Briefly Discuss the Factors Which Contributed to the Economic Slowdown of 2008 – 2009 in Us. What Measures Were Taken by U.S. to Stimulate the Economy? Were These Measures Effective? If Not, Why

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Date Submitted: 05/03/2013 10:47 PM

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The 2008-2009 recession was long and deep, and according to several factors was the most

severe economic contraction since the 1930s (but still much less severe than the Great

Depression). The slowdown of economic activity was moderate through the first half of 2008, but

at that point the weakening economy was overtaken by a major financial crisis that would

exacerbate the economic weakness and accelerate the decline.

I believe the crisis was the product of few factors. Only when taken together can they offer a sufficient explanation of what happened:

Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S. . Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in non-traditional mortgages that were in some cases deceptive, in many cases confusing, and often beyond borrowers' ability to pay.

However, the credit bubble, housing bubble, and the explosion of non-traditional mortgage products are not by themselves responsible for the crisis. Our country has experienced larger bubbles—the dot-com bubble of the 1990s, for example—that were not nearly as devastating as the housing bubble. Losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed?

Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets. Securitizers lowered the credit quality of the mortgages they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence.

We call this the risk of contagion. In other cases, the problem was a common shock. A number of firms had made similar bad bets on housing, and thus unconnected firms failed for the same reason and at roughly the same time.

A rapid succession of 10...