Financial Crisis

The financial crisis of 2006-2009 had a far reaching effect on everyone. From the poorest country to the richest, the widespread impact could be felt around the world. While a financial crisis can be caused by a variety of factors, the most recent crisis was preceded by an asset and credit boom that was the US housing market. The housing market bubble burst, and everything went downhill.

The US mortgage market saw a huge upswing in the early 2000’s due to an increase in the housing market. Home construction was seen as an optimistic expectation for investments. Subprime lending was viewed as a safe bet, and exploded in terms of mortgage lending. Huge banks such as Goldman Sachs, Bank of America, and JPMorgan Chase allowed these risky mortgage prices that could not sustain itself. When the housing market went bust in early 2006, the financial institutions began to lose money. The negative effects were seen in the economy in terms of a huge rise in unemployment, which led to a huge default in mortgage loans. This triggered a global problem because the financial institutions are so integrated. Professor Crotty stated that “Interlocking debt structure meant the system was vulnerable everywhere if a serious problem developed anywhere.”

The US government stepped in to try to slow down this economic crisis by issuing huge bailouts, both to businesses and individuals. Approximately $12-$14 trillion was issued by the US government. The Federal Reserve lent funds to a wide range of institutions and began buying private sector debt. Ironically, the firms that helped to create the crisis were the ones to receive the most help. They saved individual firms that were deemed too crucial to allow to fail, such as Bear Stearns and AIG. The bailout saved the financial institutions by providing an influx of currency to be put into circulation.

However, the temporary cash infusion into the economy via the Economic Stimulus Act of 2008 did not have...