What Caused the Current Financial Crisis?
The current U.S. (and world) financial crisis started only two years ago, but there is also an emerging consensus of what caused it, thanks to the work of Paul Krugman, Robert Shiller, Jeremy Siegel and even graphic artist Jonathan Jarvis:
1. The Federal Reserve Bank lowered interest rates to 1% in the beginning of the decade to stave off a recession, after the dot.com bust and 9/11.
2. Greedy mortgage lenders lowered lending standards, stimulating the housing market to gallop ahead of real income growth. The Federal Reserve bank did nothing about the resulting real estate “bubble.”
3. Wall Street institutions created new financial products that allowed mortgages to be securitized and then resold from the institutions who knew the lenders to those who did not, making it an even more attractive source of profit for original lenders.
4. Wall Street firms such as Bear Stearns and Lehman Brothers took on unimaginable amounts of leverage, edging themselves even closer to the precipice, sometimes with little or no direction from their boards.
5. Abandonment of the Glass-Steagall Act of 1933 meant that troubled financial behemoths such as Citigroup were ill-equipped to lend to consumers and small businesses once the financial crisis hit.
To start learning about the causes of the financial crisis at an easier pace try visiting Financial Crisis for Beginners.
Also, David Rudofsky conducted a free webinar on 7/14/09, titled: “Financial Crisis: How Did We Get Here?” which is archived at the Webex site.
