financial crisis 200-present

8/7/2019 Financial Crisis 200-Present

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The financial crisisfrom 2007 to the present is considered by manyeconomists to be the worst financial crisissince the Great Depressionofthe 1930s.[1]t was tri!!ered by a li"#idity shortfall in the $nited%tatesban&in! system'[2]and has res#lted in the collapse of lar!e

financial instit#tions' the bailo#tof ban&s by national !o(ernments' anddownt#rns in stoc& mar&ets aro#nd the world. n many areas' theho#sin! mar&et has also s#ffered' res#ltin! inn#mero#s e(ictions' foreclos#resand prolon!ed (acancies. tcontrib#ted to the fail#re of &ey b#sinesses' declines in cons#mer wealthestimated in the trillions of $.%. dollars' s#bstantial financialcommitments inc#rred by !o(ernments' and a si!nificant decline ineconomic acti(ity.[3]

)ltho#!h there ha(e been aftershoc&s' the financial crisis officially endedin 200*.[+][,]-any ca#ses for the financial crisis ha(e been s#!!ested'with (aryin! wei!ht assi!ned by eperts.[/]oth mar&etbased andre!#latory sol#tions ha(e been implemented or are #nder consideration.[7]

Contents

[hide]

1 Overview

2 Background

o 2.1 Growth of the housing bubble

o 2.2 Easy credit conditions

o 2.3 eak and fraudulent underwriting !ractice

o 2." #ub$!ri%e lending

o 2.& 'redatory lending

o 2.( )eregulation
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o 2.* +ncreased debt burden or over$leveraging

o 2., -inancial innovation and co%!leity

o 2./ +ncorrect !ricing of risk

o 2.10 Boo% and colla!se of the shadow banking syste%

o 2.11 o%%odities boo%

o 2.12 #yste%ic crisis

o 2.13 ole of econo%ic forecasting

3 -inancial %arkets i%!acts

o 3.1 +%!acts on financial institutions

o 3.2 redit %arkets and the shadow banking syste%

o 3.3 ealth effects

o

3." Euro!ean contagion

" Effects on the global econo%y

o ".1 Global effects

o ".2 .#. econo%ic effects

".2.1 eal gross do%estic !roduct

".2.2 )istribution of wealth

o ".3 Official econo%ic !ro4ections

& es!onses to financial crisis
http://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Increased_debt_burden_or_over-leveraginghttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Financial_innovation_and_complexityhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Incorrect_pricing_of_riskhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Boom_and_collapse_of_the_shadow_banking_systemhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Commodities_boomhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Systemic_crisishttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Role_of_economic_forecastinghttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Financial_markets_impactshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Impacts_on_financial_institutionshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Credit_markets_and_the_shadow_banking_systemhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Wealth_effectshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#European_contagionhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Effects_on_the_global_economyhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Global_effectshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#U.S._economic_effectshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Real_gross_domestic_producthttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Distribution_of_wealthhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Official_economic_projectionshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Responses_to_financial_crisishttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Increased_debt_burden_or_over-leveraginghttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Financial_innovation_and_complexityhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Incorrect_pricing_of_riskhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Boom_and_collapse_of_the_shadow_banking_systemhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Commodities_boomhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Systemic_crisishttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Role_of_economic_forecastinghttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Financial_markets_impactshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Impacts_on_financial_institutionshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Credit_markets_and_the_shadow_banking_systemhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Wealth_effectshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#European_contagionhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Effects_on_the_global_economyhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Global_effectshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#U.S._economic_effectshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Real_gross_domestic_producthttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Distribution_of_wealthhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Official_economic_projectionshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Responses_to_financial_crisis


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o &.1 E%ergency and short$ter% res!onses

o &.2 egulatory !ro!osals and long$ter% res!onses

o &.3 nited #tates ongress res!onse

( 5edia on the crisis

* #tabili6ation

, #econd wave of crisis7

/ #ee also

10 eferences

11 Eternal links and further reading

[edit](er(iew

The collapse of the $.%. ho#sin! b#bble' which pea&ed in 200/' ca#sedthe (al#es of sec#ritiestied to $.%. real estate pricin!to pl#mmet'dama!in! financial instit#tions !lobally.[*]#estions re!ardin!

ban& sol(ency' declines in credit a(ailability and dama!ed in(estorconfidence had an impact on !lobal stoc& mar&ets' where sec#ritiess#ffered lar!e losses d#rin! late 200* and early 2009. 4conomiesworldwide slowed d#rin! this period' as credit ti!htened and internationaltrade declined.[9]5ritics ar!#ed that credit ratin! a!enciesand in(estorsfailed to acc#rately price the ris&in(ol(ed with mort!a!erelated financialprod#cts' and that !o(ernments did not ad6#st their re!#latory practicesto address 21stcent#ry financial mar&ets.[10]Go(ernments and central

ban&sresponded with #nprecedented fiscal stim#l#s' monetarypolicyepansion and instit#tional bailo#ts. The 2011 ibyan #prisin! hasnow led to worries that the !lobal economic reco(ery may !rad#ally beslowin! down.[citation needed]

[edit]ac&!ro#nd
http://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Emergency_and_short-term_responseshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Regulatory_proposals_and_long-term_responseshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#United_States_Congress_responsehttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Media_on_the_crisishttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Stabilizationhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Second_wave_of_crisis.3Fhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#See_alsohttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Referenceshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#External_links_and_further_readinghttp://en.wikipedia.org/w/index.php?title=Financial_crisis_(2007%E2%80%93present)&action=edit&section=1http://en.wikipedia.org/wiki/Housing_bubblehttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Real_estate_pricinghttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-7http://en.wikipedia.org/wiki/Solvencyhttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-8http://en.wikipedia.org/wiki/Credit_rating_agencyhttp://en.wikipedia.org/wiki/Financial_riskhttp://en.wikipedia.org/wiki/Mortgage_loanhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-Declaration_of_G20-9http://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Fiscal_policyhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/w/index.php?title=Financial_crisis_(2007%E2%80%93present)&action=edit&section=2http://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Emergency_and_short-term_responseshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Regulatory_proposals_and_long-term_responseshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#United_States_Congress_responsehttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Media_on_the_crisishttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Stabilizationhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Second_wave_of_crisis.3Fhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#See_alsohttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#Referenceshttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#External_links_and_further_readinghttp://en.wikipedia.org/w/index.php?title=Financial_crisis_(2007%E2%80%93present)&action=edit&section=1http://en.wikipedia.org/wiki/Housing_bubblehttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Real_estate_pricinghttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-7http://en.wikipedia.org/wiki/Solvencyhttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-8http://en.wikipedia.org/wiki/Credit_rating_agencyhttp://en.wikipedia.org/wiki/Financial_riskhttp://en.wikipedia.org/wiki/Mortgage_loanhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-Declaration_of_G20-9http://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Fiscal_policyhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/w/index.php?title=Financial_crisis_(2007%E2%80%93present)&action=edit&section=2


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The immediate ca#se or tri!!er of the crisis was the b#rstin! ofthe $nited %tates ho#sin! b#bblewhich pea&ed in approimately 200,8200/.[11][12])lreadyrisin! defa#lt rates on s#bprime and ad6#stable ratemort!a!es:);-< be!an to increase "#ic&ly thereafter. )s ban&s be!an

to increasin!ly !i(e o#t more loans to potential home owners' theho#sin! price also be!an to rise. n the optimistic terms the ban&s wo#ldenco#ra!e the home owners to ta&e on considerably hi!h loans in thebelief they wo#ld be able to pay it bac& more "#ic&ly o(erloo&in! theinterest rates. nce the interest rates be!an to rise in mid 2007 theho#sin! price started to drop si!nificantly in 200/ leadin! into 2007. nmany states li&e 5alifornia refinancin! became more diffic#lt. )s a res#ltthe n#mber of foreclosed homes be!an to rise as well.

%hare in GD= of $.%. financial sector since 1*/0 [13]

%teadily decreasin! interest rates bac&ed by the $.% >ederal;eser(efrom 19*2 onward and lar!e inflows of forei!n f#nds createdeasy credit conditions for a n#mber of years prior to the crisis' f#elin! aho#sin! constr#ction boom and enco#ra!in! debtfinanced cons#mption.

[1+]The combination of easy credit and money inflow contrib#ted to the$nited %tates ho#sin! b#bble. oans of (ario#s types :e.!.' mort!a!e'credit card' and a#to< were easy to obtain and cons#mers ass#med an#nprecedented debt load.[1,][1/])s part of the ho#sin! and credit booms'the n#mber of financial a!reements called mort!a!ebac&edsec#rities:-%< andcollaterali?ed debt obli!ations:5D


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their (al#e from mort!a!e payments and ho#sin! prices' !reatlyincreased. %#ch financial inno(ationenabled instit#tions and in(estorsaro#nd the world to in(est in the $.%. ho#sin! mar&et. )s ho#sin! pricesdeclined' ma6or !lobal financial instit#tions that had borrowed and

in(ested hea(ily in s#bprime -% reported si!nificant losses. >allin!prices also res#lted in homes worth less than the mort!a!e loan'pro(idin! a financial incenti(e to enter foreclos#re. The on!oin!foreclos#re epidemic that be!an in late 200/ in the $.%. contin#es todrain wealth from cons#mers and erodes the financial stren!th ofban&in! instit#tions. Defa#lts and losses on other loan types alsoincreased si!nificantly as the crisis epanded from the ho#sin! mar&et toother parts of the economy. Total losses are estimated in the trillions of

$.%. dollars !lobally.

[17]

@hile the ho#sin! and credit b#bbles b#ilt' a series of factors ca#sed thefinancial system to both epand and become increasin!ly fra!ile' aprocess called financiali?ation. $. %. Go(ernment policy from the 1970sonward has emphasi?ed dere!#lationto enco#ra!e b#siness' whichres#lted in less o(ersi!ht of acti(ities and less disclos#re of informationabo#t new acti(ities #nderta&en by ban&sand other e(ol(in! financialinstit#tions. Th#s' policyma&ers did not immediately reco!ni?e theincreasin!ly important role played by financial instit#tions s#chasin(estment ban&sand hed!e f#nds' also &nown as the shadowban&in! system. %ome eperts belie(e these instit#tions had become asimportant as commercial :depository< ban&s in pro(idin! credit to the$.%. economy' b#t they were not s#b6ect to the same re!#lations.[1*]These instit#tions' as well as certain re!#lated ban&s' had alsoass#med si!nificant debt b#rdens while pro(idin! the loans describedabo(e and did not ha(e a financial c#shion s#fficient to absorb lar!e loandefa#lts or -% losses.[19]These losses impacted the ability of financial

instit#tions to lend' slowin! economic acti(ity. 5oncerns re!ardin! thestability of &ey financial instit#tions dro(e central ban&s to pro(ide f#ndsto enco#ra!e lendin! and restore faith in the commercial papermar&ets'which are inte!ral to f#ndin! b#siness operations. Go(ernmentsalso bailed o#t&ey financial instit#tions and implemented economic
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stim#l#s pro!rams' ass#min! si!nificant additional financialcommitments.

The $.%. >inancial 5risis n"#iry 5ommissionreported its findin!s inAan#ary 2011. t concl#ded that the crisis was a(oidable and wasca#sed byB @idespread fail#res in financial re!#lation' incl#din! the>ederal ;eser(eCs fail#re to stem the tide of toic mort!a!es Dramaticbrea&downs in corporate !o(ernance incl#din! too many financial firmsactin! rec&lessly and ta&in! on too m#ch ris& )n eplosi(e mi ofecessi(e borrowin! and ris& by ho#seholds and @all %treet that p#t thefinancial system on a collision co#rse with crisis Eey policy ma&ers illprepared for the crisis' lac&in! a f#ll #nderstandin! of the financialsystem they o(ersaw and systemic breaches in acco#ntability and

ethics at all le(els.[20][21]

[edit]Growth of the housing bubble

Main article: United States housing bubble

) !raph showin! the median and a(era!e sales prices of new homes sold in the $nited %tates between 19/3 and 200* :not

ad6#sted for inflation


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their homes at lower interest rates' or financin! cons#mer spendin! byta&in! o#t second mort!a!essec#red by the price appreciation.

n a =eabody )wardwinnin! pro!ram' =;correspondents ar!#ed thata Giant =ool of -oney :represented by H70 trillion in worldwide fiedincome in(estments< so#!ht hi!her yields than those offered by $.%.Treas#ry bonds early in the decade. This pool of money had ro#!hlydo#bled in si?e from 2000 to 2007' yet the s#pply of relati(ely safe'income !eneratin! in(estments had not !rown as fast. n(estment ban&son @all %treet answered this demand with the -% and 5D' whichwere assi!ned safe ratin!sby the credit ratin! a!encies. n effect' @all%treet connected this pool of money to the mort!a!e mar&et in the $.%.'with enormo#s fees accr#in! to those thro#!ho#t the mort!a!e s#pply

chain' from the mort!a!e bro&er sellin! the loans' to small ban&s thatf#nded the bro&ers' to the !iant in(estment ban&s behind them. yapproimately 2003' the s#pply of mort!a!es ori!inated at traditionallendin! standards had been eha#sted. Iowe(er' contin#ed stron!demand for -% and 5D be!an to dri(e down lendin! standards' aslon! as mort!a!es co#ld still be sold alon! the s#pply chain. 4(ent#ally'this spec#lati(e b#bble pro(ed #ns#stainable.[2,]

The 5D in partic#lar enabled financial instit#tions to obtain in(estor

f#nds to finance s#bprime and other lendin!' etendin! or increasin! theho#sin! b#bble and !eneratin! lar!e fees. ) 5D essentially placescash payments from m#ltiple mort!a!es or other debt obli!ations into asin!le pool' from which the cash is allocated to specific sec#rities in apriority se"#ence. Those sec#rities obtainin! cash first recei(edin(estment!rade ratin!s from ratin! a!encies. ower priority sec#ritiesrecei(ed cash thereafter' with lower credit ratin!s b#t theoretically ahi!her rate of ret#rn on the amo#nt in(ested.[2/][27]

y %eptember 200*' a(era!e $.%. ho#sin! prices had declined by o(er20F from their mid200/ pea&.[2*][29])s prices declined' borrowerswith ad6#stablerate mort!a!esco#ld not refinance to a(oid the hi!herpayments associated with risin! interest rates and be!an to defa#lt.D#rin! 2007' lenders be!an foreclos#re proceedin!s on nearly1.3 million properties' a 79F increase o(er 200/.[30]This increased to2.3 million in 200*' an *1F increase (s. 2007. [31]y )#!#st 200*' 9.2F
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of all $.%. mort!a!es o#tstandin! were either delin"#ent or inforeclos#re.[32]y %eptember 2009' this had risen to 1+.+F.[33]

[edit]Easy credit conditions

ower interest rates enco#ra!e borrowin!. >rom 2000 to 2003'the >ederal ;eser(elowered the federal f#nds ratetar!et from /.,F to1.0F.[3+]This was done to soften the effects of the collapse of the dotcom b#bbleand of the %eptember 2001 terrorist attac&s' and to combatthe percei(ed ris& of deflation.[3,]

$.%. c#rrent acco#nt or trade deficit

)dditional downward press#re on interest rates was created by the$%)Js hi!h and risin! c#rrent acco#nt:trade< deficit' which pea&ed alon!with the ho#sin! b#bble in 200/. en ernan&eeplained how tradedeficits re"#ired the $.%. to borrow money from abroad' which bid #pbond prices and lowered interest rates.[3/]

ernan&e eplained that between 199/ and 200+' the $%) c#rrentacco#nt deficit increased by H/,0 billion' from 1.,F to ,.*F of GD=.

>inancin! these deficits re"#ired the $%) to borrow lar!e s#ms fromabroad' m#ch of it from co#ntries r#nnin! trade s#rpl#ses' mainly theemer!in! economies in )sia and oileportin! nations. The balance ofpaymentsidentityre"#ires that a co#ntry :s#ch as the $%)< r#nnin!a c#rrent acco#ntdeficit also ha(e a capital acco#nt:in(estment< s#rpl#s
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of the same amo#nt. Ience lar!e and !rowin! amo#nts of forei!n f#nds:capital< flowed into the $%) to finance its imports.

This created demand for (ario#s types of financial assets' raisin! theprices of those assets while lowerin! interest rates. >orei!n in(estorshad these f#nds to lend' either beca#se they had (ery hi!h personalsa(in!s rates :as hi!h as +0F in 5hina


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that their mort!a!e ori!inations met 5itiJsstandards. -oreo(er' d#rin!2007' defecti(e mort!a!es :from mort!a!e ori!inators contract#allybo#nd to perform #nderwritin! to 5itiJsstandards< increased... to o(er*0F of prod#ction.[++]

n separate testimony to >inancial 5risis n"#iry 5ommission' officers of5layton Ioldin!sKthe lar!est residential loan d#e dili!ence andsec#riti?ation s#r(eillance company in the $nited %tates and 4#ropeKtestified that 5laytonJs re(iew of o(er 900'000 mort!a!es iss#ed fromAan#ary 200/ to A#ne 2007 re(ealed that scarcely ,+F of the loans mettheir ori!inatorsC #nderwritin! standards. The analysis :cond#cted onbehalf of 23 in(estment and commercial ban&s' incl#din! 7 Too i! To>ail ban&s< additionally showed that 2*F of the sampled loans did not

meet the minimal standards of any iss#er. 5laytonJs analysis f#rthershowed that 39F of these loans :i.e. those not meetin! anyiss#erJsminimal #nderwritin! standards< were s#bse"#ently sec#riti?ed and soldto in(estors.[+,][+/]

[edit]Sub-prime lending

$.%. s#bprime lendin! epanded dramatically 200+200/

The term s#bprime refers to the credit "#ality of partic#lar borrowers'who ha(e wea&ened credit histories and a !reater ris& of loan defa#ltthan prime borrowers.[+7]The (al#e of $.%. s#bprime mort!a!es was
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estimated at H1.3 trillion as of -arch 2007'[+*]with o(er 7., million firstliens#bprime mort!a!es o#tstandin!.[+9]

)s well as easy credit conditions' there is e(idence that both !o(ernmentand competiti(e press#res contrib#ted to an increase in the amo#nt ofs#bprime lendin! d#rin! the years precedin! the crisis. -a6or$.%.in(estment ban&sand !o(ernment sponsored enterprisesli&e>annie -ae played an important role in the epansion of hi!herris&lendin!.[,0][,1]

%#bprime mort!a!es remained below 10F of all mort!a!e ori!inations#ntil 200+' when they spi&ed to nearly 20F and remained there thro#!hthe 200,200/ pea& of the $nited %tates ho#sin! b#bble.[,2]) proimatee(ent to this increase was the )pril 200+ decision by the $.%. %ec#rities

and 4chan!e 5ommission:%45< to rela the net capital r#le' whichpermitted the lar!est fi(e in(estment ban&s to dramatically increase theirfinancial le(era!e and a!!ressi(ely epand their iss#ance of mort!a!ebac&ed sec#rities. This applied additional competiti(e press#re to >annie-aeand >reddie -ac' which f#rther epanded their ris&ier lendin!.[,3]%#bprime mort!a!e payment delin"#ency rates remained in the 101,F ran!e from 199* to 200/'[,+]then be!an to increase rapidly' risin! to2,F by early 200*.[,,][,/]

%ome' li&e)merican 4nterprise nstit#tefellow=eter A. @allison'[,7]belie(e the roots of the crisis can be traced directly to s#bprimelendin! by >annie -ae and >reddie -ac' which are !o(ernmentsponsored entities. n %eptember 30' 1999' The New YorkTimesreported that the 5linton )dministration p#shed for more lendin!to low and moderate income borrowers' while the mort!a!e ind#stryso#!ht !#arantees for s#bprime loansB

>annie -ae' the nationJs bi!!est #nderwriter of home mort!a!es' has been #nder increasin! press#re from the

5linton )dministration to epand mort!a!e loans amon! low and moderate income people and felt press#re from

stoc& holders to maintain its phenomenal !rowth in profits. n addition' ban&s' thrift instit#tions and mort!a!e

companies ha(e been pressin! >annie -ae to help them ma&e more loans to socalled s#bprime borrowers... n

mo(in!' e(en tentati(ely' into this new area of lendin!' >annie -ae is ta&in! on si!nificantly more ris&' which may not

pose any diffic#lties d#rin! fl#sh economic times. #t the !o(ernments#bsidi?ed corporation may r#n into tro#ble in
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an economic downt#rn' promptin! a !o(ernment resc#e similar to that of the sa(in!s and loan ind#stry in the 19*0s.

[,*]

) 2000 $nited %tates Department of the Treas#ryst#dy of lendin! trendsfor 30, cities from 1993 to 199* showed that H+/7 billion of mort!a!elendin! was made by 5omm#nity ;ein(estment )ct:5;)reddie -ac' 5;) or predatory lendin! were primary ca#ses of thecrisis. n other words' b#bbles in both mar&ets de(eloped e(en tho#!honly the residential mar&et was affected by these potential ca#ses. [/3]
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)s of -arch 2011 the >D5 has had to pay o#t H9 billion to co(er losseson bad loans at 1/, failed financial instit#tions. [/+]

[edit]Predatory lending

=redatory lendin! refers to the practice of #nscr#p#lo#s lenders' enticin!borrowers to enter into #nsafe or #nso#nd sec#red loans forinappropriate p#rposes.[/,]) classic baitandswitchmethod was #sedby 5o#ntrywide >inancial' ad(ertisin! low interest rates for homerefinancin!. %#ch loans were written into etensi(ely detailed contracts'and swapped for more epensi(e loan prod#cts on the day of closin!.@hereas the ad(ertisement mi!ht state that 1F or 1.,F interest wo#ldbe char!ed' the cons#mer wo#ld be p#t into an ad6#stable rate mort!a!e:);-< in which the interest char!ed wo#ld be !reater than the amo#nt of

interest paid. This created ne!ati(e amorti?ation' which the creditcons#mer mi!ht not notice #ntil lon! after the loan transaction had beencons#mmated.

5o#ntrywide' s#ed by 5alifornia )ttorney General Aerry rown for #nfairb#siness practices and false ad(ertisin! was ma&in! hi!h costmort!a!es to homeowners with wea& credit' ad6#stable rate mort!a!es:);-s< that allowed homeowners to ma&e interestonly payments.[//]@hen ho#sin! prices decreased' homeowners in );-s then had little

incenti(e to pay their monthly payments' since their home e"#ity haddisappeared. This ca#sed 5o#ntrywideJs financial condition todeteriorate' #ltimately res#ltin! in a decision by the ffice of Thrift%#per(ision to sei?e the lender.

>ormer employees from)meri"#est' which was $nited %tatesJs leadin!wholesale lender'[/7]described a system in which they were p#shed tofalsify mort!a!e doc#ments and then sell the mort!a!es to @all %treetban&s ea!er to ma&e fast profits.[/7]There is !rowin! e(idence that

s#ch mort!a!e fra#dsmay be a ca#se of the crisis.[/7]

[edit]Deregulation

Further information: Government olicies and the subrime mortgagecrisis

5ritics s#ch as economist =a#l Er#!manand $.%. Treas#ry%ecretary Timothy Geithnerha(e ar!#ed that the re!#latory framewor&
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did not &eep pace with financial inno(ation' s#ch as the increasin!importance of the shadow ban&in! system' deri(ati(es and offbalancesheet financin!. n other cases' laws were chan!ed or enforcementwea&ened in parts of the financial system. Eey eamples incl#deB

Aimmy 5arterJs !eository "nstitutions !eregulation and Monetary

#ontrol $ctof %&'(:DD-5)< phased o#t a n#mber of restrictions onban&sJ financial practices' broadened their lendin! powers' and raisedthe deposit ins#rancelimit from H+0'000 to H100'000 :raisin! theproblem of moral ha?ard


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e(era!e ratios of in(estment ban&s increased si!nificantly 20032007

$.%. ho#seholds and financial instit#tions became increasin!ly indebtedor o(erle(era!edd#rin! the years precedin! the crisis.[*3]This increasedtheir (#lnerability to the collapse of the ho#sin! b#bble and worsenedthe ens#in! economic downt#rn[citation needed]. Eey statistics incl#deB

>ree cash #sed by cons#mers from home e"#ity etraction

do#bled from H/27 billion in 2001 to H1'+2* billion in 200, as theho#sin! b#bble b#ilt' a total of nearly H, trillion dollars o(er the period'contrib#tin! to economic !rowth worldwide.[*+][*,][*/]$.%. homemort!a!e debt relati(e to GD= increased from an a(era!e of +/Fd#rin! the 1990s to 73F d#rin! 200*' reachin! H10., trillion.[*7]

$%) ho#sehold debt as a percenta!e of ann#aldisposable

personal incomewas 127F at the end of 2007' (ers#s 77F in 1990.[**]

n 19*1' $.%. pri(ate debt was 123F of GD= by the third "#arter

of 200*' it was 290F.[*9]
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>rom 200+07' the top fi(e $.%. in(estment ban&s each

si!nificantly increased their financial le(era!e :see dia!ramannie -aeand >reddie -ac' two $.%. Go(ernment sponsored

enterprises' owned or !#aranteed nearly H, trillion in mort!a!eobli!ations at the time they were placed into conser(atorshipby the$.%. !o(ernment in %eptember 200*.[91][92]

These se(en entities were hi!hly le(era!ed and had H9 trillion in debt or!#arantee obli!ations yet they were not s#b6ect to the same re!#lationas depository ban&s.[7+][93]

[edit]inancial innovation and comple!ity

-> Dia!ram of 5D and ;-%

The term financial inno(ationrefers to the on!oin! de(elopment offinancial prod#cts desi!ned to achie(e partic#lar client ob6ecti(es' s#chas offsettin! a partic#lar ris& epos#re :s#ch as the defa#lt of aborrower< or to assist with obtainin! financin!. 4amples pertinent to this
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crisis incl#dedB the ad6#stablerate mort!a!e the b#ndlin! of s#bprimemort!a!es into mort!a!ebac&ed sec#rities:-%< orcollaterali?ed debtobli!ations:5D< for sale to in(estors' a type of sec#riti?ation and aform of credit ins#rance called credit defa#lt swaps :5D%


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The pricin! of ris& refers to the incremental compensationre"#ired byin(estors for ta&in! on additional ris&' which may be meas#red byinterest rates or fees. >or a (ariety of reasons' mar&et participants didnot acc#rately meas#re the ris& inherent with financial inno(ation s#ch

as -% and 5DJs or #nderstand its impact on the o(erall stability of thefinancial system.[10]>or eample' the pricin! model for 5Ds clearly didnot reflect the le(el of ris& they introd#ced into the system. an&sestimated that H+,0bn of 5D were sold between late 200, to themiddle of 2007 amon! the H102bn of those that had been li"#idated'A=-or!an estimated that the a(era!e reco(ery rate for hi!h "#ality5Ds was approimately 32 cents on the dollar' while the reco(ery ratefor me??anine5D was approimately fi(e cents for e(ery dollar.[97]

)nother eample..... relates to)G' which ins#red obli!ations of (ario#sfinancial instit#tions thro#!h the #sa!e of credit defa#lt swaps. The basic5D% transaction in(ol(ed )G recei(in! a premi#m in echan!e for apromise to pay money to party ) in the e(ent party defa#lted.Iowe(er' )G did not ha(e the financial stren!th to s#pport its many5D% commitments as the crisis pro!ressed and was ta&en o(er by the!o(ernment in %eptember 200*. $.%. tapayers pro(ided o(erH1*0 billion in !o(ernment s#pport to )G d#rin! 200* and early 2009'thro#!h which the money flowed to (ario#s co#nterparties to 5D%transactions' incl#din! many lar!e !lobal financial instit#tions.[9*][99]

The limitations of a widely#sed financial model also were not properly#nderstood.[100][101]This form#la ass#med that the price of 5D% wascorrelated with and co#ld predict the correct price of mort!a!e bac&edsec#rities. eca#se it was hi!hly tractable' it rapidly came to be #sed bya h#!e percenta!e of 5D and 5D% in(estors' iss#ers' and ratin!a!encies.[101])ccordin! to one wired.com articleB

Then the model fell apart. 5rac&s started appearin! early on' when financial mar&ets be!an beha(in! in ways that#sers of iJs form#la hadnJt epected. The crac&s became f#llfled!ed canyons in 200*Kwhen r#pt#res in the

financial systemJs fo#ndation swallowed #p trillions of dollars and p#t the s#r(i(al of the !lobal ban&in! system in

serio#s peril... iJsGa#ssian cop#laform#la will !o down in history as instr#mental in ca#sin! the #nfathomable

losses that bro#!ht the world financial system to its &nees. [101]
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4mbrechts[10/]and the boo& by ri!o' =alla(icini and Torresetti' thatreports rele(ant warnin!s and research on 5Ds appeared in 200/. [107]

[edit]"oom and collapse of the shadow banking system

%ec#riti?ation mar&ets were impaired d#rin! the crisis

n a A#ne 200* speech' =resident and 54 of the ew Nor& >ederal;eser(e an& Timothy GeithnerK who in 2009 became %ecretary ofthe $nited %tates Treas#ry K placed si!nificant blame for the free?in! ofcredit mar&ets on a r#n on the entities in the parallel ban&in! system'

also called the shadow ban&in! system. These entities became critical tothe credit mar&ets #nderpinnin! the financial system' b#t were nots#b6ect to the same re!#latory controls. >#rther' these entities were(#lnerable beca#se of mat#rity mismatch' meanin! that they borrowedshortterm in li"#id mar&ets to p#rchase lon!term' illi"#id and ris&yassets. This meant that disr#ptions in credit mar&ets wo#ld ma&e thems#b6ect to rapid dele(era!in!' sellin! their lon!term assets at depressedprices. Ie described the si!nificance of these entitiesB

n early 2007' assetbac&ed commercial paper cond#its' in str#ct#red in(estment (ehicles' in a#ctionrate preferred

sec#rities' tender option bonds and (ariable rate demand notes' had a combined asset si?e of ro#!hly H2.2 trillion.

)ssets financed o(erni!ht in triparty repo !rew to H2., tr illion. )ssets held in hed!e f#nds !rew to ro#!hly H1.* trillion.

The combined balance sheets of the then fi(e ma6or in(estment ban&s totaled H+ trillion. n comparison' the total

assets of the top fi(e ban& holdin! companies in the $nited %tates at that point were 6#st o(er H/ trillion' and total
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assets of the entire ban&in! system were abo#t H10 trillion. The combined effect of these factors was a financial

system (#lnerable to selfreinforcin! asset price and credit cycles. [1*]

=a#l Er#!man' la#reate of the obel =ri?e in 4conomics' described ther#n on the shadow ban&in! system as the core of what happened toca#se the crisis. Ie referred to this lac& of controls as mali!n ne!lectand ar!#ed that re!#lation sho#ld ha(e been imposed on all ban&in!li&eacti(ity.[7+]

The sec#riti?ation mar&ets s#pported by the shadow ban&in! systemstarted to close down in the sprin! of 2007 and nearly sh#tdown in thefall of 200*. -ore than a third of the pri(ate credit mar&ets th#s became#na(ailable as a so#rce of f#nds.[10*])ccordin! to the roo&in!snstit#tion' the traditional ban&in! system does not ha(e the capital to

close this !ap as of A#ne 2009B t wo#ld ta&e a n#mber of years ofstron! profits to !enerate s#fficient capital to s#pport that additionallendin! (ol#me. The a#thors also indicate that some forms ofsec#riti?ation are li&ely to (anish fore(er' ha(in! been an artifact ofecessi(ely loose credit conditions.[109]

4conomist -ar& Oanditestified to the >inancial 5risis n"#iry5ommissionin Aan#ary 2010B The sec#riti?ation mar&ets also remainimpaired' as in(estors anticipate more loan losses. n(estors are also

#ncertain abo#t comin! le!al and acco#ntin! r#le chan!es andre!#latory reforms. =ri(ate bond iss#ance of residential andcommercial mort!a!ebac&ed sec#rities' assetbac&ed sec#rities'and 5Dspea&ed in 200/ at close to H2 trillion...n 2009' pri(ateiss#ance was less than H1,0 billion' and almost all of it was assetbac&ed iss#ance s#pported by the >ederal ;eser(eJs T)> pro!ram toaid credit card' a#to and smallb#siness lenders. ss#ance of residentialand commercial mort!a!ebac&ed sec#rities and 5Ds remains

dormant.

[110]

[edit]#ommodities boom

Main article: )(((s commodities boom

;apid increases in a n#mber of commodity prices followed the collapsein the ho#sin! b#bble. The price of oil nearly tripled from H,0 to H1+7from early 2007 to 200*' before pl#n!in! as the financial crisis be!an to
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ta&e hold in late 200*.[111]4perts debate the ca#ses' with someattrib#tin! it to spec#lati(e flow of money from ho#sin! and otherin(estments into commodities' some to monetary policy'[112]and some tothe increasin! feelin! of raw materials scarcity in a fast !rowin! world'

leadin! to lon! positions ta&en on those mar&ets' s#ch as 5hineseincreasin! presence in )frica. )n increase in oil prices tends to di(ert alar!er share of cons#mer spendin! into !asoline' which createsdownward press#re on economic !rowth in oil importin! co#ntries' aswealth flows to oilprod#cin! states.[113]) pattern of spi&in! instability inthe price of oil o(er the decade leadin! #p to the price hi!h of 200* hasbeen recently identified.[11+]The destabili?in! effects of this price (ariancehas been proposed as a contrib#tory factor in the financial crisis.

n testimony before the %enate 5ommittee on 5ommerce' %cience' andTransportation on A#ne 3' 200*' former director of the 5>T5 Di(ision ofTradin! P -ar&ets :responsible for enforcement< -ichael Greenber!erspecifically named the )tlantabased ntercontinental4chan!e' fo#ndedby Goldman %achs' -or!an %tanleyand =as playin! a &ey role inspec#lati(e r#n#p of oil f#t#res prices traded off the re!#lated f#t#resechan!es in ondon and ew Nor&.[11,]Iowe(er' thentercontinental4chan!e :54< had been re!#lated by both 4#ropeanand $% a#thorities since its p#rchase of the nternational =etrole#m4chan!e in 2001. -r Greenber!er was later corrected on this matter. [11/]

Global copper prices

5opper prices increased at the same time as the oil prices. 5oppertraded at abo#t H2',00 per tonne from 1990 #ntil 1999' when it fell to
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abo#t H1'/00. The price sl#mp lasted #ntil 200+ which saw a price s#r!ethat had copper reachin! H7'0+0 per tonne in 200*.[117]

ic&elprices boomed in the late 1990s' then the price of nic&el implodedfrom aro#nd H,1'000 MQ3/'700 per metric ton in -ay 2007 to abo#tH11',,0MQ*'300 per metric ton in Aan#ary 2009. =rices were only 6#ststartin! to reco(er as of Aan#ary 2010' b#t most of )#straliaJs nic&elmines had !one ban&r#pt by then.[11*])s the price for hi!h !rade nic&els#lphateore reco(ered in 2010' so did the )#stralian nic&el minin!ind#stry.[119]

5oincidentally with these price fl#ct#ations' lon!only commodity indef#nds became pop#lar 8 by one estimate in(estment increased fromH90 billion in 200/ to H200 billion at the end of 2007' while commodity

prices increased 71F 8 which raised concern as to whether these indef#nds ca#sed the commodity b#bble.[120]The empirical research hasbeen mied.[120]

[edit]Systemic crisis

)nother analysis' different from the mainstreameplanation' is that thefinancial crisis is merely a symptom of another' deeper crisis' which is asystemic crisis of capitalism itself.[121])ccordin! to %amir )min' an4!yptian -arist economist' the constant decrease in GD= !rowthrates

in @estern co#ntriessince the early 1970s created a !rowin! s#rpl#s ofcapital which did not ha(e s#fficient profitable in(estment o#tlets in thereal economy. The alternati(e was to place this s#rpl#s into the financialmar&et' which became more profitable than capital in(estment'especially with s#bse"#ent dere!#lation.[122])ccordin! to %amir )min'this phenomenon has led to rec#rrent financial b#bbles:s#ch asthe internet b#bbleoster' a political economy analyst and editor of

the -onthly ;e(iew' belie(es that the decrease in GD= !rowth ratessince the early 1970s is d#e to increasin! mar&et sat#ration.[12+]

Aohn 5. o!lewrote d#rin! 200, that a series of #nresol(ed challen!esface capitalism that ha(e contrib#ted to past financial crises and ha(enot been s#fficiently addressedB
http://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-116http://en.wikipedia.org/wiki/Nickelhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-117http://en.wikipedia.org/wiki/Nickel_sulphatehttp://en.wikipedia.org/wiki/Nickel_sulphatehttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-118http://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-IrwinSanders2010-119http://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-IrwinSanders2010-119http://en.wikipedia.org/w/index.php?title=Financial_crisis_(2007%E2%80%93present)&action=edit&section=14http://en.wikipedia.org/wiki/Mainstreamhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-120http://en.wikipedia.org/wiki/Samir_Aminhttp://en.wikipedia.org/wiki/Economic_growthhttp://en.wikipedia.org/wiki/Western_worldhttp://en.wikipedia.org/wiki/Capital_investmenthttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-121http://en.wikipedia.org/wiki/Economic_bubblehttp://en.wikipedia.org/wiki/Internet_bubblehttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-122http://en.wikipedia.org/wiki/John_Bellamy_Fosterhttp://en.wikipedia.org/wiki/Monthly_Reviewhttp://en.wikipedia.org/wiki/Market_saturationhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-123http://en.wikipedia.org/wiki/John_C._Boglehttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-116http://en.wikipedia.org/wiki/Nickelhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-117http://en.wikipedia.org/wiki/Nickel_sulphatehttp://en.wikipedia.org/wiki/Nickel_sulphatehttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-118http://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-IrwinSanders2010-119http://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-IrwinSanders2010-119http://en.wikipedia.org/w/index.php?title=Financial_crisis_(2007%E2%80%93present)&action=edit&section=14http://en.wikipedia.org/wiki/Mainstreamhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-120http://en.wikipedia.org/wiki/Samir_Aminhttp://en.wikipedia.org/wiki/Economic_growthhttp://en.wikipedia.org/wiki/Western_worldhttp://en.wikipedia.org/wiki/Capital_investmenthttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-121http://en.wikipedia.org/wiki/Economic_bubblehttp://en.wikipedia.org/wiki/Internet_bubblehttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-122http://en.wikipedia.org/wiki/John_Bellamy_Fosterhttp://en.wikipedia.org/wiki/Monthly_Reviewhttp://en.wikipedia.org/wiki/Market_saturationhttp://en.wikipedia.org/wiki/Financial_crisis_(2007%E2%80%93present)#cite_note-123http://en.wikipedia.org/wiki/John_C._Bogle


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5orporate )merica went astray lar!ely beca#se the power of mana!ers went (irt#ally #nchec&ed by o#r !ate&eepers

for far too lon!...They failed to J&eep an eye on these !eni#sesJ to whom they had entr#sted the responsibility of the

mana!ement of )mericaJs !reat corporations.

Ie cites partic#lar iss#es' incl#din!B[12,][12/]

-ana!erJs capitalism which he ar!#es has replaced ownerJs

capitalism' meanin! mana!ement r#ns the firm for its benefit ratherthan for the shareholders' a (ariation on the principala!ent problem

#r!eonin! eec#ti(e compensation

-ana!ed earnin!s' mainly a foc#s on share price rather than the

creation of !en#ine (al#e and

The fail#re of !ate&eepers' incl#din! a#ditors' boards of directors'

@all %treet analysts' and career politicians.

)n analysis cond#cted by -ar& ;oeder' a former eec#ti(e at the %wissbased $%an&' s#!!ested that lar!e scale moment#m' or The i!-oplayed a pi(otal role in the 200*09 !lobal financial crisis. ;oeders#!!ested that recent technolo!ical ad(ances' s#ch as comp#terdri(entradin! pro!rams' to!ether with the increasin!ly interconnected nat#re of

mar&ets' has ma!nified the moment#m effect. This has made thefinancial sector inherently #nstable. [127]

;obert ;eichhas attrib#ted the c#rrent economic downt#rn to thesta!nation of wa!es in the $nited %tates' partic#larly those of the ho#rlywor&ers who comprise *0F of the wor&force. Iis claim is that thissta!nation forced the pop#lation to borrow in order to meet the cost ofli(in!.[12*]

[edit]$ole of economic forecasting

The financial crisis was not widely predicted by mainstream economists'who instead spo&e of The Great -oderation. ) n#mber of heterodoeconomistspredicted the crisis' with (aryin! ar!#ments. Dir& e?emer inhis research[129]credits :with s#pportin! ar!#ment and estimates oftimin!< 12 economists with predictin! the crisisB Deana&er:$%red Iarrison:$E


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I#dson:$%


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[edit]>inancial mar&ets impacts

[edit]Impacts on financial institutions

See also: Nationalisation of Northern ,ockand Federal takeover ofFannie Mae and Freddie Mac

2007 ban& r#n on orthern ;oc&'a $E ban&

The nternational -onetary >#nd estimated that lar!e $.%. and4#ropean ban&s lost more than H1 trillion on toic assets and from badloans from Aan#ary 2007 to %eptember 2009. These losses areepected to top H2.* trillion from 200710. $.%. ban&s losses wereforecast to hit H1 trillion and 4#ropean ban& losses will reach H1./ trillion.The -> estimated that $.%. ban&s were abo#t /0F thro#!h their losses'b#t ritish and e#ro?one ban&s only +0F.[1+2]

ne of the first (ictims was orthern ;oc&' a medi#msi?ed ritish ban&.[1+3]The hi!hly le(era!ednat#re of its b#siness led the ban& to re"#estsec#rity from the an& of 4n!land. This in t#rn led to in(estor panic anda ban& r#n[1++]in mid%eptember 2007. 5alls by iberal DemocratTreas#ry %po&esman ince 5ableto nationalisethe instit#tion wereinitially i!nored in >ebr#ary 200*' howe(er' the ritish!o(ernment:ha(in! failed to find a pri(ate sector b#yer< relented' andthe ban& was ta&en into p#blic hands. orthern ;oc&Js problemspro(ed

to be an early indication of the tro#bles that wo#ld soon befall otherban&s and financial instit#tions.

nitially the companies affected were those directly in(ol(ed in homeconstr#ction and mort!a!e lendin! s#ch as orthern ;oc&and5o#ntrywide >inancial' as they co#ld no lon!er obtain financin!thro#!h the credit mar&ets. (er 100 mort!a!e lenders went ban&r#pt
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d#rin! 2007 and 200*. 5oncerns that in(estment ban& ear%tearnswo#ld collapse in -arch 200* res#lted in its firesale to A=-or!an 5hase. The financial instit#tion crisis hit its pea& in %eptemberand ctober 200*. %e(eral ma6or instit#tions either failed' were ac"#ired

#nder d#ress' or were s#b6ect to !o(ernment ta&eo(er. Theseincl#ded ehman rothers' -errill ynch' >annie -ae' >reddie-ac' @ashin!ton -#t#al'@acho(ia' and)G.[1+,]

[edit]#redit markets and the shadow banking system

T4D spread and components d#rin! 200*

D#rin! %eptember 200*' the crisis hit its most critical sta!e. There wasthe e"#i(alent of a ban& r#non the money mar&et m#t#al f#nds' whichfre"#ently in(est in commercial paperiss#ed by corporations to f#ndtheir operations and payrolls. @ithdrawal from money mar&ets wereH1++., billion d#rin! one wee&' (ers#s H7.1 billion the wee& prior. Thisinterr#pted the ability of corporations to rollo(er :replace< their shorttermdebt. The $.%. !o(ernment responded by etendin! ins#rance formoney mar&et acco#nts analo!o#s to ban& deposit ins#rance(ia a

temporary !#arantee[1+/]and with >ederal ;eser(e pro!rams to p#rchasecommercial paper. The T4D spread' an indicator of percei(ed credit ris&in the !eneral economy' spi&ed #p in A#ly 2007' remained (olatile for ayear' then spi&ed e(en hi!her in %eptember 200*'[1+7]reachin! a record+./,F on ctober 10' 200*.
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n a dramatic meetin! on %eptember 1*' 200*' Treas#ry%ecretary Ienry =a#lsonand >ed 5hairman en ernan&emet with &eyle!islators to propose a H700 billion emer!ency bailo#t. ernan&ereportedly told themB f we donJt do this' we may not ha(e an economy

on -onday.[1+*]The4mer!ency 4conomic %tabili?ation )ct' whichimplemented the Tro#bled )sset ;elief =ro!ram:T);=


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The ew Nor& 5ity head"#arters of ehman rothers

There is a direct relationship between declines in wealth' and declines incons#mption and b#siness in(estment' which alon! with !o(ernmentspendin! represent the economic en!ine. etween A#ne 2007 ando(ember 200*' )mericans lost an estimated a(era!e of more than a"#arter of their collecti(e net worth[citation needed]. y early o(ember 200*' abroad $.%. stoc& inde the %P= ,00' was down +,F from its 2007 hi!h.Io#sin! prices had dropped 20F from their 200/ pea&' with f#t#resmar&ets si!nalin! a 303,F potential drop. Total home e"#ity in the$nited %tates' which was (al#ed at H13 trillion at its pea& in 200/' had

dropped to H*.* trillion by mid200* and was still fallin! in late 200*.Total retirement assets' )mericansJ secondlar!est ho#sehold asset'dropped by 22F' from H10.3 trillion in 200/ to H* trillion in mid200*.D#rin! the same period' sa(in!s and in(estment assets :apart fromretirement sa(in!s< lost H1.2 trillion and pension assets lost H1.3 trillion.Ta&en to!ether' these losses total a sta!!erin! H*.3 trillion.[1,2]%incepea&in! in the second "#arter of 2007' ho#sehold wealth is downH1+ trillion.[1,3]

>#rther' $.%. homeowners had etracted si!nificant e"#ity in their homesin the years leadin! #p to the crisis' which they co#ld no lon!er do onceho#sin! prices collapsed. >ree cash #sed by cons#mers from homee"#ity etraction do#bled from H/27 billion in 2001 to H1'+2* billion in200, as the ho#sin! b#bble b#ilt' a total of nearly H, trillion o(er theperiod.[*+][*,][*/]$.%. home mort!a!e debt relati(e to GD= increased from
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an a(era!e of +/F d#rin! the 1990s to 73F d#rin! 200*' reachin!H10., trillion.[*7]

To offset this decline in cons#mption and lendin! capacity' the $.%.!o(ernment and $.%. >ederal ;eser(e ha(e committed H13.9 trillion' ofwhich H/.* trillion has been in(ested or spent' as of A#ne 2009. [1,+]neffect' the >ed has !one from bein! the lender of last resort to thelender of only resort for a si!nificant portion of the economy. n somecases the >ed can now be considered the b#yer of last resort.

4conomist Dean a&ereplained the red#ction in the a(ailability ofcredit this wayB

Nes' cons#mers and b#sinesses canJt !et credit as easily as they co#ld a year a!o. There is a really !ood reason for

ti!hter credit. Tens of millions of homeowners who had s#bstantial e"#ity in their homes two years a!o ha(e little ornothin! today. #sinesses are facin! the worst downt#rn since the Great Depression.This matters for credit

decisions. ) homeowner with e"#ity in her home is (ery #nli&ely to defa#lt on a car loan or credit card debt. They will

draw on this e"#ity rather than lose their car andMor ha(e a defa#lt placed on their credit record. n the other hand' a

homeowner who has no e"#ity is a serio#s defa#lt ris&. n the case of b#sinesses' their creditworthiness depends on

their f#t#re profits. =rofit prospects loo& m#ch worse in o(ember 200* than they did in o(ember 2007 :of co#rse'

to cleareyed analysts' they didnJt loo& too !ood a year a!o either


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oth -% and 5D were p#rchased by corporate and instit#tionalin(estors !lobally. Deri(ati(es s#ch as credit defa#lt swaps alsoincreased the lin&a!e between lar!e financial instit#tions. -oreo(er'the dele(era!in!of financial instit#tions' as assets were sold to pay

bac& obli!ations that co#ld not be refinanced in fro?en credit mar&ets'f#rther accelerated the sol(ency crisis and ca#sed a decrease ininternational trade.

@orld political leaders' national ministers of finance and central ban&directors coordinated their efforts[1/1]to red#ce fears' b#t the crisiscontin#ed. )t the end of ctober 200* a c#rrency crisis de(eloped' within(estors transferrin! (ast capital reso#rces into stron!er c#rrenciess#ch as the yen' the dollar and the %wiss franc' leadin! many emer!ent

economies to see& aid from the nternational -onetary >#nd.[1/2][1/3]

[edit]4ffects on the !lobal economy

Main article: -ate.)(((s recession

[edit]Global effects

) n#mber of commentators ha(e s#!!ested that if the li"#idity crisiscontin#es' there co#ld be an etended recessionor worse.[1/+]Thecontin#in! de(elopment of the crisis has prompted in some "#arters

fears of a !lobal economic collapsealtho#!h there are now manyca#tio#sly optimistic forecasters in addition to some prominent so#rceswho remain ne!ati(e.[1/,]The financial crisis is li&ely to yield the bi!!estban&in! sha&eo#t since the sa(in!sandloan meltdown. [1//]n(estmentban& $%stated on ctober / that 200* wo#ld see a clear !lobalrecession' with reco(ery #nli&ely for at least two years. [1/7]Three dayslater $% economists anno#nced that the be!innin! of the end of thecrisis had be!#n' with the world startin! to ma&e the necessary actionsto fi the crisisB capitalin6ection by !o(ernments in6ection made

systemically interest rate c#ts to help borrowers. The $nited Ein!domhad started systemic in6ection' and the worldJs central ban&s were nowc#ttin! interest rates. $% emphasi?ed the $nited %tates needed toimplement systemic in6ection. $% f#rther emphasi?ed that this fiesonly the financial crisis' b#t that in economic terms the worst is still tocome.[1/*]$% "#antified their epected recession d#rations on ctober
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financial crisis 200-present

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