What was the main root cause of the 2008-09 economic crisis?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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This is a controversial topic and the answer to the question tends to depend on the political opinions of the person answering.

We know that the economic crisis came about because the housing bubble burst.  House prices were too high and too many people had borrowed too much money to buy houses.  In addition, too many financial institutions had too much money wrapped up in "bets" that the housing market would keep going up and the mortgages that people took out would not come back to haunt them.  All of this came crashing down when housing prices fell.

But that makes us ask why housing prices were so high and why so many bad loans were out there.  Here is where views differ.

Conservatives argue that government regulation caused the problem.  They say government agencies pushed for more loans to high risk borrowers.  They say the government created moral hazard by insuring too many mortgages.  In this view, the bubble would not have happened had it not been for government intervention.

Liberals would argue that big business caused the problem.  They would point to predatory lending policies on the part of the banks.  They would also point to a lack of regulation in the financial markets.  This lack of regulation allowed the creation of complicated derivatives that were based on the value of the mortgages.  All of this manipulation by businesses caused the bubble and it caused the financial system to be too dependent on high housing prices.

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