its secured liabilities, and its insured deposit accounts. The FDIC announced plans to open IndyMac Federal Bank, FSB on July 14, 2008. 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.<ref name="nyt4">{{cite news|url=https://www.reuters.com/article/indymac-idUSWAO00014120080711|title=IndyMac Taken Over By Regulators|publisher={{wipe|Reuters}}|date=July 11, 2008|accessdate=July 11, 2008|url-status=dead|archiveurl=https://web.archive.org/web/20170922002645/https://www.reuters.com/article/indymac-idUSWAO00014120080711|archivedate=September 22, 2017|df=mdy-all}}</ref><ref name="closeletter">{{cite web|url=http://ml-implode.com/info/indy-fdic.pdf|publisher=IndyMac Bank|title=FDIC Notification to All Employees|first=Evan|last=Wagner|date=July 11, 2008|accessdate=July 11, 2008}}</ref><ref name=fn1>{{cite news|url=http://www.foxnews.com/story/0,2933,381130,00.html|publisher=Fox News|date=July 11, 2008|title=Federal Regulators Close California Mortgage Lender|accessdate=July 11, 2008}}</ref> The FDIC guarantees the funds of all insured accounts up to US$100,000, and has declared a special advance dividend to the roughly 10,000 depositors with funds in excess of the insured amount, guaranteeing 50% of any amounts in excess of $100,000.<ref name="Veiga" />  Yet, even with the pending sale of Indymac to IMB Management Holdings, an estimated 10,000 uninsured depositors of Indymac are still at a loss of over $270 million.<ref name="articles.latimes.com">{{cite web|url=http://articles.latimes.com/2009/02/28/business/fi-indymac28?s=o&n=o&rd=www.indymacdepositors.com&sessid=0a54f7d60afb37bb36c4626de4b5ae93d1ac0db2&pg=0&pgtp=article&eagi=&page_type=article&exci=2009_02_28_business_fi-indymac28|title=Lax IndyMac regulation worsened exposure of depositors|first=William|last=Heisel|date=February 28, 2009|publisher=|accessdate=July 11, 2017|via=LA Times}}</ref><ref>{{cite web|url=http://www.fdic.gov/bank/individual/failed/IndyMac.html|title=FDIC: Failed Bank Information - Bank Closing Information for IndyMac Bank, F.S.B., Pasadena, CA|last=DRR|website=fdic.gov|accessdate=July 11, 2017}}</ref>

With $32 billion in assets, IndyMac Bank was one of the largest bank failures in American history.

IndyMac Bancorp filed for Chapter 7 bankruptcy on July 31, 2008.<ref name="LaCapra" />

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 100 mortgage lenders went bankrupt during 2007 and 2008. Concerns that investment bank Bear Stearns would collapse in March 2008 resulted in its fire-sale to JP Morgan Chase. The financial institution crisis hit its peak in September and October 2008. Several major institutions either failed, were acquired under duress, or were subject to government takeover. These included Lehman Brothers, [[Company:Merrill Lynch|Merrill Lynch]], Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, [[Company:Citigroup|Citigroup]], and AIG.<ref name="foreignaffairs1">{{cite web|author=Roger C. Altman |url=http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html |title=The Great Crash |publisher=Foreign Affairs |accessdate=February 27, 2009 |url-status=dead |archiveurl=https://web.archive.org/web/20090223132656/http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html |archivedate=February 23, 2009 |df=mdy }}</ref> On October 6, 2008, three weeks after Lehman Brothers filed the largest bankruptcy in US history, Lehman's former CEO Richard S. Fuld Jr. found himself before Representative Henry A. Waxman, the California Democrat who chaired the House Committee on Oversight and Government Reform. Fuld said he was a victim of the collapse, blaming a "crisis of confidence" in the markets for dooming his firm.<ref>{{cite web|first=James|last=Sterngold|url=http://www.businessweek.com/magazine/content/10_19/b4177056214833.htm|title=How Much Did Lehman CEO Dick Fuld Really Make?|publisher=businessweek.com|date=April 29, 2010|accessdate=December 16, 2014}}</ref>

===Credit markets and the shadow banking system===
[[File:TED spread 2008.svg|thumb|upright=1.6|TED spread and components during 2008]]
In September 2008, the crisis hit its most critical stage. There was the equivalent of a [[Finance:Bank run|bank run]] on the money market funds, which frequently invest in [[Finance:Commercial paper|commercial paper]] issued by corporations to fund their operations and payrolls. Withdrawal from money markets were $144.5&nbsp;billion during one week, versus $7.1&nbsp;billion the week prior. This interrupted the ability of corporations to rollover (replace) their [[Finance:Money market|short-term debt]]. The US government responded by extending insurance for money market accounts analogous to bank [[Finance:Deposit insurance|deposit insurance]] via a temporary guarantee<ref>{{cite news|last=Gullapalli|first=Diya|url=https://www.wsj.com/articles/SB122186683086958875 |work=The Wall Street Journal|title=Bailout of Money Funds Seems to Stanch Outflow|date=September 20, 2008|accessdate=May 1, 2010}}</ref> and with Federal Reserve programs to purchase commercial paper. The [[Finance:TED spread|TED spread]], an indicator of perceived credit risk in the general economy, spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008,<ref>[https://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND "3 year chart"] [[Finance:TED spread|TED spread]] Bloomberg.com "Investment Tools"  {{webarchive|url=https://web.archive.org/web/20100528145833/http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND |date=May 28, 2010 }}</ref> reaching a record 4.65% on October 10, 2008.

In a dramatic meeting on September 18, 2008, Treasury Secretary Henry Paulson and Fed chairman [[Biography:Ben Bernanke|Ben Bernanke]] met with key legislators to propose a $700&nbsp;billion emergency bailout. Bernanke reportedly told them: "If we don't do this, we may not have an economy on Monday."<ref>{{cite news|last=Ross|first=Andrew|url=https://www.nytimes.com/2008/10/02/business/02crisis.html|title=As Crisis Spiraled, Alarm Led to Action|work=The New York Times|date=October 1, 2008|accessdate=April 22, 2011}}</ref> The Emergency Economic Stabilization Act, which implemented the [[Finance:Troubled Asset Relief Program|Troubled Asset Relief Program]] (TARP), was signed into law by President George W. Bush on October 3, 2008.<ref name='Associated Press-Raum-2008-10-03'>{{cite news|title=Economic rescue swiftly signed into law |url=http://afp.google.com/article/ALeqM5h40yrrEcqeJEeVRgcrDXB7egDo2A |agency=AFP |date=October 3, 2008 |url-status=dead |archiveurl=https://web.archive.org/web/20120429172133/http://afp.google.com/article/ALeqM5h40yrrEcqeJEeVRgcrDXB7egDo2A |archivedate=April 29, 2012 |df=mdy }}</ref>

Economist [[Biography:Paul Krugman|Paul Krugman]] and US Treasury Secretary Timothy Geithner explain the credit crisis via the implosion of the [[Finance:Shadow banking system|shadow banking system]], which had grown to nearly equal the importance of the traditional commercial banking sector as described above. Without the ability to obtain investor funds in exchange for most types of [[Finance:Mortgage-backed security|mortgage-backed securities]] or [[Finance:Asset-backed commercial paper|asset-backed commercial paper]], investment banks and other entities in the shadow banking system could not provide funds to mortgage firms and other corporations.<ref name="newyorkfed.org" /><ref name="Krugman 2009" />

This meant that nearly one-third of the US lending mechanism was frozen and continued to be frozen into June 2009.<ref name="Search Site" /> According to the Brookings Institution, at that time the traditional banking system did not have the capital to close this gap: "It would take a number of years of strong profits to generate sufficient capital to support that additional lending volume." The authors also indicate that some forms of [[Finance:Securitization|securitization]] were "likely to vanish forever, having been an artifact of excessively loose credit conditions". 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.<ref>{{cite web|url=http://www.brookings.edu/papers/2009/0615_economic_crisis_baily_elliott.aspx|title=U.S. Financial and Economic Crisis June&nbsp;2009 PDF Page 14|publisher=Brookings Institution|date=June 15, 2009|accessdate=May 1, 2010|url-status=dead|archiveurl=https://web.archive.org/web/20100603093153/http://www.brookings.edu/papers/2009/0615_economic_crisis_baily_elliott.aspx|archivedate=June 3, 2010|df=mdy}}</ref>

===Wealth effects===
[[File:Lehman Brothers Times Square by David Shankbone.jpg|thumb|upright|The New York City headquarters of Lehman Brothers]]
There is a direct relationship between declines in wealth and declines in consumption and business investment, which along with government spending, represent the economic engine. Between June 2007 and November 2008, Americans lost an estimated average of more than a quarter of their collective net worth.<ref>Tami Luhby, [http://money.cnn.com/2009/06/11/news/economy/Americans_wealth_drops/?postversion=2009061113 Americans' wealth drops $1.3 trillion: Fed report shows a decline of home values and the stock market cut the nation's wealth to $50.4 trillion]", ''CNN Money'', June 11, 2009. Accessed July 25, 2007. Luhby reports that in Q2 2007, collective American wealth totaled $64.4 trillion, and by Q1 2009 this value had fallen to $50.4 trillion.</ref> By early November 2008, a broad US stock index, the S&P 500, was down 45% from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30–35% potential drop. Total home equity in the United States, which was valued at $13&nbsp;trillion at its peak in 2006, had dropped to $8.8&nbsp;trillion by mid-2008 and was still falling in late 2008. Total retirement assets, Americans' second-largest household asset, dropped by 22%, from $10.3&nbsp;trillion in 2006 to $8&nbsp;trillion in mid-2008. During the same period, savings and investment assets (apart from retirement savings) lost $1.2&nbsp;trillion and pension assets lost $1.3&nbsp;trillion. Taken together, these losses totaled a staggering $8.3&nbsp;trillion.<ref name="foreignaffairs1" /> Since peaking in the second quarter of 2007, household wealth was down&nbsp;$14&nbsp;trillion.<ref>{{cite web|url=http://money.cnn.com/2009/06/11/news/economy/Americans_wealth_drops/?postversion=2009061113|title=Americans' wealth drops $1.3 trillion - Jun. 11, 2009|first=By Tami Luhby, CNNMoney.com senior|last=writer|website=money.cnn.com|accessdate=July 11, 2017}}</ref>

Further, US homeowners had extracted significant equity in their homes in the years leading up to the crisis, which they could no longer do once housing prices collapsed. Readily obtainable cash used by consumers from home equity extraction doubled from $627&nbsp;billion in 2001 to $1,428&nbsp;billion in 2005 as the housing bubble built, a total of nearly $5&nbsp;trillion over the period.<ref name="Greenspan Kennedy Report – Table 2" /><ref name="Equity extraction – Charts" /><ref name="reuters.com" /> US home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5&nbsp;trillion.<ref name="money.cnn.com" />

To offset this decline in consumption and lending capacity, the US government and US Federal Reserve committed $13.9&nbsp;trillion, of which $6.8&nbsp;trillion was invested or spent as of June 2009.<ref>{{cite news|url=http://www.fdic.gov/regulations/examinations/supervisory/insights/sisum09/si_sum09.pdf|title=Government Support for Financial Assets and Liabilities Announced in 2008 and Soon Thereafter ($ in billions). Page 7.|work=FDIC Supervisory Insights|date=Summer 2009|accessdate=May 1, 2010}}</ref> In effect, the Fed went from being the "[[Finance:Lender of last resort|lender of last resort]]" to the "lender of only resort" for a significant portion of the economy. In some cases the Fed was considered the "buyer of last resort".

In November 2008, economist [[Biography:Dean Baker|Dean Baker]] observed:

{{blockquote|There is a really good reason for tighter credit. Tens of millions of homeowners who had substantial equity in their homes two years ago have little or nothing today. Businesses are facing the worst downturn since the Great Depression. This matters for credit decisions. A homeowner with equity in her home is very unlikely to default on a car loan or credit card debt. They will draw on this equity rather than lose their car and/or have a default placed on their credit record. On the other hand, a homeowner who has no equity is a serious default risk. In the case of businesses, their creditworthiness depends on their future profits. Profit prospects look much worse in November 2008 than they did in November 2007... While many banks are obviously at the brink, consumers and businesses would be facing a much harder time getting credit right now even if the financial system were rock solid. The problem with the economy is the loss of close to $6&nbsp;trillion in housing wealth and an even larger amount of stock wealth.<ref>{{cite web|url=http://prospect.org/article/its-not-credit-crisis-damn-it|title=It's Not the Credit Crisis, Damn It!|last=Baker|first=Dean|website=|publisher=|date=November 29, 2008|accessdate=March 8, 2009}}</ref>}}

At the heart of the portfolios of many of these institutions were investments whose assets had been derived from bundled home mortgages. Exposure to these mortgage-backed securities, or to the credit derivatives used to insure them against failure, caused the collapse or takeover of several key firms such as Lehman Brothers, [[Company:American International Group|AIG]], [[Company:Merrill Lynch|Merrill Lynch]], and HBOS.<ref>{{cite news|last=Uchitelle|first=Louis|date=September 18, 2008|title=Pain Spreads as Credit Vise Grows Tighter|newspaper=The New York Times|page=A1|url=https://www.nytimes.com/2008/09/19/business/economy/19econ.html|accessdate=March 8, 2009}}</ref><ref name="Lehman Merrill">{{cite web|url=https://www.nytimes.com/2008/09/15/business/15lehman.html|title=Lehman Files for Bankruptcy; Merrill Is Sold|first=Andrew Ross|last=Sorkin|date=September 14, 2008|publisher=|accessdate=July 11, 2017|via=NYTimes.com}}</ref><ref>{{cite web|url=https://www.nytimes.com/2008/09/18/business/worldbusiness/18lloyds.html|title=Lloyds Bank Is Discussing Purchase of British Lender|first=Julia|last=Werdigier|date=September 17, 2008|publisher=|accessdate=July 11, 2017|via=NYTimes.com}}</ref>

===European contagion===
The crisis rapidly developed and spread into a global economic shock, resulting in a number of European [[Finance:Bank failure|bank failure]]s, declines in various stock indexes, and large reductions in the market value of equities<ref>{{cite news|url=http://norris.blogs.nytimes.com/2008/10/24/united-panic|title=United Panic|work=The New York Times|date=October 24, 2008|accessdate=October 24, 2008|first=Floyd|last=Norris}}</ref> and [[Finance:Commodity|commodities]].<ref name="Telegraph-Evans-Pritchard-2007-07-25">{{cite news|first=Ambrose|last=Evans-Pritchard|title=Dollar tumbles as huge credit crunch looms|date=July 25, 2007|publisher=Telegraph Media Group Limited|url=https://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/07/25/cnusecon125.xml|work=The Daily Telegraph|location=London|accessdate=October 15, 2008}}</ref>

Both MBS and CDO were purchased by corporate and institutional investors globally. Derivatives such as [[Finance:Credit default swap|credit default swap]]s also increased the linkage between large financial institutions. Moreover, the [[Finance:Leverage|de-leveraging]] of financial institutions, as assets were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated the solvency crisis and caused a decrease in international trade.

World political leaders, national ministers of finance and central bank directors coordinated their efforts to reduce fears, but the crisis continued.<ref>[http://www.ft.com/cms/s/0/e91b24b6-8557-11dd-a1ac-0000779fd18c.html "Central banks act to calm markets"], ''The Financial Times'', September 18, 2008</ref> At the end of October 2008 a [[Finance:Currency crisis|currency crisis]] developed, with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the [[Organization:International Monetary Fund|International Monetary Fund]].<ref name="landler1">{{cite news|url=https://www.nytimes.com/2008/10/24/business/worldbusiness/24emerge.html|title=West Is in Talks on Credit to Aid Poorer Nations|work=The New York Times|date=October 23, 2008|accessdate=October 24, 2008|first=Mark|last=Landler}}</ref><ref name="fackler1">{{cite news|url=https://www.nytimes.com/2008/10/24/business/worldbusiness/24won.html|title=Trouble Without Borders|work=The New York Times|date=October 23, 2008|accessdate=October 24, 2008|first=Martin|last=Fackler}}</ref>

==Effects on the global economy (as of 2009)==

===Global effects===
Several commentators have suggested that if the liquidity crisis continues, an extended [[Finance:Recession|recession]] or worse could occur.<ref>{{Cite news|last=Goodman|first=Peter S. | date = September 26, 2008|title=Credit Enters a Lockdown|newspaper=The New York Times|pages=A1|url=https://www.nytimes.com/2008/09/26/business/26assess.html|accessdate=March 8, 2009}}</ref> The continuing development of the crisis had prompted fears of an impending global economic collapse.<ref>{{Cite news|last1=Cho|first1=David|last2=Appelbaum|first2=Binyamin |  date = October 7, 2008|title=Unfolding Worldwide Turmoil Could Reverse Years of Prosperity|newspaper=The Washington Post|pages=A01|url=https://www.washingtonpost.com/wp-dyn/content/article/2008/10/06/AR2008100603249.html|accessdate=March 8, 2009}}</ref> The financial crisis is likely to yield the biggest banking shakeout since the savings-and-loan meltdown.<ref name="bank-failures">{{cite news|title=Bank on this: bank failures will rise in next year|agency=Associated Press|date=October 5, 2008|url=http://biz.yahoo.com/ap/081005/shaky_banks.html?.&.pf=banking-budgeting|url-status=dead|archiveurl=https://web.archive.org/web/20081009212842/http://biz.yahoo.com/ap/081005/shaky_banks.html?.&.pf=banking-budgeting|archivedate=October 9, 2008}}</ref>
Investment bank UBS stated on October 6 that 2008 would see a clear global recession, with recovery unlikely for at least two years.<ref>UBS AG. {{YouTube|_27gGoplAQA|"Recession". There is no alternative}}. Daily roundup for October 6, 2008. Retrieved October 12, 2008. 'global growth at 2.2% {{Abbr|yoy|Year-over-year}} (previously 2.8%). The IMF brands 2.5% {{Abbr|yoy|Year-over-year}} a "recession".' 'global collapse is inevitable' ... 'at least two years before we can talk of a normalisation in economic activity'</ref> Three days later UBS economists announced that the "beginning of the end" of the crisis had begun, with the world starting to make the necessary actions to fix the crisis: [[Social:Financial capital|capital]] injection by governments; injection made systemically; interest rate cuts to help borrowers. The United Kingdom had started systemic injection, and the world's central banks were now cutting interest rates. UBS emphasized the United States needed to implement systemic injection. UBS further emphasized that this fixes only the financial crisis, but that in economic terms "the worst is still to come".<ref>UBS AG. {{YouTube|-yLIkx2QT00|A plan to save the world}}. Daily roundup for October 9, 2008. Retrieved October 13, 2008. "The actions yesterday can not stop a significant economic downturn."</ref> UBS quantified their expected recession durations on October 16: the Eurozone's would last two quarters, the United States' would last three quarters, and the United Kingdom's would last four quarters.<ref>UBS AG. {{YouTube|wOiHdfRauXc|Fears of recession loom}}. Daily roundup for October 9, 2008. Retrieved October 17, 2008. "short by historical standards"</ref> The economic crisis in Iceland involved all three of the country's major banks. Relative to the size of its economy, Iceland's banking collapse is the largest suffered by any country in economic history.<ref>{{cite news|url=http://www.economist.com/world/europe/displaystory.cfm?story_id=12762027|title=Cracks in the crust|work=The Economist|date=December 11, 2008|accessdate=November 11, 2009}}</ref>

At the end of October UBS revised its outlook downwards: the forthcoming recession would be the worst since the early 1980s recession with negative 2009 growth for the US, Eurozone, UK; very limited recovery in 2010; but not as bad as the [[Finance:Great Depression|Great Depression]].<ref>UBS AG. The IMF in March 2009 forecast that it would be the first occasion since the great depression that the world economy as a whole would contract. {{YouTube|ZsuM1kIPSiM|Be afraid. Be very afraid}}. Daily roundup for October 31, 2008. Retrieved November 2, 2008. "NEGATIVE growth in 2009 for the US, UK, Euro area. Japan is the fastest growing G7 economy at 0.1% growth, Followed close behind by Canada with .098% growth. Global growth in 2009 forecast at 1.3%."</ref>

The Brookings Institution reported in June 2009 that US consumption accounted for more than a third of the growth in global consumption between 2000 and 2007. "The US economy has been spending too much and borrowing too much for years and the rest of the world depended on the US consumer as a source of global demand." With a recession in the US and the increased savings rate of US consumers, declines in growth elsewhere have been dramatic. For the first quarter of 2009, the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia,<ref>{{cite web|url=http://pulitzercenter.typepad.com/untold_stories/2009/05/latvia-sobering-lessons-in-unregulated-lending.html|title=Untold Stories: Latvia: Sobering Lessons in Unregulated Lending|publisher=Pulitzercenter.typepad.com|date=May 18, 2009|accessdate=November 11, 2009|url-status=dead|archiveurl=https://web.archive.org/web/20090522105036/http://pulitzercenter.typepad.com/untold_stories/2009/05/latvia-sobering-lessons-in-unregulated-lending.html|archivedate=May 22, 2009}}</ref> 9.8% in the Euro area and 21.5% for Mexico.<ref>{{cite web|author1=Baily, Martin Neil|author2=Elliott, Douglas J.|url=http://www.brookings.edu/papers/2009/0615_economic_crisis_baily_elliott.aspx|title=The U.S. Financial and Economic Crisis: Where Does It Stand and Where Do We Go From Here?|publisher=Brookings.edu|date=June 15, 2009|accessdate=May 1, 2010|url-status=dead|archiveurl=https://web.archive.org/web/20100603093153/http://www.brookings.edu/papers/2009/0615_economic_crisis_baily_elliott.aspx|archivedate=June 3, 2010|df=mdy}}</ref>

Some developing countries that had seen strong economic growth saw significant slowdowns. For example, growth forecasts in Cambodia show a fall from more than 10% in 2007 to close to zero in 2009, and Kenya may achieve only 3–4% growth in 2009, down from 7% in 2007. According to the research by the Overseas Development Institute, reductions in growth can be attributed to falls in trade, commodity prices, investment and remittances sent from migrant workers (which reached a record $251&nbsp;billion in 2007, but have fallen in many countries since).<ref name="odi.org.uk">Dirk Willem te Velde(2009) [http://www.odi.org.uk/resources/details.asp?id=2822&title=global-financial-crisis-developing-countries-crisis-resilient-growth|ODI Briefing Paper 54 – The global financial crisis and developing countries: taking stock, taking action]. London: Overseas Development Institute</ref> This has stark implications and has led to a dramatic rise in the number of households living below the poverty line, be it 300,000 in Bangladesh or 230,000 in Ghana.<ref name="odi.org.uk" /> Especially states with a fragile political system have to fear that investors from Western states withdraw their money because of the crisis. Bruno Wenn of the German DEG recommends to provide a sound economic policymaking and good governance to attract new investors<ref>{{cite web|title=Exceedingly high interest rates|author=Bruno Wenn|publisher=D+C Development and Cooperation/ dandc.eu|date=January 2013|url=http://www.dandc.eu/en/article/european-bank-regulators-would-do-well-learn-their-latin-american-counterparts}}</ref>

The World Bank reported in February 2009 that the Arab World was far less severely affected by the credit crunch. With generally good balance of payments positions coming into the crisis or with alternative sources of financing for their large current account deficits, such as remittances, Foreign Direct Investment (FDI) or foreign aid, Arab countries were able to avoid going to the market in the latter part of 2008. This group is in the best position to absorb the economic shocks. They entered the crisis in exceptionally strong positions. This gives them a significant cushion against the global downturn. The greatest effect of the global economic crisis will come in the form of lower oil prices, which remains the single most important determinant of economic performance. Steadily declining oil prices would force them to draw down reserves and cut down on investments. Significantly lower oil prices could cause a reversal of economic performance as has been the case in past oil shocks. Initial impact will be seen on public finances and employment for foreign workers.<ref>{{cite web|author=Dina Elnaggar.|url=http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/0,,contentMDK:22069140~pagePK:146736~piPK:146830~theSitePK:256299,00.html|title=Update on the Impact of the Global Financial Crisis on Arab Countries|publisher=World Bank|date=February 1, 2009|accessdate=November 5, 2010}}</ref>

===US economic effects===
====Real gross domestic product====
The output of goods and services produced by labor and property located in the United States decreased at an annual rate of approximately 6% in the fourth quarter of 2008 and first quarter of 2009, versus activity in the year-ago periods.<ref>{{cite web|url=https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm|title=BEA Press Releases|publisher=Bea.gov|accessdate=May 1, 2010}}</ref> The US unemployment rate increased to 10.1% by October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours per work week declined to 33, the lowest level since the government began collecting the data in 1964.<ref>{{cite web|url=http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNU04000000&years_option=all_years&periods_option=specific_periods&periods=Annual+Data|title=BLS-Historical Unemployment Rate Table|publisher=Data.bls.gov|accessdate=May 1, 2010}}</ref><ref>{{cite web|last=Herbst|first=Moira|url=http://www.businessweek.com/bwdaily/dnflash/content/jul2009/db20090710_255918.htm|title=Business Week-Unemployed lose with hour and wage cuts|work=BusinessWeek|date=July 10, 2009|accessdate=May 1, 2010}}</ref>
With the decline of gross domestic product came the decline in innovation.  With fewer resources to risk in creative destruction, the number of patent applications flat-lined.  Compared to the previous 5 years of exponential increases in patent application, this stagnation correlates to the similar drop in GDP during the same time period.<ref>{{cite web|url=http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.pdf|title=U.S. Patent Statistics|publisher=uspto.gov|accessdate=April 26, 2014}}</ref>

====Distribution of wealth in the US====
[[File:2008 Top1percentUSA.png|right|thumb|upright=1.35|US inequality from 1913 to 2008.]]

Typical American families did not fare well, nor did those "wealthy-but-not-wealthiest" families just beneath the pyramid's top. On the other hand, half of the poorest families did not have wealth declines at all during the crisis (because they tend not to own financial investments whose value fluctuates). The Federal Reserve surveyed 4,000 households between 2007 and 2009, and found that the total wealth of 63 percent of all Americans declined in that period. 77 percent of the richest families had a decrease in total wealth, while only 50 percent of those on the bottom of the pyramid suffered a decrease.<ref>{{cite web|url=http://moneywatch.bnet.com/economic-news/blog/financial-decoder/fed-survey-were-45-poorer/3560/|title=Fed Survey: We're 45% Poorer &#124; Jill Schlesinger – CBS MoneyWatch.com|publisher=Moneywatch.bnet.com|date=March 25, 2011|accessdate=April 22, 2011}}</ref><ref>{{cite book|title=Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America|last=Taibbi|first=Matt|year=2010|publisher=Spiegel & Grau|isbn=978-0-385-52995-2|page=[https://archive.org/details/griftopiabubblem0000taib/page/12 12]|url=https://archive.org/details/griftopiabubblem0000taib/page/12}}</ref><ref>{{cite journal|last1=Wolff|first1=Edward N|year=2010|title=Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze – An Update to 2007|journal=Levy Economics Institute Working Papers Series|issue=159|ssrn=1585409|accessdate=}}</ref> A 2015 study commissioned by the ACLU found that white home-owning households recovered from the financial crisis faster than black home-owning households, and projected that the financial crisis will likely widen the racial wealth gap in the US.<ref>Sarah Burd-Sharps and Rebecca Rasch. ''[https://www.ssrc.org/publications/view/impact-of-the-us-housing-crisis-on-the-racial-wealth-gap-across-generations/ Impact of the US Housing Crisis on the Racial Wealth Gap Across Generations]''. The [[Organization:Social Science Research Council|Social Science Research Council]] and the ACLU. 2015.</ref>

===Official economic projections===

The US Federal Reserve Open Market Committee release in June 2009 stated:

{{quote|...the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.<ref>{{cite web|url=http://www.federalreserve.gov/newsevents/press/monetary/20090624a.htm|title=FOMC Statement June&nbsp;24, 2009|publisher=Federalreserve.gov|date=June 24, 2009|accessdate=May 1, 2010}}</ref> Economic projections from the Federal Reserve and Reserve Bank Presidents include a return to typical growth levels (GDP) of 2.5–3% in 2010; an unemployment plateau in 2009 and 2010 around 10% with moderation in 2011; and inflation that remains at typical levels around 1–2%.<ref>{{cite web|url=http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20090429.pdf|title=Minutes of the FOMC April&nbsp;2009|accessdate=May 1, 2010}}</ref>}}

==Government responses==
===Emergency and short-term responses===

The US Federal Reserve and central banks around the world took steps to expand money supplies to avoid the risk of a deflationary spiral, in which lower wages and higher unemployment led to a self-reinforcing decline in global consumption. In addition, governments enacted large fiscal stimulus packages, by borrowing and spending to offset the reduction in private sector demand caused by the crisis. The US Federal Reserve's new and expanded liquidity facilities were intended to enable the central bank to fulfill its traditional lender-of-last-resort role during the crisis while mitigating stigma, broadening the set of institutions with access to liquidity, and increasing the flexibility with which institutions could tap such liquidity.<ref>[http://www.newyorkfed.org/research/staff_reports/sr563.pdf ''Federal Reserve Liquidity Provision during the Financial Crisis of 2007–2009''], Federal Reserve Bank of New York, July 2012</ref>

This credit freeze brought the [[Finance:Global financial system|global financial system]] to the brink of collapse. The response of the Federal Reserve, the European Central Bank, the Bank of England and other central banks was immediate and dramatic. During the last quarter of 2008, these central banks purchased US$2.5&nbsp;trillion of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history. Following a model initiated by the [[Finance:2008 United Kingdom bank rescue package|United Kingdom bank rescue package]],<ref name=Langley2015>{{cite book|last1=Langley|first1=Paul|title=Liquidity Lost: The Governance of the Global Financial Crisis|date=2015|publisher=Oxford University Press|isbn=978-0-19-968378-9|pages=83–86|url=https://books.google.com/books?id=FhGaBQAAQBAJ&pg=PA86#v=onepage&q&f=false}}</ref><ref>{{cite news|title=Gordon Does Good|url=https://www.nytimes.com/2008/10/13/opinion/13krugman.html?_r=0|accessdate=February 5, 2016|work=The New York Times|date=October 12, 2008}}</ref> the governments of European nations and the US guaranteed the debt issued by their banks and raised the capital of their national banking systems, ultimately purchasing $1.5&nbsp;trillion newly issued [[Finance:Preferred stock|preferred stock]] in their major banks.<ref name="foreignaffairs1" /> In October 2010, Nobel laureate [[Biography:Joseph Stiglitz|Joseph Stiglitz]] explained how the US Federal Reserve was implementing another monetary policy —creating currency— as a method to combat the [[Finance:Liquidity trap|liquidity trap]].<ref>{{cite news|last=Stiglitz|first=Joseph|title=New $600B Fed Stimulus Fuels Fears of US Currency War|url=http://www.democracynow.org/2010/11/5/new_600b_fed_stimulus_fuels_fears|accessdate=November 5, 2010|newspaper=Democracy Now|date=November 5, 2010}}</ref> By creating $600 billion and inserting{{clarify|date=February 2013}} this directly into banks, the Federal Reserve intended to spur banks to finance more domestic loans and refinance mortgages. However, banks instead were spending the money in more profitable areas by investing internationally in emerging markets. Banks were also investing in foreign currencies, which Stiglitz and others point out may lead to [[Finance:Currency war|currency war]]s while China redirects its currency holdings away from the United States.<ref>{{cite news|last=Wheatley|first=Jonathan|title=Brazil in 'currency war' alert|url=http://www.ft.com/cms/s/0/33ff9624-ca48-11df-a860-00144feab49a.html|accessdate=November 5, 2010|newspaper=Financial Times|date=November 5, 2010|author2=Peter Garnham}}</ref>

Governments have also [[Finance:Bailout|bailed out]] a variety of firms as discussed above, incurring large financial obligations. To date, various US government agencies have committed or spent trillions of dollars in loans, asset purchases, guarantees, and direct spending.<ref>Summary of U.S. government financial commitments and investments related to the crisis: [http://money.cnn.com/news/specials/storysupplement/bailout_scorecard/index.html CNN – Bailout Scorecard].</ref> Significant controversy has accompanied the bailout, leading to the development of a variety of "decision making frameworks", to help balance competing policy interests during times of financial crisis.<ref>{{cite web|ssrn=1686982|author=Tim Wafa (J.D.)|title=When Policies Collide: A Decision Making Framework for Financial System Overhaul in the 21st Century|publisher=Social Science Research Network (SSRN), October 2010}}</ref>

The US executed two stimulus packages, totaling nearly $1&nbsp;trillion during 2008 and 2009.<ref>{{cite news|url=http://news.bbc.co.uk/1/hi/business/7889897.stm|title=BBC – Stimulus Package 2009|publisher=BBC News|date=February 14, 2009|accessdate=February 27, 2009}}</ref> Other countries also implemented fiscal stimulus plans beginning in 2008.

===Regulatory proposals and long-term responses===
United States President [[Biography:Barack Obama|Barack Obama]] and key advisers introduced a series of regulatory proposals in June 2009. The proposals address consumer protection, executive pay, bank financial cushions or capital requirements, expanded regulation of the [[Finance:Shadow banking system|shadow banking system]] and [[Finance:Derivative|derivatives]], and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others.<ref>{{cite web|url=http://www.whitehouse.gov/the_press_office/Remarks-of-the-President-on-Regulatory-Reform/|title=Remarks of the President on Regulatory Reform &#124; The White House|publisher=Whitehouse.gov|date=June 17, 2009|accessdate=November 11, 2009}}</ref><ref>{{cite news|url=https://www.washingtonpost.com/wp-dyn/content/article/2009/06/14/AR2009061402443_pf.html|title=Geithner & Summers – A New Financial Foundation|work=Washington Post|date=June 14, 2009|accessdate=May 1, 2010}}</ref><ref>{{cite web|url=http://www.financialstability.gov/roadtostability/regulatoryreform.html|title=Treasury Department Report – Financial Regulatory Reform|publisher=Financialstability.gov|date=March 22, 2010|accessdate=May 1, 2010|url-status=dead|archiveurl=https://web.archive.org/web/20100421184209/http://www.financialstability.gov/roadtostability/regulatoryreform.html|archivedate=April 21, 2010}}</ref> In January 2010, Obama proposed additional regulations limiting the ability of banks to engage in [[Finance:Proprietary trading|proprietary trading]]. The proposals were dubbed "The [[Finance:Volcker Rule|Volcker Rule]]", in recognition of Paul Volcker, who has publicly argued for the proposed changes.<ref>{{Cite news|url=https://economix.blogs.nytimes.com/2010/01/22/glass-steagall-vs-the-volcker-rule/|accessdate=January 27, 2010|title=Glass-Steagall vs. the Volcker Rule|work=The New York Times|first=Louis|last=Uchitelle|date=January 22, 2010}}</ref><ref name="David Cho, and Binyamin Appelbaum">{{cite news|url=https://www.washingtonpost.com/wp-dyn/content/article/2010/01/21/AR2010012104935.html|title=Obama's 'Volcker Rule' shifts power away from Geithner|author1=David Cho|author2=Binyamin Appelbaum|date=January 22, 2010|work=The Washington Post|accessdate=February 13, 2010}}</ref>

The US Senate passed a reform bill in May 2010, following the House, which passed a bill in December 2009. These bills must now be reconciled. The ''{{wipe|New York Times}}'' provided a comparative summary of the features of the two bills, which address to varying extent the principles enumerated by the Obama administration.<ref>{{cite news|last=New|first=The|url=https://www.nytimes.com/interactive/2010/05/20/business/20100520-regulation-graphic.html|title=New York Times-Major Parts of the Financial Regulation Overhaul-May&nbsp;2010|work=The New York Times|date=May 20, 2010|accessdate=June 27, 2010}}</ref> For instance, the Volcker Rule against proprietary trading is not part of the legislation, though in the Senate bill regulators have the discretion but not the obligation to prohibit these trades.{{Citation needed|reason=No source|date=September 2019}}

European regulators introduced [[Finance:Basel III|Basel III]] regulations for banks.<ref>{{cite news|url=http://www.bis.org/press/p100912.pdf|title=Group of Governors and Heads of Supervision announces higher global minimum capital standards|date=September 12, 2010}}</ref> It increased capital ratios, limits on leverage, narrow definition of capital (to exclude subordinated debt), limit counter-party risk, and new liquidity requirements.<ref>{{cite web|url=http://www.brookings.edu/papers/2010/0726_basel_elliott.aspx|title=Basel III, the Banks, and the Economy|publisher=Brookings Institution|date=July 26, 2010|last=Elliott|first=Douglas J.}}</ref> Critics argue that Basel III doesn't address the problem of faulty risk-weightings. Major banks suffered losses from AAA-rated created by [[Finance:Financial engineering|financial engineering]] (which creates apparently risk-free assets out of high risk collateral) that required less capital according to Basel II. Lending to AA-rated sovereigns has a risk-weight of zero, thus increasing lending to governments and leading to the next crisis.<ref>{{cite news|url=https://www.economist.com/blogs/freeexchange/2010/09/basel_iii|title=Third time's the charm?|date=September 13, 2010|newspaper=The Economist|accessdate=April 28, 2012}}</ref> Johan Norberg argues that regulations (Basel III among others) have indeed led to excessive lending to risky governments (see European sovereign-debt crisis) and the ECB pursues even more lending as the solution.<ref>{{cite news|url=http://reason.com/archives/2012/04/17/financial-crisis-ii|title=Financial Crisis II: European governments fail to learn from history|last=Norberg|first=Johan|date=May 2012|newspaper=Reason}}</ref>

===United States Congress response===
At least two major reports were produced by Congress: the [[Finance:Financial Crisis Inquiry Commission|Financial Crisis Inquiry Commission]] report, released January 2011, and a report by the United States Senate Homeland Security Permanent Subcommittee on Investigations  entitled Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (released April 2011). 
* February 13, 2009 – President Barack Obama signed [[Finance:American Recovery and Reinvestment Act of 2009|American Recovery and Reinvestment Act of 2009]].
* May 20, 2009 – President Obama signed Fraud Enforcement and Recovery Act of 2009.
* December 11, 2009 – House cleared bill H.R.4173, Wall Street Reform and Consumer Protection Act of 2009.<ref>{{cite web|url=http://www.opencongress.org/bill/111-h4173/show|title=H.R.4173: Dodd-Frank Wall Street Reform and Consumer Protection Act – U.S. Congress|publisher=OpenCongress|date=July 21, 2010|accessdate=January 2, 2011|archive-url=https://web.archive.org/web/20100419030415/http://www.opencongress.org/bill/111-h4173/show|archive-date=April 19, 2010|url-status=dead|df=mdy-all}}</ref>
* April 15, 2010 – Senate introduced bill S.3217, Restoring American Financial Stability Act of 2010.<ref>{{cite web|url=http://www.opencongress.org/bill/111-s3217/show|title=S.3217: Restoring American Financial Stability Act of 2010 – U.S. Congress|publisher=OpenCongress|date=July 21, 2010|accessdate=January 2, 2011|archive-url=https://web.archive.org/web/20101228161803/http://www.opencongress.org/bill/111-s3217/show|archive-date=December 28, 2010|url-status=dead|df=mdy-all}}</ref>
* July 21, 2010 – Dodd–Frank Wall Street Reform and Consumer Protection Act enacted.<ref name="actions">{{cite web|url=http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR04173:@@@L&summ2=m&#major%20actions|title=Bill Summary & Status – 111th Congress (2009–2010) – H.R.4173 – All Information – THOMAS (Library of Congress)|publisher=Library of Congress|accessdate=July 22, 2010}}</ref><ref>{{cite web|url=http://www.marketwatch.com/story/senate-defeats-filibuster-threat-on-bank-bill-2010-07-15|title=Bank-reform bill sent to Obama|publisher=Marketwatch.com|date=December 29, 2010|accessdate=January 2, 2011}}</ref>

===Court proceedings===
In Iceland in April 2012, the special Landsdómur court convicted former Prime Minister Geir Haarde of mishandling the 2008–2012 Icelandic financial crisis.{{Citation needed|reason=No source|date=September 2019}}

As of September 2011, no individuals in the UK have been prosecuted for misdeeds during the financial meltdown of 2008.<ref>{{cite web|url=http://blogs.channel4.com/snowblog/bankers-arrested/16148|title=Why have no bankers been arrested?|last1=Snow|first1=Jon|date=September 13, 2011|website=Channel 4 (Snowblog) |access-date=December 11, 2015|quote=The publication of the Vickers report into British banking reform sparks the question why the UK has so far failed to prosecute a single individual for his or her misdeeds during the financial meltdown of 2008}}</ref>{{update inline|date=March 2019}}

===Continuation of the financial crisis in the US housing market===
As of 2012, in the United States, a large volume of troubled mortgages remained in place. It had proved impossible for most homeowners facing foreclosure to refinance or modify their mortgages and foreclosure rates remained high.<ref name=NYT81920>{{cite news|title=Cautious Moves on Foreclosures Haunting Obama|url=https://www.nytimes.com/2012/08/20/business/economy/slow-response-to-housing-crisis-now-weighs-on-obama.html|accessdate=August 20, 2012|newspaper=The New York Times|date=August 19, 2012|author=Binyamin Appelbaum}}</ref>

==Stabilization==
The US recession that began in December 2007 ended in June 2009, according to the US [[Organization:National Bureau of Economic Research|National Bureau of Economic Research]] (NBER)<ref>{{Cite news|url=http://online.barrons.com/article/SB50001424052970203983104575367471896032724.html?mod=googlenews_barrons|title=It's Dippy to Fret About a Double-Dip Recession|author=Mark Hulbert|date=July 15, 2010}}</ref> and the financial crisis appears to have ended about the same time. In April 2009 ''{{wipe|Time (magazine)}}'' magazine declared "More Quickly Than It Began, The Banking Crisis Is Over."<ref name="autogenerated1">''{{wipe|Time (magazine)}}'' magazine Friday, April 10, 2009 [http://www.time.com/time/business/article/0,8599,1890560,00.html]</ref> The United States Financial Crisis Inquiry Commission dates the crisis to 2008.<ref name="Financial Crisis Inquiry Commission">[http://www.fcic.gov/report Financial Crisis Inquiry Commission], Get the Report, accessed February 14, 2011.</ref><ref name="Financial Crisis Was Avoidable">{{cite web|url=https://www.nytimes.com/2011/01/26/business/economy/26inquiry.html|title=Financial Crisis Was Avoidable, Inquiry Concludes|first=Sewell|last=Chan|date=January 25, 2011|publisher=|accessdate=July 11, 2017|via=NYTimes.com}}</ref> President [[Biography:Barack Obama|Barack Obama]] declared on January 27, 2010, "the markets are now stabilized, and we've recovered most of the money we spent on the banks."<ref>[http://www.treasury.gov/initiatives/financial-stability/briefing-room/reports/agency_reports/Documents/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf Troubled Asset Relief Program:Two Year Retrospective] United States Department of the Treasury, Office of Financial Stability</ref>

The ''{{wipe|New York Times}}'' identifies March 2009 as the "nadir of the crisis" and noted in 2011 that "Most stock markets around the world are at least 75 percent higher than they were then. Financial stocks, which led the markets down, have also led them up." Nevertheless, the lack of fundamental changes in banking and financial markets worries many market participants, including the [[Organization:International Monetary Fund|International Monetary Fund]].<ref name=Over>{{cite news|last=Norris|first=Floyd|title=Crisis Is Over, but Where's the Fix?|work=New York Times|date=March 10, 2011|url=https://www.nytimes.com/2011/03/11/business/economy/11norris.html?|accessdate=March 10, 2011}}</ref>

The distribution of household incomes in the United States has become more unequal during the post-2008 [[Finance:Economic recovery|economic recovery]], a first for the US but in line with the trend over the last ten economic recoveries since 1949.<ref>{{cite news|last1=Tcherneva|first1=Pavlina R.|title=This Chart Shows Just How (Un)Equal Things Are During A 'Champion' Of The 99%'s Administration|url=http://www.ijreview.com/2014/08/165868-chart-shows-just-unequal-things-champion-99s-administration/|accessdate=September 13, 2014|work=Independent Journal Review|date=August 2014|archive-url=https://web.archive.org/web/20140913062459/http://www.ijreview.com/2014/08/165868-chart-shows-just-unequal-things-champion-99s-administration/|archive-date=September 13, 2014|url-status=dead}}</ref><ref name=Appelbaum>{{cite news|last1=Binyamin|first1=Appelbaum|title=Fed Says Growth Lifts the Affluent, Leaving Behind Everyone Else|url=https://www.nytimes.com/2014/09/05/business/economy/least-affluent-families-incomes-are-declining-fed-survey-shows.html|accessdate=September 13, 2014|work=New York Times|date=September 4, 2014}}</ref> Income inequality in the United States has grown from 2005 to 2012 in more than 2 out of 3 metropolitan areas.<ref>{{cite news|last1=Chokshi|first1=Niraj|title=Income inequality seems to be rising in more than 2 in 3 metro areas|url=https://www.washingtonpost.com/blogs/govbeat/wp/2014/08/11/income-inequality-seems-to-be-rising-in-more-than-2-in-3-metro-areas/|accessdate=September 13, 2014|work=Washington Post|date=August 11, 2014}}</ref>  Median household wealth fell 35% in the US, from $106,591 to $68,839 between 2005 and 2011.<ref name=Kurtzleben>{{cite news|last1=Kurtzleben|first1=Danielle|title=Middle class households' wealth fell 35 percent from 2005 to 2011|url=https://www.vox.com/2014/8/23/6057467/middle-class-households-wealth-fell-35-percent-from-2005-to-2011|accessdate=September 13, 2014|work=Vox.com|date=August 23, 2014}}</ref>

==Media coverage==
The financial crisis generated many articles and books outside of the scholarly and financial press, including articles and books by author William Greider, economist [[Biography:Michael Hudson (economist)|Michael Hudson]], author and former bond salesman Michael Lewis, Kevin Phillips, and investment broker Peter Schiff.{{Citation needed|reason=No source|date=September 2019}}

In May 2010, a documentary, ''Overdose: A Film about the Next Financial Crisis'',<ref>{{cite web|url=http://www.cato.org/events/100517screening.html|title=Overdose: A Film about the Next Financial Crisis|publisher=Cato.org|date=May 17, 2010|accessdate=January 2, 2011|archive-url=https://web.archive.org/web/20101231154303/http://www.cato.org/events/100517screening.html|archive-date=December 31, 2010|url-status=dead}}</ref> premiered about how the financial crisis came about and how the solutions that have been applied by many governments are setting the stage for the next crisis. The film is based on the book ''Financial Fiasco'' by Johan Norberg and features Alan Greenspan, with funding from the [[Philosophy:Libertarianism|libertarian]] think tank The Cato Institute. Greenspan is responsible for de-regulating the derivatives market while chairman of the Federal Reserve.{{Citation needed|reason=No source|date=September 2019}}

In October 2010, a documentary film about the crisis, ''Inside Job'' directed by Charles Ferguson, was released by Sony Pictures Classics. In 2011, it was awarded the Academy Award for Best Documentary Feature at the 83rd Academy Awards.{{Citation needed|reason=No source|date=September 2019}}

''Time'' magazine named "25 People to Blame for the Financial Crisis".<ref>{{cite news|url=http://www.time.com/time/specials/packages/completelist/0,29569,1877351,00.html|work=Time|title=25 People to Blame for the Financial Crisis}}</ref>

Michael Lewis published a best-selling non-fiction book about the crisis, entitled ''[[Finance:The Big Short|The Big Short]]''. In 2015, it was adapted into a film of the same name, which won the Academy Award for Best Adapted Screenplay. One point raised is to what extent those outside of the markets themselves (i.e., not working for a mainstream investment bank) could forecast the events and be generally less myopic. Subsequent to the crisis itself some observers furthermore noted a change in social relations as some group culpability emerged.<ref>{{cite book|last1=Drummond|first1=Norman|title=The Power of Three: Discovering what really matters in life|date=2010|publisher=Hachette (Hodder & Stoughton)|location=London|isbn=978-0-340-97991-4|page=1}}</ref>

==Consequences for subsequent economic growth==
"Advanced" economies led global economic growth prior to the financial crisis with "emerging" and "developing" economies lagging behind.{{Dubious|date=August 2018}} The crisis overturned this relationship. The [[Organization:International Monetary Fund|International Monetary Fund]] found that "advanced" economies accounted for only 26.5% of global [[Finance:Gross domestic product|GDP]] ([[Finance:Purchasing power parity|PPP]]) growth while emerging and developing economies accounted for 73.5% of global GDP (PPP) growth from 2007 to 2017.<ref>{{cite web|url=http://www.imf.org/external/pubs/ft/weo/2018/01/weodata/weorept.aspx|title=International Monetary Fund, World Economic Outlook Database, April 2018: GDP list of countries. Data for the year 2007-2017|publisher=Imf.org|accessdate=August 30, 2018}}</ref>

In the table, the names of emerging and developing economies are shown in boldface type, while the names of developed economies are in Roman (regular) type.

{{Bar chart|float=center
| title       = The top twenty growing economies (by increase in GDP (PPP) from 2007 to 2017)
| table_width = 70
| bar_width   = 50 <!-- must be an unformatted number -->
| data_max    = 14,148<!-- Upper bound on the values in the data fields -->
| label_type  = Economy
| data_type   = {{center|Incremental GDP (billions in USD)}}
| label1      = (01) '''{{Flagu|China}}''' | data1 = 14,147
| label2      = (02) '''{{Flagu|India}}''' | data2 = 5,348
| label3      = (03) {{Flagu|United States}} | data3 = 4,913
| label4      = (—) {{Flagu|European Union}} | data4 = 4,457
| label5      = (04) '''{{Flagu|Indonesia}}''' | data5 = 1,632
| label6      = (05) '''{{Flagu|Turkey}}''' | data6 = 1,024
| label7      = (06) {{Flagu|Japan}} | data7 = 1,003
| label8      = (07) {{Flagu|Germany}} | data8 = 984
| label9      = (08) '''{{Flagu|Russia}}''' | data9 = 934
| label10     = (09) '''{{Flagu|Brazil}}''' | data10 = 919
| label11     = (10) {{Flagu|South Korea}} | data11 = 744
| label12     = (11) '''{{Flagu|Mexico}}''' | data12 = 733
| label13     = (12) '''{{Flagu|Saudi Arabia}}''' | data13 = 700
| label14     = {{nowrap|(13) {{Flagu|United Kingdom}}}} | data14 = 671
| label15     = (14) {{Flagu|France}} | data15 = 566
| label16     = (15) '''{{Flagu|Nigeria}}''' | data16 = 523
| label17     = (16) '''{{Flagu|Egypt}}''' | data17 = 505
| label18     = (17) {{Flagu|Canada}} | data18 = 482
| label19     = (18) '''{{Flagu|Iran}}''' | data19 = 462
| label20     = (19) '''{{Flagu|Thailand}}''' | data20 = 447
| label21     = (20) '''{{Flagu|Philippines}}''' | data21 = 440
| caption     = {{resize|88%|The twenty largest economies contributing to global GDP (PPP) growth (2007–2017)<ref>Figures from the April 2018 update of the International Monetary Fund's ''World Economic Outlook Database''. [http://www.imf.org/external/pubs/ft/weo/2018/01/weodata/weorept.aspx?pr.x=80&pr.y=8&sy=2007&ey=2014&scsm=1&ssd=1&sort=country&ds=.&br=1&c=998&s=NGDPD&grp=1&a=1 Figure for EU], accessed August 30, 2018. [http://www.imf.org/external/pubs/ft/weo/2018/01/weodata/weorept.aspx?pr.x=52&pr.y=15&sy=1980&ey=2017&scsm=1&ssd=1&sort=country&ds=.&br=1&c=512%2C946%2C914%2C137%2C612%2C546%2C614%2C962%2C311%2C674%2C213%2C676%2C911%2C548%2C193%2C556%2C122%2C678%2C912%2C181%2C313%2C867%2C419%2C682%2C513%2C684%2C316%2C273%2C913%2C868%2C124%2C921%2C339%2C948%2C638%2C943%2C514%2C686%2C218%2C688%2C963%2C518%2C616%2C728%2C223%2C836%2C516%2C558%2C918%2C138%2C748%2C196%2C618%2C278%2C624%2C692%2C522%2C694%2C622%2C142%2C156%2C449%2C626%2C564%2C628%2C565%2C228%2C283%2C924%2C853%2C233%2C288%2C632%2C293%2C636%2C566%2C634%2C964%2C238%2C182%2C662%2C359%2C960%2C453%2C423%2C968%2C935%2C922%2C128%2C714%2C611%2C862%2C321%2C135%2C243%2C716%2C248%2C456%2C469%2C722%2C253%2C942%2C642%2C718%2C643%2C724%2C939%2C576%2C644%2C936%2C819%2C961%2C172%2C813%2C132%2C726%2C646%2C199%2C648%2C733%2C915%2C184%2C134%2C524%2C652%2C361%2C174%2C362%2C328%2C364%2C258%2C732%2C656%2C366%2C654%2C734%2C336%2C144%2C263%2C146%2C268%2C463%2C532%2C528%2C944%2C923%2C176%2C738%2C534%2C578%2C536%2C537%2C429%2C742%2C433%2C866%2C178%2C369%2C436%2C744%2C136%2C186%2C343%2C925%2C158%2C869%2C439%2C746%2C916%2C926%2C664%2C466%2C826%2C112%2C542%2C111%2C967%2C298%2C443%2C927%2C917%2C846%2C544%2C299%2C941%2C582%2C446%2C474%2C666%2C754%2C668%2C698%2C672&s=PPPGDP&grp=0&a= Figures for the countries of the world], accessed August 30, 2018.</ref>}}
}}

==See also==
{{div col|colwidth=35em}}
* [[Finance:Wall Street Crash of 1929|Wall Street Crash of 1929]]
* 2008 Greek riots
* Banking (Special Provisions) Act 2008 (United Kingdom) 
* 2008–2011 bank failures in the United States
* [[Finance:2008–2009 Keynesian resurgence|2008–2009 Keynesian resurgence]] 
* 2009 G-20 London summit protests
* 2009 Icelandic financial crisis protests
* 2009 May Day protests
* 2009 Moldova civil unrest
* 2010 United States foreclosure crisis
* 2012 May Day protests
* Crisis (Marxian)
* Europeans for Financial Reform
* Financial Crisis Responsibility Fee
* Inside Job (2010 film)
* [[Finance:Kondratiev wave|Kondratiev wave]]
* List of banks acquired or bankrupted during the Great Recession
* List of acquired or bankrupt United States banks in the late 2000s financial crisis
* List of acronyms: European sovereign-debt crisis
* List of economic crises
* List of entities involved in 2007–08 financial crises
* List of largest U.S. bank failures
* Low-Income Countries Under Stress
* [[Finance:Mark-to-market accounting|Mark-to-market accounting]]
* [[Social:Neoliberalism|Neoliberalism]]
* [[Social:Occupy movement|Occupy movement]]
* [[Unsolved:Pessimism porn|Pessimism porn]]
* [[Finance:PIGS (economics)|PIGS (economics)]]
* [[Finance:Private equity in the 2000s|Private equity in the 2000s]]
* Subprime crisis impact timeline
* ''[[Finance:The Chicago Plan Revisited|The Chicago Plan Revisited]]''
{{div col end}}

==References==
{{Reflist}}

The initial articles and some subsequent material were adapted from the Wikinfo article [https://web.archive.org/web/20120111145026/http://www.wikinfo.org/index.php?title=Financial_crisis_of_2007-2008 Financial crisis of 2007–2008]  released under the GNU Free Documentation License Version 1.2

==Further reading==
*Kotz, David M. (2015). ''The Rise and Fall of Neoliberal Capitalism''. Harvard University Press. {{ISBN|9780674725652}}.
* Lanchester, John, "The Invention of Money:  How the heresies of two bankers became the basis of our modern economy", ''The New Yorker'', 5 & 12 August 2019, pp.&nbsp;28–31.
*Mercille, J. & Murphy, E., 2015, ''Deepening neoliberalism, austerity, and crisis: Europe's treasure Ireland,'' Palgrave Macmillan, Basingstoke.
*Nomi Prins: ''Collusion: How Central Bankers Rigged the World'', Nation Books 2018, {{ISBN|978-1568585628}}.
*Patterson, Laura A., & Koller, Cynthia A. Koller (2011). "Diffusion of Fraud Through Subprime Lending: The Perfect Storm." In Mathieu Deflem (ed.) ''Economic Crisis and Crime'' (Sociology of Crime Law and Deviance, Volume 16), Emerald Group Publishing, pp.&nbsp;25–45. {{ISBN|9780857248022}}.
*Pezzuto, Ivo (2013). ''Predictable and Avoidable: Repairing Economic Dislocation and Preventing the Recurrence of Crisis'', Publisher: Gower Pub Co; New edition. {{ISBN|978-1-4094-5445-8}}.
* {{cite book |last=Tooze |first=Adam |title=Crashed: How a Decade of Financial Crises Changed the World |location=New York |publisher=Viking |year=2018 |isbn=9780670024933 |title-link=Crashed (book) }}
*Wallison, Peter, ''Bad History, Worse Policy'' (Washington, D.C.: AEI Press, 2013) {{ISBN|978-0-8447-7238-7}}.

==External links==
'''Reports on causes'''
* [https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf Final Report] of the [[Finance:Financial Crisis Inquiry Commission|Financial Crisis Inquiry Commission]]
* [http://fcic.law.stanford.edu/ Archived website] of the [[Finance:Financial Crisis Inquiry Commission|Financial Crisis Inquiry Commission]] (maintained by the [[Organization:Stanford University|Stanford University]] and the Stanford Law School)
* [http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf Wall Street and the Financial Crisis: Anatomy of a Financial Collapse], Majority and Minority Staff Report, United States Senate Homeland Security Permanent Subcommittee on Investigations, April 13, 2011
* [https://www.stlouisfed.org/financial-crisis/articles-and-papers/what-caused-the-crisis What Caused the Crisis]: A collection of papers at the Federal Reserve Bank of St. Louis

'''Journalism and interviews'''
* [https://www.pbs.org/wgbh/pages/frontline/meltdown/ Inside the Meltdown] – PBS ''Frontline'' documentation including additional background article and in-depth interviews
* [https://www.pbs.org/wgbh/pages/frontline/money-power-wall-street/ "Money, Power & Wall Street"] – PBS ''Frontline'' documentation including additional background article and in-depth interviews
* Stewart, James B., [http://www.newyorker.com/reporting/2009/09/21/090921fa_fact_stewart Eight Days: the battle to save the American financial system], ''The New Yorker'' magazine, September 21, 2009. pp.&nbsp;58–81. Summarizing September 15–23, 2008, with interviews of Paulson, Bernanke, and Geithner by James Stewart
* ''{{wipe|New York Times}}'' topics
** [https://www.nytimes.com/topic/subject/credit-crisis-8212-bailout-plan-tarp Credit Crisis — Bailout Plan (TARP)]
** [https://www.nytimes.com/topic/subject/economic-crisis-and-market-upheavals Economic Crisis and Market Upheavals]
** [https://www.nytimes.com/topic/subject/financial-crisis-cases-and-litigation Financial Crisis: Cases and Litigation]
** [https://www.nytimes.com/topic/organization/financial-crisis-inquiry-commission Financial Crisis Inquiry Commission] 
* [https://www.ft.com/global-financial-crisis Archive of articles on the global financial crisis] from the ''[[Social:Financial Times|Financial Times]]''
* [https://features.marketplace.org/bernanke-paulson-geithner/ Panic, Fear, and Regret] - audio interviews with Timothy Geithner, Ben Bernanke and Henry Paulson from ''Marketplace''

'''Other'''
* [http://www.imf.org/external/np/exr/key/finstab.htm Archived financial crisis page] from the [[Organization:International Monetary Fund|International Monetary Fund]] (IMF)
* [https://fraser.stlouisfed.org/timeline/financial-crisis Federal Reserve Bank of St. Louis' Financial Crisis Timeline] of key events and actions surrounding the crisis

{{2008 economic crisis|state=expanded}}
{{Financial crises}}

{{DEFAULTSORT:Financial Crisis Of 2007-2008}}
[[Category:Financial crises|2007-08]]
[[Category:Systemic risk]]
[[Category:Stock market crashes]]

{{Sourceattribution|Financial crisis of 2007–08|1}}