Why was there a financial crisis in the United States in 2008?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

This is a question that is subject to a tremendous amount of disagreement.  One’s answer to this question generally depends on whether one is a Democrat or a Republican.  There is general agreement on the idea that the crisis was caused by a housing bubble, but there is much disagreement as to why that bubble existed and why it led to a crisis.

During the early 2000s, the US housing market boomed, creating a bubble.  House prices went up too rapidly.  People took on what proved to be more debt than they could afford to buy those houses.  When the bubble started to leak in 2007, many homeowners could not pay their debts.  They suffered, as did the banks that loaned them the money.

While this much is beyond question, there is disagreement as to why the bubble existed and why it was so serious.  Republicans tend to say the bubble existed because of government policies (“Fannie Mae” is an example of this) that encouraged lenders to loan to people who could not afford it.  Democrats argue that the bubble existed because lenders were engaging in predatory and unscrupulous practices, pushing people into loans that were too big for them.  Republicans say the crash was made worse by things like government bailouts while Democrats say it was exacerbated by the fact that financial companies were creating complicated financial products such as mortgage-backed derivatives that no one understood and which caused the financial system to collapse.

Thus, Republicans generally say the root cause was too much regulation while Democrats blame greedy companies and a lack of regulation.

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narukami's profile pic

narukami | (Level 1) Salutatorian

Posted on

While it is true that the collapse of the housing market lead to the 'Great Recession' we might also note this contributing element: You can not fight two very expensive wars while giving everyone a substantial tax cut, ALL with borrowed money, and not have an adverse impact upon the economy.  

Eventually the bill must be paid.  Everyone wants to attend the party but no one wants to stay and clean up.  

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