2008 financial crisis#Prediction by economists

File:GDP Real Growth in 2009.svg for 2009 (countries in brown were in recession)]]

File:NYUGDPFinancialShare.jpg at New York University, link to blog [http://pages.stern.nyu.edu/~sternfin/crisis/]]]The crisis sparked the Great Recession, which, at the time, was the most severe global recession since the Great Depression.{{Cite web |last=Gopinath |first=Gita |date=April 14, 2020 |title=The Great Lockdown: Worst Economic Downturn Since the Great Depression |url=https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/ |archive-url=https://web.archive.org/web/20250213023027/https://www.imf.org/en/Blogs/Articles/2020/04/14/blog-weo-the-great-lockdown-worst-economic-downturn-since-the-great-depression |archive-date=2025-02-13 |work=International Monetary Fund}}{{cite press release |title=Three Top Economists Agree 2009 Worst Financial Crisis Since Great Depression; Risks Increase if Right Steps are Not Taken |date=February 13, 2009 |publisher=Business Wire |url=https://www.businesswire.com/news/home/20090213005161/en/Top-Economists-Agree-2009-Worst-Financial-Crisis |archive-url=https://web.archive.org/web/20221207125712/https://www.businesswire.com/news/home/20090213005161/en/Top-Economists-Agree-2009-Worst-Financial-Crisis |archive-date=2022-12-07}}{{Cite news |title=The Great Depression(s) of 1929–1933 and 2007–2009? Parallels, Differences and Policy Lessons| ssrn=2612243| publisher=Hungarian Academy of Science | date=July 1, 2015 | first1=Peter| last1=Eigner |first2=Thomas S.| last2=Umlauft}}{{Cite web| title=A tale of two depressions: What do the new data tell us?| url=https://voxeu.org/article/tale-two-depressions-what-do-new-data-tell-us-february-2010-update |website=VoxEU.org |last1=Eichengreen| last2=O'Rourke| date=March 8, 2010}}{{Cite journal |first=Peter |last=Temin |year=2010 |title=The Great Recession & the Great Depression |journal=Daedalus |volume=139 |issue=4 |pages=115–124 |doi=10.1162/DAED_a_00048 |hdl=1721.1/60250 |s2cid=57568335 |url=https://dspace.mit.edu/bitstream/1721.1/60250/1/Temin-2010-The%20Great%20Recession.pdf|hdl-access=free |issn = 0011-5266 }} It was also followed by the European debt crisis, which began with a deficit in Greece in late 2009, and the 2008–2011 Icelandic financial crisis, which involved the bank failure of all three of the major banks in Iceland and, relative to the size of its economy, was the largest economic collapse suffered by any country in history.{{cite news |date=December 11, 2008 |title=Cracks in the crust |url=https://www.economist.com/briefing/2008/12/11/cracks-in-the-crust |url-access=subscription |archive-url=https://web.archive.org/web/20250111235019/https://www.economist.com/briefing/2008/12/11/cracks-in-the-crust |archive-date=2025-01-11 |newspaper=The Economist}} It was among the five worst financial crises the world had experienced and led to a loss of more than $2 trillion from the global economy.{{Cite web |title=5 of the World's Most Devastating Financial Crises |url=https://www.britannica.com/story/5-of-the-worlds-most-devastating-financial-crises |archive-url=https://web.archive.org/web/20250129133042/https://www.britannica.com/story/5-of-the-worlds-most-devastating-financial-crises |archive-date=2025-01-29 |access-date=December 19, 2023 |website=Encyclopedia Britannica |language=en}}{{Cite news|last=Merle|first=Renae|title=A guide to the financial crisis – 10 years later|language=en-US|newspaper=The Washington Post|url=https://www.washingtonpost.com/business/economy/a-guide-to-the-financial-crisis--10-years-later/2018/09/10/114b76ba-af10-11e8-a20b-5f4f84429666_story.html|access-date=November 24, 2020|issn=0190-8286}} U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 (~${{Format price|{{Inflation|index=US-GDP|value=10500000000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}) trillion. The increase in cash out refinancings, as home values rose, fueled an increase in consumption that could no longer be sustained when home prices declined. Many financial institutions owned investments whose value was based on home mortgages such as mortgage-backed securities, or credit derivatives used to insure them against failure, which declined in value significantly.{{cite news |last=Uchitelle |first=Louis |author-link=Louis Uchitelle |date=September 18, 2008 |title=Pain Spreads as Credit Vise Grows Tighter |url=https://www.nytimes.com/2008/09/19/business/economy/19econ.html |url-access=subscription |archive-url=https://web.archive.org/web/20090225230431/http://www.nytimes.com/glogin?URI=http://www.nytimes.com/2008/09/19/business/economy/19econ.html&OQ=_rQ3D1&OP=53cd68c3Q2F8(KC8Q5Bzepszz0Q248Q24))Q228)t8Ft8CqpDZKpp8KezZz9Q268FtKezZQ25v09n |archive-date=2009-02-25 |work=The New York Times}}{{cite news |last=Sorkin |first=Andrew Ross |author-link=Andrew Ross Sorkin |date=September 14, 2008 |title=Lehman Files for Bankruptcy; Merrill Is Sold |url=https://archive.nytimes.com/www.nytimes.com/2008/09/15/business/15lehman.html |work=The New York Times|access-date=February 15, 2025}}{{cite news |last=Werdigier |first=Julia |date=September 17, 2008 |title=Lloyds Bank Is Discussing Purchase of British Lender |url=https://www.nytimes.com/2008/09/18/business/worldbusiness/18lloyds.html |url-access=subscription |archive-url=https://web.archive.org/web/20250126183726/https://www.nytimes.com/2008/09/18/business/worldbusiness/18lloyds.html |archive-date=2025-01-26 |work=The New York Times}} The International Monetary Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009.{{cite news |url=https://www.reuters.com/article/banks-writedowns-losses-idCNL554155620091105?rpc=44 |title=Factbox–U.S., European bank write-downs, credit losses |work=Reuters | date=November 5, 2009}}

Lack of investor confidence in bank solvency and declines in credit availability led to plummeting stock and commodity prices in late 2008 and early 2009.{{cite news |first=Ambrose |last=Evans-Pritchard |title=Dollar tumbles as huge credit crunch looms |url=https://www.telegraph.co.uk/expat/4204516/Dollar-tumbles-as-huge-credit-crunch-looms.html |archive-url=https://ghostarchive.org/archive/20220110/https://www.telegraph.co.uk/expat/4204516/Dollar-tumbles-as-huge-credit-crunch-looms.html |archive-date=January 10, 2022 |url-access=subscription |url-status=live |work=The Daily Telegraph |date=July 25, 2007}}{{cbignore}} The crisis rapidly spread into a global economic shock, resulting in several bank failures.{{cite news |last=Norris |first=Floyd |author-link=Floyd Norris |date=October 24, 2008 |title=United Panic |url=https://economix.blogs.nytimes.com//2008/10/24/united-panic |url-access=subscription |archive-url=https://web.archive.org/web/20230501200556/https://archive.nytimes.com/economix.blogs.nytimes.com/2008/10/24/united-panic/ |archive-date=2023-05-01 |work=The New York Times}} Economies worldwide slowed during this period since credit tightened and international trade declined.{{cite web |date=April 2009 |title=World Economic Outlook: Crisis and Recovery, April 2009 |url=http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf |archive-url=https://web.archive.org/web/20250126163230/https://www.imf.org/~/media/Websites/IMF/imported-flagship-issues/external/pubs/ft/weo/2009/01/pdf/_textpdf.ashx |archive-date=2025-01-26}} Housing markets suffered and unemployment soared, resulting in evictions and foreclosures. Several businesses failed.{{cite web |last1=Baily |first1=Martin Neil |last2=Elliott |first2=Douglas J. |date=June 15, 2009 |title=The U.S. Financial and Economic Crisis: Where Does It Stand and Where Do We Go From Here? |url=https://www.brookings.edu/research/the-u-s-financial-and-economic-crisis-where-does-it-stand-and-where-do-we-go-from-here/ |archive-url=https://web.archive.org/web/20241203023846/https://www.brookings.edu/articles/the-u-s-financial-and-economic-crisis-where-does-it-stand-and-where-do-we-go-from-here/ |archive-date=2024-12-03 |work=Brookings Institution}}{{cite news |last=Williams |first=Carol J. |date=May 22, 2012 |title=Euro crisis imperils recovering global economy, OECD warns |url=https://latimesblogs.latimes.com/world_now/2012/05/eurozone-crisis-global-economy.html |url-access=subscription |archive-url=https://web.archive.org/web/20241224191234/https://www.latimes.com/archives/blogs/world-now/story/2012-05-22/euro-crisis-imperils-recovering-global-economy-oecd-warns |archive-date=2024-12-24 |work=Los Angeles Times}} From its peak in the second quarter of 2007 at $61.4 trillion, household wealth in the United States fell $11 trillion, to $50.4 trillion by the end of the first quarter of 2009, resulting in a decline in consumption, then a decline in business investment.{{cite news |last=Luhby |first=Tami |date=June 11, 2009 |title=Americans' wealth drops $1.3 trillion: Fed report shows a decline of home values and the stock market cut the nation's wealth to $50.4 trillion |url=https://money.cnn.com/2009/06/11/news/economy/Americans_wealth_drops/?postversion=2009061113 |archive-url=https://web.archive.org/web/20250207103327/https://money.cnn.com/2009/06/11/news/economy/Americans_wealth_drops/?postversion=2009061113 |archive-date=2025-02-07 |work=CNN}} In the fourth quarter of 2008, the quarter-over-quarter decline in real GDP in the U.S. was 8.4%.{{cite web |url=https://fred.stlouisfed.org/series/A191RL1Q225SBEA | title=Real Gross Domestic Product | date=April 1947 | publisher=Federal Reserve Economic Data}} The U.S. unemployment rate peaked at 11.0% in October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours per work week declined to 33, the lowest level since the government began collecting the data in 1964.{{cite web |title=Labor Force Statistics from the Current Population Survey |url=https://data.bls.gov/timeseries/LNS14000000 |archive-url=https://web.archive.org/web/20250214065916/https://data.bls.gov/timeseries/LNS14000000 |archive-date=2025-02-14 |publisher=Bureau of Labor Statistics}}{{cite web |date=February 2012 |title=The Recession of 2007–2009 |url=https://www.bls.gov/spotlight/2012/recession/pdf/recession_bls_spotlight.pdf |archive-url=https://web.archive.org/web/20250212015752/https://www.bls.gov/spotlight/2012/recession/pdf/recession_bls_spotlight.pdf |archive-date=2025-02-12 |publisher=Bureau of Labor Statistics}}

The economic crisis started in the U.S. but spread to the rest of the world. U.S. consumption accounted for more than a third of the growth in global consumption between 2000 and 2007 and the rest of the world depended on the U.S. consumer as a source of demand.{{citation needed|date=April 2023}}{{Cite news |date=2023-09-28 |title=What China's economic problems mean for the world |url=https://www.bbc.com/news/business-66840367 |archive-url=https://web.archive.org/web/20250206201909/https://www.bbc.com/news/business-66840367 |archive-date=2025-02-06 |access-date=2024-03-11 |language=en-GB}}{{Cite web |title=ConsumerSignals |url=https://www2.deloitte.com/us/en/insights/industry/retail-distribution/consumer-behavior-trends-state-of-the-consumer-tracker.html |archive-url=https://web.archive.org/web/20241212151939/https://www2.deloitte.com/us/en/insights/industry/retail-distribution/consumer-behavior-trends-state-of-the-consumer-tracker.html |archive-date=2024-12-12 |access-date=2024-03-11 |website=Deloitte Insights |language=en-us}} Toxic securities were owned by corporate and institutional investors globally. Derivatives such as credit default swaps also increased the linkage between large financial institutions. The de-leveraging of financial institutions, as assets were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated the solvency crisis and caused a decrease in international trade. Reductions in the growth rates of developing countries were due to falls in trade, commodity prices, investment and remittances sent from migrant workers (example: ArmeniaAn example of a developing country which suffered decreases in these fields is Armenia. According to World Bank data, the foreign direct investment decreased from 2008 until 2021 (see {{Cite web |title=Foreign direct investment, net inflows (% of GDP) – Armenia |url=https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?end=2019&locations=AM&start=2000 |access-date=May 12, 2021 |website=data.worldbank.org }}). Moreover, the remittances also decreased after 2007/08, then fluctuated (see {{Cite web |title=Personal remittances, received (% of GDP) – Armenia |url=https://data.worldbank.org/indicator/BX.TRF.PWKR.DT.GD.ZS?end=2019&locations=AM&start=2000 |access-date=May 12, 2021 |website=data.worldbank.org }}). This led to a dramatic rise in the number of households living below the poverty line (see {{cite web |url=https://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/3705.pdf |title=The global financial crisis and developing countries: taking stock, taking action |work=Overseas Development Institute |date=September 2009 |access-date=June 17, 2022 |archive-date=July 12, 2020 |archive-url=https://web.archive.org/web/20200712194416/https://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/3705.pdf |url-status=dead }}). The poverty headcount ratio at $1.90 (~${{Format price|{{Inflation|index=US|value=1.9|start_year=2007}}}} in {{Inflation/year|US}}) a day increased after 2007/08, from 0.9% to 1.2% (see {{Cite web |title=Poverty headcount ratio at $1.90 a day (2011 PPP) (% of population) – Armenia |url=https://data.worldbank.org/indicator/SI.POV.DDAY?locations=AM |access-date=May 12, 2021 |website=data.worldbank.org }}).). States with fragile political systems feared that investors from Western states would withdraw their money because of the crisis.{{cite web |last=Wenn |first=Bruno |date=January 2013 |title=Exceedingly high interest rates |url=https://www.dandc.eu/en/article/european-bank-regulators-would-do-well-learn-their-latin-american-counterparts |archive-url=https://web.archive.org/web/20241212175814/https://www.dandc.eu/en/article/european-bank-regulators-would-do-well-learn-their-latin-american-counterparts |archive-date=2024-12-12 |publisher=D+C Development and Cooperation}}

As part of national fiscal policy response to the Great Recession, governments and central banks, including the Federal Reserve, the European Central Bank and the Bank of England, provided then-unprecedented trillions of dollars in bailouts and stimulus, including expansive fiscal policy and monetary policy to offset the decline in consumption and lending capacity, avoid a further collapse, encourage lending, restore faith in the integral commercial paper markets, avoid the risk of a deflationary spiral, and provide banks with enough funds to allow customers to make withdrawals.{{Cite web |title=The Federal Reserve's Policy Actions during the Financial Crisis and Lessons for the Future |url=https://www.federalreserve.gov/newsevents/speech/kohn20100513a.htm |archive-url=https://web.archive.org/web/20250209211153/https://www.federalreserve.gov/newsevents/speech/kohn20100513a.htm |archive-date=2025-02-09 |access-date=2024-03-11 |website=Board of Governors of the Federal Reserve System |language=en}} In effect, the central banks went from being the "lender of last resort" to the "lender of only resort" for a significant portion of the economy. In some cases the Fed was considered the "buyer of last resort".{{cite news |date=February 14, 2009 |title=US Congress passes stimulus plan |url=http://news.bbc.co.uk/2/hi/business/7889897.stm |archive-url=https://web.archive.org/web/20250212163027/http://news.bbc.co.uk/2/hi/business/7889897.stm |archive-date=2025-02-12 |work=BBC News}}{{cite news|date=Summer 2009|title=Government Support for Financial Assets and Liabilities Announced in 2008 and Soon Thereafter ($ in billions)|page=7|work=Federal Deposit Insurance Corporation|url=https://www.fdic.gov/regulations/examinations/supervisory/insights/sisum09/si_sum09.pdf|access-date=June 8, 2020|archive-date=July 31, 2020|archive-url=https://web.archive.org/web/20200731161912/https://www.fdic.gov/regulations/examinations/supervisory/insights/sisum09/si_sum09.pdf|url-status=dead}}{{cite news |last=Collins |first=Mike |date=July 14, 2015 |title=The Big Bank Bailout |url=https://www.forbes.com/sites/mikecollins/2015/07/14/the-big-bank-bailout/ |archive-url=https://web.archive.org/web/20250208023403/https://www.forbes.com/sites/mikecollins/2015/07/14/the-big-bank-bailout/ |archive-date=2025-02-08 |work=Forbes}}{{cite web|date=July 2012|title=Federal Reserve Liquidity Provision during the Financial Crisis of 2007–2009|url=http://www.newyorkfed.org/research/staff_reports/sr563.pdf|publisher=Federal Reserve Bank of New York}}{{cite web |last=Singh |first=Kavaljit |year=2010 |title=Fixing Global Finance: A Developing Country Perspective on Global Financial Reforms |url=http://www.bibalex.org/Search4Dev/files/400653/344463.pdf |archive-url=https://web.archive.org/web/20250121112649/http://www.bibalex.org/Search4Dev/files/400653/344463.pdf |archive-date=2025-01-21 |publisher=Centre for Research on Multinational Corporations}} During the fourth quarter of 2008, these central banks purchased US$2.5 (~${{Format price|{{Inflation|index=US-GDP|value=2500000000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}) trillion of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action in world history. Following a model initiated by the 2008 United Kingdom bank rescue package,{{cite book|last1=Langley|first1=Paul|url=https://books.google.com/books?id=FhGaBQAAQBAJ&pg=PA86|title=Liquidity Lost: The Governance of the Global Financial Crisis|date=2015|publisher=Oxford University Press|isbn=978-0-19-968378-9|pages=83–86}}{{cite news |last=Krugman |first=Paul |author-link=Paul Krugman |date=October 12, 2008 |title=Gordon Does Good |url=https://www.nytimes.com/2008/10/13/opinion/13krugman.html |url-access=subscription |archive-url=https://web.archive.org/web/20250118165542/https://www.nytimes.com/2008/10/13/opinion/13krugman.html |archive-date=2025-01-18 |work=The New York Times}} the governments of European nations and the United States guaranteed the debt issued by their banks and raised the capital of their national banking systems, ultimately purchasing $1.5 trillion newly issued preferred stock in major banks. The Federal Reserve created then-significant amounts of new currency as a method to combat the liquidity trap.{{cite news |last=Stiglitz |first=Joseph |author-link=Joseph Stiglitz |date=November 5, 2010 |title=New $600B Fed Stimulus Fuels Fears of US Currency War |url=https://www.democracynow.org/2010/11/5/new_600b_fed_stimulus_fuels_fears |archive-url=https://web.archive.org/web/20250214143758/https://www.democracynow.org/2010/11/5/new_600b_fed_stimulus_fuels_fears |archive-date=2025-02-14 |work=Democracy Now}}

Bailouts came in the form of trillions of dollars of loans, asset purchases, guarantees, and direct spending.{{cite web|title=CNNMoney.com's bailout tracker|url=https://money.cnn.com/news/storysupplement/economy/bailouttracker/index.html|publisher=CNN}} Significant controversy accompanied the bailouts, such as in the case of the AIG bonus payments controversy, leading to the development of a variety of "decision making frameworks", to help balance competing policy interests during times of financial crisis.{{cite journal|last=Wafa |first=Tim|date=October 4, 2010|title=When Policies Collide: A Decision Making Framework for Financial System Overhaul in the 21st Century|journal=Social Science Research Network|ssrn=1686982}} Alistair Darling, the U.K.'s Chancellor of the Exchequer at the time of the crisis, stated in 2018 that Britain came within hours of "a breakdown of law and order" the day that Royal Bank of Scotland was bailed-out.{{Cite news|last=Martin|first=Will|date=May 28, 2018|title='It sent a tremor down my back': Alistair Darling reveals how Britain came within hours of the 'breakdown of law and order'|work=Business Insider|url=https://www.businessinsider.com/alistair-darling-uk-breakdown-of-law-and-order-financial-crisis-2018-5}} Instead of financing more domestic loans, some banks instead spent some of the stimulus money in more profitable areas such as investing in emerging markets and foreign currencies.{{cite news|last1=Wheatley|first1=Jonathan|last2=Garnham|first2=Peter|date=November 5, 2010|title=Brazil in 'currency war' alert|work=Financial Times|url=https://www.ft.com/content/33ff9624-ca48-11df-a860-00144feab49a}}

In July 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the United States to "promote the financial stability of the United States".{{USPL|111|203}} The Basel III capital and liquidity standards were adopted worldwide.{{cite journal|title=Monitoring adoption of Basel standards|date=October 18, 2017|url=https://www.bis.org/bcbs/implementation/rcap_reports.htm|journal=Bank for International Settlements}} Since the 2008 financial crisis, consumer regulators in America have more closely supervised sellers of credit cards and home mortgages in order to deter anticompetitive practices that led to the crisis.{{Cite journal|last=Van Loo|first=Rory|date=April 1, 2015|title=Helping Buyers Beware: The Need for Supervision of Big Retail|url=https://scholarship.law.bu.edu/faculty_scholarship/29|journal=University of Pennsylvania Law Review|volume=163|issue=5|page=1311}}

At least two major reports on the causes of the crisis were produced by the U.S. Congress: the Financial Crisis Inquiry Commission report, released January 2011, and a report by the United States Senate Homeland Security Permanent Subcommittee on Investigations entitled Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, released April 2011.

In total, 47 bankers served jail time as a result of the crisis, over half of which were from Iceland, where the crisis was the most severe and led to the collapse of all three major Icelandic banks.{{cite news|last1=Noonan|first1=Laura|last2=Tilford|first2=Cale|last3=Milne|first3=Richard|last4=Mount|first4=Ian|last5=Wise|first5=Peter|date=September 20, 2018|title=Who went to jail for their role in the financial crisis?|work=Financial Times|url=https://ig.ft.com/jailed-bankers/}} In April 2012, Geir Haarde of Iceland became the only politician to be convicted as a result of the crisis.{{cite news|last=Neate|first=Rupert|date=April 23, 2012|title=Iceland ex-PM Geir Haarde cleared of bank negligence|work=The Guardian|url=https://www.theguardian.com/world/2012/apr/23/iceland-geir-haarde-found-guilty}}{{cite news|date=April 23, 2012|title=Mixed verdict for ex-PM of Iceland in trial tied to banking system's collapse|work=CNN|url=https://www.cnn.com/2012/04/23/world/europe/iceland-haarde-verdict/index.html}} Only one banker in the United States served jail time as a result of the crisis, Kareem Serageldin, a banker at Credit Suisse who was sentenced to 30 months in jail and returned $24.6 million in compensation for manipulating bond prices to hide $1 billion of losses.{{cite news|last=Eisinger|first=Jesse|date=April 30, 2014|title=Why Only One Top Banker Went to Jail for the Financial Crisis|work=The New York Times Magazine|url=https://www.nytimes.com/2014/05/04/magazine/only-one-top-banker-jail-financial-crisis.html}} No individuals in the United Kingdom were convicted as a result of the crisis.{{cite news|last1=Snow|first1=Jon|date=September 13, 2011|title=Why have no bankers been arrested?|website=Channel 4|url=https://www.channel4.com/news/by/jon-snow/blogs/bankers-arrested}}{{cite news|last1=Scannell|first1=Kara|last2=Milne|first2=Richard|date=August 9, 2017|title=Who was convicted because of the global financial crisis?|work=Financial Times|url=https://www.ft.com/content/de173cc6-7c79-11e7-ab01-a13271d1ee9c|url-access=subscription}} Goldman Sachs paid $550 million to settle fraud charges after allegedly anticipating the crisis and selling toxic investments to its clients.{{cite news|last1=Morgenson|first1=Gretchen|last2=Story|first2=Louise|date=December 24, 2009|title=Banks Bundled Bad Debt, Bet Against It and Won|work=The New York Times|url=https://www.nytimes.com/2009/12/24/business/24trading.html}}

With fewer resources to risk in creative destruction, the number of patent applications was flat, compared to exponential increases in patent application in prior years.{{cite web|title=U.S. Patent Statistics|url=http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.pdf|publisher=United States Patent and Trademark Office}}

File:2008 Top1percentUSA.svg

Typical American families did not fare well, nor did the "wealthy-but-not-wealthiest" families just beneath the pyramid's top.{{Cite web |last=Goodkind |first=Nicole |date=2023-11-01 |title=Analysis: American inequality is rising despite higher wages {{!}} CNN Business |url=https://www.cnn.com/2023/11/01/investing/premarket-stocks-trading-wealth-inequality/index.html |access-date=2024-03-11 |website=CNN |language=en}}{{Cite web |title=Wealth Inequality in the United States since 1913 |url=https://eml.berkeley.edu/~saez/SaezZucman14slides.pdf}}{{Cite web |last1=Stone|first1=Chad|last2=Trisi|first2=Danilo|first3=Arloc|last3=Sherman|first4=Jennifer|last4=Beltrán|date=January 13, 2020 |title=A Guide to Statistics on Historical Trends in Income Inequality |url=https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality |website=cbpp.org}} However, half of the poorest families in the United States did not have wealth declines at all during the crisis because they generally did not own financial investments whose value could fluctuate. The Federal Reserve surveyed 4,000 households from 2007 to 2009, and found that the total wealth of 63% of all Americans declined in that period and 77% of the richest families had a decrease in total wealth, while only 50% of those on the bottom of the pyramid suffered a decrease.{{cite news|last=Schlesinger|first=Jill|date=March 25, 2011|title=Fed Survey: We're 45% Poorer|work=CBS News|url=https://www.cbsnews.com/news/fed-survey-were-45-poorer/}}{{cite book|last=Taibbi|first=Matt|url=https://archive.org/details/griftopiabubblem0000taib/page/12|title=Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America|publisher=Spiegel & Grau|year=2010|isbn=978-0-385-52995-2|page=[https://archive.org/details/griftopiabubblem0000taib/page/12 12]|author-link=Matt Taibbi}}{{cite journal|last1=Wolff|first1=Edward N.|year=2010|title=Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze – An Update to 2007|journal=Levy Economics Institute Working Papers Series|issue=159|ssrn=1585409}}

{{See also|Global financial crisis in September 2008|Global financial crisis in October 2008|Global financial crisis in November 2008|Global financial crisis in December 2008|Global financial crisis in 2009|United States bear market of 2007–2009|Dodd–Frank Wall Street Reform and Consumer Protection Act|Regulatory responses to the subprime crisis|Subprime mortgage crisis solutions debate}}

The following is a timeline of the major events of the financial crisis, including government responses, and the subsequent economic recovery.{{Cite news |url=https://www.thebalance.com/2007-financial-crisis-overview-3306138 |title=Here's How They Missed the Early Clues of the Financial Crisis |last=Amadeo| first=Kimberly |website=The Balance | publisher=Dotdash | date=May 4, 2020}}{{Cite web| url=https://www.thebalance.com/2008-financial-crisis-timeline-3305540 |title=37 Critical Events of the 2008 Financial Crisis| last=Amadeo |first=Kimberly|website=The Balance | publisher=Dotdash | date=November 20, 2019}}{{Cite web| url=https://www.thebalance.com/2009-financial-crisis-bailouts-3305539 |title=How They Stopped the Financial Crisis in 2009| last=Amadeo |first=Kimberly|website=The Balance| publisher=Dotdash | date=May 4, 2020}}{{Cite web | url=https://fraser.stlouisfed.org/timeline/financial-crisis | title=Federal Reserve Bank of St. Louis' Financial Crisis Timeline | publisher=FRASER}}

File:Cost of housing by State.webp

• May 19, 2005: Fund manager Michael Burry closed a credit default swap against subprime mortgage bonds with Deutsche Bank valued at $60 million – the first such CDS. He projected they would become volatile within two years of the low "teaser rate" of the mortgages expiring.{{Cite magazine|last=Lewis|first=Michael|title=Betting on the Blind Side|url=https://www.vanityfair.com/news/2010/04/wall-street-excerpt-201004|access-date=January 24, 2021|magazine=Vanity Fair|date=March 2010|language=en-us}}{{Cite web|last=Lewis|first=Michael|title=The Outsiders Who Foresaw The Subprime Crisis|url=https://www.npr.org/templates/story/story.php?storyId=124698825|access-date=January 24, 2021|website=NPR.org|language=en}}
• 2006: After years of above-average price increases, housing prices peaked and mortgage loan delinquency rose, leading to the United States housing bubble.{{cite web| publisher=United States Census Bureau| url=https://www.census.gov/construction/nrs/historical_data/index.html| title=Median and Average Sale Price of Houses Sold}}{{cite news| title=Quarterly Homeownership Rates and Seasonally Adjusted Homeownership Rates for the United States: 1997–2014 | work=United States Census | date=May 5, 2006 |url=https://www.census.gov/housing/hvs/data/charts/fig06.pdf }} Due to increasingly lax underwriting standards, one-third of all mortgages in 2006 were subprime or no-documentation loans,{{cite news | url=https://www.washingtonpost.com/news/business/wp/2018/10/04/feature/10-years-later-how-the-housing-market-has-changed-since-the-crash/ | title=10 years later: How the housing market has changed since the crash | first=Michele | last=Lerner | newspaper=The Washington Post | date=October 4, 2018}} which comprised 17 percent of home purchases that year.
• May 2006: JPMorgan warns clients of housing downturn, especially sub-prime.{{cite web|url=https://www.institutionalinvestor.com/article/b150ny2f12sbsp/the-2007-all-america-fixed-income-research-team|title=The 2007 All-America Fixed-Income Research Team|author=Pam Abramowitz|work=Institutional Investor|date=September 16, 2007|accessdate=September 7, 2022}}
• August 2006: The yield curve inverted, signaling a recession was likely within a year or two.{{Cite web |last1=Haubrich |first1=Joseph G. |last2=Cherny |first2=Kent |date=December 18, 2008 |title=The Yield Curve, December 2008 |url=https://www.clevelandfed.org/our-research/indicators-and-data/yield-curve-and-gdp-growth/yield-curve-archives/yc-20081217 |language=English |access-date=August 8, 2022 |archive-date=August 8, 2022 |archive-url=https://web.archive.org/web/20220808143456/https://www.clevelandfed.org/our-research/indicators-and-data/yield-curve-and-gdp-growth/yield-curve-archives/yc-20081217 |url-status=dead }}
• November 2006: UBS sounded "the alarm about an impending crisis in the U.S. housing market"

• February 27, 2007: Stock prices in China and the U.S. fell by the most since 2003 as reports of a decline in home prices and durable goods orders stoked growth fears, with Alan Greenspan predicting a recession.{{cite news | url=https://money.cnn.com/2007/02/27/markets/markets_0630/index.htm?cnn=yes | title=Brutal day on Wall Street | first=Alexandra | last=Twin | work=CNN | date=February 27, 2007 |url-status=live |archive-url=https://web.archive.org/web/20230401120810/https://money.cnn.com/2007/02/27/markets/markets_0630/index.htm?cnn=yes |archive-date= April 1, 2023 }} Due to increased delinquency rates in subprime lending, Freddie Mac said that it would stop investing in certain subprime loans.{{cite news | url=https://www.reuters.com/article/idUSN2737639920070227 | title=Fannie, Freddie tout limited subprime exposure | first=Patrick | last=Rucker | work=Reuters | date=February 27, 2007 |url-status=live |archive-url=https://web.archive.org/web/20221207125813/https://www.reuters.com/article/idUSN2737639920070227 |archive-date= December 7, 2022 }}
• April 2, 2007: New Century, an American real estate investment trust specializing in subprime lending and securitization, filed for Chapter 11 bankruptcy protection. This propagated the subprime mortgage crisis.{{cite news | url=https://www.reuters.com/article/us-newcentury-bankruptcy/new-century-files-for-chapter-11-bankruptcy-idUSN0242080520070403 | title=New Century files for Chapter 11 bankruptcy | first=Jonathan | last=Stempel | work=Reuters | date=April 2, 2007 |url-status=live |archive-url=https://web.archive.org/web/20230516094211/https://www.reuters.com/article/us-newcentury-bankruptcy/new-century-files-for-chapter-11-bankruptcy-idUSN0242080520070403 |archive-date= May 16, 2023 }}{{cite news | url=https://www.nytimes.com/2007/04/02/business/03lend.web.html | title=New Century Files for Bankruptcy | first=Julie | last=Creswell | work=The New York Times | date=April 2, 2007 | url-access=subscription |url-status=live |archive-url=https://web.archive.org/web/20230420174043/http://www.nytimes.com/2007/04/02/business/03lend.web.html |archive-date= April 20, 2023 }}{{cite news | url=https://money.cnn.com/2007/04/02/news/companies/new_century_bankruptcy/ | title=New Century files for Chapter 11 bankruptcy | work=CNN | date=April 3, 2007}}{{cite news | url=https://www.usatoday.com/story/money/business/2013/09/08/chronology-2008-financial-crisis-lehman/2779515/ | title=Timeline: Key events in financial crisis | work=USA Today | date=September 8, 2013 |url-status=live |archive-url=https://web.archive.org/web/20230324095755/https://www.usatoday.com/story/money/business/2013/09/08/chronology-2008-financial-crisis-lehman/2779515/ |archive-date= March 24, 2023 }}{{cite web |url=http://news.bbc.co.uk/2/hi/business/7521250.stm | title=Timeline: Credit crunch to downturn | website=BBC News | date=August 7, 2009 |url-status=live |archive-url=https://web.archive.org/web/20231201074505/http://news.bbc.co.uk/1/hi/business/7521250.stm |archive-date= December 1, 2023 }}
• June 20, 2007: After receiving margin calls, Bear Stearns bailed out two of its hedge funds with $20 billion of exposure to collateralized debt obligations including subprime mortgages.{{cite news | url=https://www.reuters.com/article/us-subprime-bearstearns/bear-stearns-hedge-funds-near-shutting-down-report-idUSN2021611320070620 | title=Bear Stearns hedge funds near shutting down: report | work=Reuters | date=June 20, 2007 |url-status=live |archive-url=https://web.archive.org/web/20221207125826/https://www.reuters.com/article/us-subprime-bearstearns/bear-stearns-hedge-funds-near-shutting-down-report-idUSN2021611320070620 |archive-date= December 7, 2022 }}
• July 19, 2007: The Dow Jones Industrial Average (DJIA) closed above 14,000 for the first time at 14,000.41.{{Cite web |title=Dow Jones Industrial Average (^DJI) Charts, Data & News |url=https://finance.yahoo.com/quote/%5EDJI/chart/ |access-date=2023-02-15 |website=Yahoo Finance |language=en-US}}
• July 30, 2007: IKB Deutsche Industriebank, the first banking casualty of the crisis, announces its bailout by German public financial institution KfW.{{citation |website=IKB Deutsche Industriebank |title=KfW backs IKB |date=2007-07-31 |url=https://www.ikb.de/uploads/media/07_07_30_PME_KfW_staerkt_IKB.pdf }}
• July 31, 2007: Bear Stearns liquidated the two hedge funds.
• August 6, 2007: American Home Mortgage filed bankruptcy.
• August 9, 2007: BNP Paribas blocked withdrawals from three of its hedge funds with a total of $2.2 billion in assets under management, due to "a complete evaporation of liquidity", making valuation of the funds impossible – a clear sign that banks were refusing to do business with each other.{{cite news | url=https://www.reuters.com/article/us-bnpparibas-subprime-funds-idUSWEB612920070809 | title=BNP freezes $2.2 bln of funds over subprime | first1=Sudip | last1=Kar-Gupta | first2=Yann Le | last2=Guernigou | work=Reuters | date=August 9, 2007}}{{cite news | title=Three myths that sustain the economic crisis | url=https://www.theguardian.com/business/economics-blog/2012/aug/05/economic-crisis-myths-sustain | first=Larry | last=Elliott | work=The Guardian |date=August 5, 2012}}
• August 16, 2007: The DJIA closes at 12,945.78 after falling 12 out of the previous 20 trading days following its peak. It had fallen 1,164.63 or 8.3%.

File:Northern Rock Queue.jpg branch in the United Kingdom to withdraw their savings during the financial crisis]]

• September 14, 2007: Northern Rock, a medium-sized and highly leveraged British bank, received support from the Bank of England.{{cite press release | url=https://www.bankofengland.co.uk/-/media/boe/files/news/2007/september/liquidity-support-facility-for-northern-rock-plc.pdf |title=News Release: Liquidity Support Facility for Northern Rock plc| publisher=Bank of England |date=September 14, 2007}} This led to investor panic and a bank run.{{cite web |url=https://www.bbc.com/news/business-41229513 |title=The collapse of Northern Rock: Ten years on | first=Dominic | last=O'Connell | work=BBC News | date=September 12, 2017}}
• September 18, 2007: The Federal Open Market Committee began reducing the federal funds rate from its peak of 5.25% in response to worries about liquidity and confidence.{{cite news | url=https://money.cnn.com/2007/09/18/news/economy/fed_rates/index.htm | title=Interest rates slashed to help economy | first=Paul R. | last=La Monica | work=CNN | date=September 18, 2007}}{{Cite news | url=https://www.nytimes.com/2007/09/18/business/18cnd-fed.html | title=Markets Soar After Fed Cuts Key Rate by a Half Point | first1=Edmund L. | last1=Andrews | author-link1=Edmund L. Andrews | first2=Jeremy W. | last2=Peters | author-link2=Jeremy W. Peters | work=The New York Times | date=September 18, 2007 | url-access=subscription}}
• September 28, 2007: NetBank suffered from bank failure and filed bankruptcy due to exposure to home loans.{{cite news | url=https://www.nytimes.com/2007/09/29/business/29netbank.html | title=Online Bank Fails, and Regulators Shut It | agency=Associated Press | work=The New York Times | date=September 29, 2007}}
• October 9, 2007: The DJIA hit its peak closing price of 14,164.53.{{Cite web| url=https://www.thebalance.com/dow-jones-closing-history-top-highs-and-lows-since-1929-3306174 | title=Dow High of 26,828.39 Set on October 3, 2018 |last=Amadeo |first=Kimberly | website=The Balance | publisher=Dotdash | date=March 20, 2020}}
• October 15, 2007: Citigroup, Bank of America, and JPMorgan Chase announced plans for the $80 billion Master Liquidity Enhancement Conduit to provide liquidity to structured investment vehicles. The plan was abandoned in December.{{cite news | url=https://www.reuters.com/article/us-financial-supersiv/banks-abandon-plan-for-super-siv-idUSWEN314120071222 | title=Banks abandon plan for Super-SIV | first=Dan | last=Wilchins | work=Reuters | date=December 21, 2007}}
• November 26, 2007: US markets enter a correction as worries about the financial sector continued to mount.{{Cite web |last=Gongloff |first=Mark |date=November 26, 2007 |title=Credit Woes Slam Stocks |url=https://www.wsj.com/articles/SB119608282533903873 |access-date=August 11, 2024 |website=Wall Street Journal}}
• December 2007: Unemployment in the US hit 5%.{{Cite web |title=FRED |url=https://fred.stlouisfed.org/series/UNRATE |website=fred.stlouisfed.org}}
• December 12, 2007: The Federal Reserve instituted the Term auction facility to supply short-term credit to banks with sub-prime mortgages.{{cite press release | url=https://www.federalreserve.gov/monetarypolicy/20071212a.htm | title=Press Release | publisher=Federal Reserve Board of Governors | date=December 12, 2007}}
• December 17, 2007: Delta Financial Corporation filed bankruptcy after failing to securitize subprime loans.{{Cite news | url=https://www.newsday.com/business/technology/ex-delta-chief-starts-mortgage-company-1.516094 | title=Ex-Delta chief starts mortgage company | work=New York Newsday | date=May 20, 2008 | access-date=June 17, 2022 | archive-date=September 3, 2020 | archive-url=https://web.archive.org/web/20200903224122/https://www.newsday.com/business/technology/ex-delta-chief-starts-mortgage-company-1.516094 | url-status=dead }}
• December 19, 2007: the Standard and Poor's rating agency downgrades the ratings of many monoline insurers which pay out bonds that fail.{{Citation needed|date=June 2024}}
• December 31, 2007: Despite volatility through the last part of the year, markets close above where they started the year, with the DJIA closing at 13,264.82, up 6.4% for the year.{{Cite web |last=LaVallee |first=Andrew |date=December 31, 2007 |title=Nasdaq Ends Year on a Down Note But Finishes 2007 With a 9.8% Gain |work=Wall Street Journal |url=https://www.wsj.com/articles/SB119911487920259503 |access-date=August 11, 2024}}

• January 11, 2008: Bank of America agreed to buy Countrywide Financial for $4 billion in stock.{{Cite news | url=https://www.npr.org/2013/01/11/169108131/looking-back-on-bank-of-americas-countrywide-debacle | title=Looking Back On Bank Of America's Countrywide Debacle | first=Jim | last=Zarroli | work=NPR | date=January 11, 2013}}
• January 18, 2008: Stock markets fell to a yearly low as the credit rating of Ambac, a bond insurance company, was downgraded. Meanwhile, an increase in the amount of withdrawals causes Scottish Equitable to implement up to 12 month delays on people wanting to withdraw money.{{Cite news | url=https://money.cnn.com/2008/01/18/markets/markets_0500/index.htm | title=Disastrous Dow tumbles again | first=Alexandra | last=Twin | work=CNN | date=January 18, 2008}}
• January 21, 2008: As US markets were closed for Martin Luther King Jr. Day, the FTSE 100 Index in the United Kingdom tumbled 323.5 points or 5.5% in its largest crash since the September 11 attacks.{{Cite web |last=Guillén |first=Mauro |title=The Global Economic & Financial Crisis: A Timeline |url=https://lauder.wharton.upenn.edu/wp-content/uploads/2015/06/Chronology_Economic_Financial_Crisis.pdf |access-date=March 5, 2023}}
• January 22, 2008: The US Federal Reserve cut interest rates by 0.75% to stimulate the economy, the largest drop in 25 years and the first emergency cut since 2001.
• January 2008: U.S. stocks had the worst January since 2000 over concerns about the exposure of companies that issue bond insurance.{{Cite news |url=https://www.post-gazette.com/business/businessnews/2008/01/31/Stocks-erase-early-losses-rise-as-concerns-about-bond-insurers-ease/stories/200801310428 | title=Stocks erase early losses, rise as concerns about bond insurers ease | first=Tim | last=Paradis | work=Pittsburgh Post-Gazette | date=January 31, 2008}}
• February 13, 2008: The Economic Stimulus Act of 2008 was enacted, which included a tax rebate.{{cite press release | url=https://georgewbush-whitehouse.archives.gov/news/releases/2008/02/20080213-3.html | title=President Bush Signs H.R. 5140, the Economic Stimulus Act of 2008 | publisher=whitehouse.gov | date=February 13, 2008}}{{cite news | url=https://www.reuters.com/article/us-usa-economy-stimulus/bush-signs-stimulus-bill-and-cites-economic-resilience-idUSWAT00889920080214 | title=Bush signs stimulus bill and cites economic resilience | first=Jeremy | last=Pelofsky | work=Reuters | date=February 13, 2008}}
• February 22, 2008: The nationalisation of Northern Rock was completed.
• March 5, 2008: The Carlyle Group received margin calls on its mortgage bond fund.{{Cite press release | url=https://www.businesswire.com/news/home/20080305006383/en/Carlyle-Capital-Corporation-Limited-Issues-Update-Liquidity | title=Carlyle Capital Corporation Limited Issues Update on Its Liquidity | publisher=Business Wire | date=March 5, 2008}}
• March 17, 2008: Bear Stearns, with $46 billion of mortgage assets that had not been written down and $10 trillion in total assets, faced bankruptcy; instead, in its first emergency meeting in 30 years, the Federal Reserve agreed to guarantee its bad loans to facilitate its acquisition by JPMorgan Chase for $2/share. A week earlier, the stock was trading at $60/share and a year earlier it traded for $178/share. The buyout price was increased to $10/share the following week.{{cite news | url=https://archive.nytimes.com/www.nytimes.com/2008/03/17/business/17bear.html| title=Search JP Morgan Pays $2 a Share for Bear Stearns | first=Andrew Ross | last=Sorkin | author-link=Andrew Ross Sorkin | work=The New York Times | date=March 17, 2008 | access-date=February 15, 2025}}{{cite news | url=https://www.marketwatch.com/story/jp-morgan-to-buy-bear-stearns-for-2-a-share | title=J.P. Morgan to buy Bear Stearns for $2 a share | first1=Alistair | last1=Barr | first2=Greg | last2=Morcroft | work=MarketWatch | date=March 17, 2008}}{{cite news | url=https://www.businessinsider.com/the-bear-stearns-books-still-dont-answer-the-most-interesting-questions-2009-5 | title=The Bear Stearns Books Still Don't Answer The Interesting Questions | first=Eric | last=Falkenstein | work=Business Insider | date=May 18, 2009}}
• March 18, 2008: In a contentious meeting, the Federal Reserve cut the federal funds rate by 75 basis points, its 6th cut in 6 months.{{Cite news | url=https://money.cnn.com/2008/03/18/news/economy/fed_rates/index.htm?postversion=2008031816 | title=Fed cuts rates by 3/4 of a point | first=Chris | last=Isidore | work=CNN | date=March 18, 2008}} It also allowed Fannie Mae & Freddie Mac to buy $200 billion in subprime mortgages from banks. Officials thought this would contain the possible crisis. The U.S. dollar weakened and commodity prices soared.{{Data missing|date=September 2023}}{{Cite web |date=2018-04-27 |title=Commodities Prices to Rise in 2018 |url=https://blogs.worldbank.org/developmenttalk/commodities-prices-rise-2018 |access-date=2024-03-11 |website=blogs.worldbank.org |language=en}}{{Cite web |title=Commodity prices to rise more than expected in 2018 |url=https://www.worldbank.org/en/news/press-release/2018/04/24/commodity-prices-to-rise-more-than-expected-in-2018-world-bank |access-date=2024-03-11 |website=World Bank |language=en}}{{Cite web |title=World Economic Situation And Prospects: March 2018 Briefing, No. 112 {{!}} Department of Economic and Social Affairs |url=https://www.un.org/development/desa/dpad/publication/world-economic-situation-and-prospects-march-2018-briefing-no-112/ |access-date=2024-03-11 |website=www.un.org}}
• Late June 2008: Despite the U.S. stock market falling to a 20% drop off its highs, commodity-related stocks soared as oil traded above $140/barrel for the first time and steel prices rose above $1,000 per ton. Worries about inflation combined with strong demand from China encouraged people to invest in commodities during the 2000s commodities boom.{{Cite news | url=https://money.cnn.com/2008/06/27/markets/oil/ | title=Oil settles at record high above $140 | first1=Ben | last1=Rooney | first2=David | last2=Goldman | work=CNN | date=June 27, 2008}}{{Cite news | url=https://www.bloomberg.com/news/articles/2008-06-27/marcial-u-dot-s-dot-steel-is-on-a-rollbusinessweek-business-news-stock-market-and-financial-advice | title=Marcial: U.S. Steel Is on a Roll | first=Gene G. | last=Marcial | work=Bloomberg News | date=June 27, 2008}}
• July 11, 2008: IndyMac failed. Oil prices peaked at $147.50
• July 30, 2008: The Housing and Economic Recovery Act of 2008 was enacted.{{cite web | url=https://www.hud.gov/hudprograms/hera2008 | title=Housing and Economic Recovery Act of 2008 (HERA) Programs | date=September 20, 2017 | publisher=United States Department of Housing and Urban Development}}
• August 2008: Unemployment hit 6% in the US.

• September 7, 2008: The Federal takeover of Fannie Mae and Freddie Mac was implemented.{{cite news | url=https://money.cnn.com/2008/09/07/news/companies/fannie_freddie/ | title=U.S. seizes Fannie and Freddie | first=David | last=Ellis | work=CNN | date=September 7, 2008}}
• September 15, 2008: After the Federal Reserve declined to guarantee its loans as it did for Bear Stearns, the Bankruptcy of Lehman Brothers led to a 504.48-point (4.42%) drop in the DJIA, its worst decline in seven years. To avoid bankruptcy, Merrill Lynch was acquired by Bank of America for $50 billion in a transaction facilitated by the government.{{cite news | url=https://money.cnn.com/2008/09/15/news/companies/merrill_bofa_deal/ | title=Bank of America to buy Merrill | first=Chris | last=Isidore | work=CNN | date=September 15, 2008}} Lehman had been in talks to be sold to either Bank of America or Barclays but neither bank wanted to acquire the entire company.{{cite news| url=https://www.nytimes.com/2008/09/13/business/13rescue.html |title=U.S. Gives Banks Urgent Warning to Solve Crisis |work=The New York Times |first=Eric |last=Dash | date=September 12, 2008 | url-access=subscription}}
• September 16, 2008: The Federal Reserve took over American International Group with $85 billion in debt and equity funding. The Reserve Primary Fund "broke the buck" as a result of its exposure to Lehman Brothers securities.{{cite news | url=https://www.americanactionforum.org/research/the-federal-reserves-crisis-response/ | title=The Federal Reserve's Crisis Response | work=American Action Network | date=September 12, 2013}}
• September 17, 2008: Investors withdrew $144 billion from U.S. money market funds, the equivalent of a bank run on money market funds, which frequently invest in commercial paper issued by corporations to fund their operations and payrolls, causing the short-term lending market to freeze. The withdrawal compared to $7.1 billion in withdrawals the week prior. This interrupted the ability of corporations to rollover their short-term debt. The U.S. government extended insurance for money market accounts analogous to bank deposit insurance via a temporary guarantee{{cite news |last=Gullapalli |first=Diya| url=https://www.wsj.com/articles/SB122186683086958875 |work=The Wall Street Journal |title=Bailout of Money Funds Seems to Stanch Outflow| date=September 20, 2008 | url-access=subscription}} and with Federal Reserve programs to purchase commercial paper.
• September 18, 2008: In a dramatic meeting, United States Secretary of the Treasury Henry Paulson and Chair of the Federal Reserve Ben Bernanke met with Speaker of the United States House of Representatives Nancy Pelosi and warned that the credit markets were close to a complete meltdown. Bernanke requested a $700 billion fund to acquire toxic mortgages and reportedly told them: "If we don't do this, we may not have an economy on Monday".{{cite news | url=https://www.nytimes.com/2008/10/02/business/02crisis.html | title=As Crisis Spiraled, Alarm Led to Action| first=Joe | last=Nocera | author-link=Joe Nocera | work=The New York Times | date=October 1, 2008 | url-access=subscription}}
• September 19, 2008: The Federal Reserve created the Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility to temporarily insure money market funds and allow the credit markets to continue operating.{{Citation needed|date=June 2024}}
• September 20, 2008: Paulson requested the U.S. Congress authorize a $700 billion fund to acquire toxic mortgages, telling Congress "If it doesn't pass, then heaven help us all".{{Cite news | url=https://www.wsj.com/articles/SB122186563104158747 | title=Shock Forced Paulson's Hand | first1=Deborah | last1=Solomon | first2=Liz | last2=Rappaport | first3=Damian | last3=Paletta | first4=Jon | last4=Hilsenrath | work=The Wall Street Journal | date=September 20, 2008| url-access=subscription }}
• September 21, 2008: Goldman Sachs and Morgan Stanley converted from investment banks to bank holding companies to increase their protection by the Federal Reserve.{{cite news | url=https://dealbook.nytimes.com/2008/09/21/goldman-morgan-to-become-bank-holding-companies/ | title=As Goldman and Morgan Shift, a Wall St. Era Ends | work=The New York Times | date=September 21, 2008 | url-access=subscription}}{{cite news | url=https://www.cnbc.com/2009/09/18/the-financial-crisis-this-dayone-year-ago-sept-21-2008.html | title=The Financial Crisis: This Day – One Year Ago, Sept. 21, 2008 | work=CNBC | date=September 18, 2009}}{{cite press release | url=https://www.federalreserve.gov/newsevents/pressreleases/bcreg20080921a.htm | title=Board approves, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies | publisher=Federal Reserve Board of Governors | date=September 21, 2008}}{{Cite news | url=https://www.forbes.com/2008/09/22/goldman-morgan-fed-biz-wall-cx_lm_0922bizgoldman.html | title=Say Goodbye To The Investment Banks | first=Liz | last=Moyer | work=Forbes | date=September 21, 2008}}
• September 22, 2008: MUFG Bank acquired 20% of Morgan Stanley.{{Cite news | url=https://money.cnn.com/2008/09/22/news/companies/mufg_morgan_stanley/index.htm | title=Morgan Stanley to sell stake to Japan's MUFG | first=David | last=Ellis | work=CNN | date=September 22, 2008}}
• September 23, 2008: Berkshire Hathaway made a $5 billion investment in Goldman Sachs.{{Cite news | url=https://money.cnn.com/2008/09/23/news/companies/goldman_berkshire/ | title=Buffett's Berkshire invests $5B in Goldman | first=Tami | last=Luhby | work=CNN | date=September 23, 2008}}
• September 26, 2008: Washington Mutual went bankrupt and was seized by the Federal Deposit Insurance Corporation after a bank run in which panicked depositors withdrew $16.7 billion in 10 days.{{Cite news | url=https://www.cbsnews.com/news/washington-mutual-falls-to-subprime-mess/ | title=Washington Mutual Falls To Subprime Mess | work=CBS News | date=September 26, 2008}}
• September 29, 2008: By a vote of 225–208, with most Democrats in support and Republicans against, the House of Representatives rejected the Emergency Economic Stabilization Act of 2008, which included the $700 billion Troubled Asset Relief Program. In response, the DJIA dropped 777.68 points, or 6.98%, then the largest point drop in history. The S&P 500 Index fell 8.8% and the Nasdaq Composite fell 9.1%.{{cite news | url=https://money.cnn.com/2008/09/29/news/economy/bailout/ | title=Bailout plan rejected – supporters scramble | first=Chris | last=Isidore | work=CNN | date=September 29, 2008}} Several stock market indices worldwide fell 10%. Gold prices soared to $900/ounce. The Federal Reserve doubled its credit swaps with foreign central banks as they all needed to provide liquidity. Wachovia reached a deal to sell itself to Citigroup; however, the deal would have made shares worthless and required government funding.{{Cite news | url=https://money.cnn.com/2008/09/29/news/companies/wachovia_citigroup/index.htm | title=Citigroup buys Wachovia bank assets for $2.2B | first=David | last=Ellis | work=CNN | date=September 29, 2008}}
• September 30, 2008: President George W. Bush addressed the country, saying "Congress must act. ... Our economy is depending on decisive action from the government. The sooner we address the problem, the sooner we can get back on the path of growth and job creation". The DJIA rebounded 4.7%.{{Cite news |url=https://www.cnbc.com/2009/09/29/the-financial-crisis-this-dayone-year-ago-sept-30-2008.html | title=The Financial Crisis: This Day – One Year Ago, Sept. 30, 2008 | work=CNBC | date=September 30, 2009}}

• October 1, 2008: The U.S. Senate passed the Emergency Economic Stabilization Act of 2008.{{Cite news | url=https://money.cnn.com/2008/10/01/news/economy/senate_rescuebill2/ | title=Senate passes bailout | first=Jeanne | last=Sahadi | work=CNN | date=October 2, 2008}}
• October 2, 2008: Stock market indices fell 4% as investors were nervous ahead of a vote in the U.S. House of Representatives on the Emergency Economic Stabilization Act of 2008.{{Cite news | url=https://money.cnn.com/2008/10/02/markets/markets_newyork/index.htm | title=Bailout fears sink stocks | first=Alexandra |last=Twin | work=CNN | date=October 2, 2008}}
• October 3, 2008: The House of Representatives passed the Emergency Economic Stabilization Act of 2008 and the $700 billion Troubled Asset Relief Program.{{cite press release | url=https://hoyer.house.gov/content/congress-passes-emergency-economic-stabilization-act | title=Congress Passes Emergency Economic Stabilization Act | publisher=Steny Hoyer | date=October 3, 2008}} Bush signed the legislation that same day.{{cite news | url=https://www.smh.com.au/world/economic-rescue-swiftly-signed-into-law-20081004-4tnf.html | title=Economic rescue swiftly signed into law | first=Stephen | last=Collinson | work=The Sydney Morning Herald | date=October 4, 2008}} Wachovia reached a deal to be acquired by Wells Fargo in a deal that did not require government funding.{{Cite news |url=https://abcnews.go.com/Business/SmartHome/story?id=5946486&page=1 | title=Wells Fargo Buys Wachovia for $15.1 Billion | first=Sara | last=Lepro | work=ABC News | agency=Associated Press | date=October 3, 2008}}
• October 6–10, 2008: From October 6–10, 2008, the Dow Jones Industrial Average (DJIA) closed lower in all five sessions. Volume levels were record-breaking. The DJIA fell 1,874.19 points, or 18.2%, in its worst weekly decline ever on both a points and percentage basis. The S&P 500 fell more than 20%.{{cite news | url=https://www.telegraph.co.uk/finance/financialcrisis/3174151/Financial-crisis-US-stock-markets-suffer-worst-week-on-record.html |archive-url=https://ghostarchive.org/archive/20220110/https://www.telegraph.co.uk/finance/financialcrisis/3174151/Financial-crisis-US-stock-markets-suffer-worst-week-on-record.html |archive-date=January 10, 2022 |url-status=live | title=Financial crisis: US stock markets suffer worst week on record | work=The Daily Telegraph | date=October 10, 2008 | url-access=subscription}}{{cbignore}}
• October 7, 2008: In the U.S., per the Emergency Economic Stabilization Act of 2008, the Federal Deposit Insurance Corporation increased deposit insurance coverage to $250,000 per depositor.{{Cite press release | url=https://www.fdic.gov/news/press-releases/2008/pr08093.html | title=Emergency Economic Stabilization Act of 2008 Temporarily Increases Basic FDIC Insurance Coverage from $100,000 to $250,000 Per Depositor | publisher=Federal Deposit Insurance Corporation | date=October 7, 2008}}

File:S&P BSE SENSEX chart.svg experienced a sharp decline. It dropped from over 21,000 points in January 2008 to below 8,000 points in October 2008.

{{Cite news |url = https://www.ndtvprofit.com/business/the-sensex-journey-from-2008-to-2013-371137 |title = The Sensex journey: From 2008 to 2013 |publisher = NDTV Profit |date = 1 November 2013 }}]]

• October 8, 2008: The Indonesian stock market halted trading after a 10% drop in one day.{{Cite news | url=https://www.thejakartapost.com/news/2020/03/13/covid-19-indonesia-idx-trading-halted-first-time-2008.html | title=Trading halted for first time since 2008 over pandemic | first1=Riska | last1=Rahman | first2=Prima | last2=Wirayani | work=The Jakarta Post | date=March 13, 2020}} Global central banks held emergency meetings and coordinated interest rate cuts before the US stock markets opened.{{cite web |url=https://www.federalreserve.gov/newsevents/pressreleases/monetary20081008a.htm |title = FOMC statement: Federal Reserve and other central banks announce reductions in policy interest rates}}
• October 11, 2008: The head of the International Monetary Fund (IMF) warned that the world financial system was teetering on the "brink of systemic meltdown".{{Cite news | url=https://www.reuters.com/article/us-financial3/imf-warns-of-financial-meltdown-idUSTRE49A36O20081011 | title=IMF warns of financial meltdown | first1=Lesley | last1=Wroughton | first2=Francois | last2=Murphy | work=Reuters | date=October 11, 2008}}
• October 14, 2008: Having been suspended for three successive trading days (October 9, 10 and 13), the Icelandic stock market reopened on October 14, with the main index, the OMX Iceland 15, closing at 678.4, which was about 77% lower than the 3,004.6 at the close on October 8, after the value of the three big banks, which had formed 73.2% of the value of the OMX Iceland 15, had been set to zero, leading to the 2008–2011 Icelandic financial crisis.{{Cite news | url=https://www.theguardian.com/business/2008/oct/14/iceland-marketturmoil | title=Iceland markets plummet | first=Julia | last=Kollewe | work=The Guardian | date=October 14, 2008}} The Federal Deposit Insurance Corporation created the Temporary Liquidity Guarantee Program to guarantee the senior debt of all FDIC-insured institutions through June 30, 2009.{{Cite press release | url=https://www.fdic.gov/news/news/press/2008/pr08100.html | title=FDIC Announces Plan to Free Up Bank Liquidity | publisher=Federal Deposit Insurance Corporation | date=October 14, 2008}}
• October 16, 2008: A rescue plan was unveiled for Swiss banks UBS AG and Credit Suisse.{{cite news | url=https://www.theguardian.com/business/2008/oct/16/ubs-creditsuisse | title=Switzerland unveils bank bail-out plan | first=David | last=Gow | work=The Guardian | date=October 16, 2008}}
• October 24, 2008: Many of the world's stock exchanges experienced the worst declines in their history, with drops of around 10% in most indices.{{cite news | url=https://www.marketwatch.com/story/indexes-fall-hard-on-bloody-friday | title=Indexes fall hard on bloody Friday | first=V. Phani | last=Kumar | work=Marketwatch | date=October 24, 2008}} In the U.S., the DJIA fell 3.6%, although not as much as other markets.{{Cite news | url=https://money.cnn.com/2008/10/24/markets/markets_newyork/index.htm | title=Stocks can't shake the blues | first=Alexandra | last=Twin | work=CNN | date=October 24, 2008}} The United States dollar and Japanese yen and the Swiss franc soared against other major currencies, particularly the British pound and Canadian dollar, as world investors sought safe havens. A currency crisis developed, with investors transferring vast capital resources into stronger currencies, leading many governments of emerging economies to seek aid from the International Monetary Fund.{{cite news| url=https://www.nytimes.com/2008/10/24/business/worldbusiness/24emerge.html |title=West Is in Talks on Credit to Aid Poorer Nations|work=The New York Times |first=Mark |last=Landler | author-link=Mark Landler | date=October 23, 2008 | url-access=subscription}}{{cite news |url=https://www.nytimes.com/2008/10/24/business/worldbusiness/24won.html |title=Trouble Without Borders | work=The New York Times |first=Martin | last=Fackler | author-link=Martin Fackler (journalist) | date=October 23, 2008 | url-access=subscription}} Later that day, the deputy governor of the Bank of England, Charlie Bean, suggested that "This is a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history".{{Cite news | url=https://www.reuters.com/article/britain-bank-bean/financial-crisis-may-be-worst-in-history-boes-bean-idUSLAC00300720081024 | title=Financial crisis may be worst in history – BoE's Bean | work=Reuters | date=October 24, 2008}} In a transaction pushed by regulators, PNC Financial Services agreed to acquire National City Corp.{{Cite news | url=https://abcnews.go.com/Business/story?id=6107696 | title=PNC will buy troubled National City Corp. for $5.58 billion | first=Pallavi | last=Gogoi | agency=USA Today | work=ABC News | date=October 24, 2008}}

File:22 2007-2008 global financial crisis effect in Bristol UK - credit crunch lunch.jpg, United Kingdom advertising cheap "Credit Crunch Lunch"]]

• November 6, 2008: The IMF predicted a worldwide recession of −0.3% for 2009. On the same day, the Bank of England and the European Central Bank, respectively, reduced their interest rates from 4.5% to 3%, and from 3.75% to 3.25%.{{Cite news | url=https://money.cnn.com/2008/10/08/news/economy/fed_move/ | title=Fed: Emergency cut | first=Chris | last=Isidore | work=CNN | date=October 8, 2008}}
• November 10, 2008: American Express converted to a bank holding company.{{cite news | url=https://money.cnn.com/2008/11/10/news/companies/amex/index.htm | title=AmEx becomes bank to stabilize funding | first=Tami | last=Luhby | work=CNN | date=November 10, 2008}}
• November 20, 2008: Iceland obtained an emergency loan from the International Monetary Fund after the failure of banks in Iceland resulted in a devaluation of the Icelandic króna and threatened the government with bankruptcy.{{cite news |url=http://news.bbc.co.uk/2/hi/in_depth/7738874.stm |title=IMF approves $2.1bn Iceland loan |work=BBC News |date=November 20, 2008}}
• November 25, 2008: The Term Asset-Backed Securities Loan Facility was announced.{{cite press release | url=https://www.federalreserve.gov/monetarypolicy/20081125a.htm | title=Press Release | publisher=Federal Reserve Board of Governors | date=November 25, 2008}}
• November 29, 2008: Economist Dean Baker observed:{{Blockquote|There is a really good reason for tighter credit. Tens of millions of homeowners who had substantial equity in their homes two years ago have little or nothing today. Businesses are facing the worst downturn since the Great Depression. This matters for credit decisions. A homeowner with equity in her home is very unlikely to default on a car loan or credit card debt. They will draw on this equity rather than lose their car and/or have a default placed on their credit record. On the other hand, a homeowner who has no equity is a serious default risk. In the case of businesses, their creditworthiness depends on their future profits. Profit prospects look much worse in November 2008 than they did in November 2007 ... While many banks are obviously at the brink, consumers and businesses would be facing a much harder time getting credit right now even if the financial system were rock solid. The problem with the economy is the loss of close to $6 trillion in housing wealth and an even larger amount of stock wealth.{{cite web |url=https://prospect.org/economy/credit-crisis-damn-it/ |title=It's Not the Credit Crisis, Damn It! |last=Baker |first=Dean | work=The American Prospect |date=November 29, 2008}}}}
• December 1, 2008: The NBER announced the US was in a recession and had been since December 2007. The Dow tumbled 679.95 points or 7.8% on the news.{{Cite web |title=It's official: U.S. in a recession since December 2007 – Dec. 1, 2008 |url=https://money.cnn.com/2008/12/01/news/economy/recession/ |access-date=2023-05-03 |website=CNN Money}}
• December 6, 2008: The 2008 Greek riots began, sparked in part by economic conditions in the country.{{Citation needed|date=June 2024}}
• December 16, 2008: The federal funds rate was lowered to zero percent.{{cite news | url=https://money.cnn.com/2008/12/16/news/economy/fed_decision/index.htm | title=Fed slashes key rate to near zero | first=Chris | last=Isidore | work=CNN | date=December 16, 2008}}
• December 20, 2008: Financing under the Troubled Asset Relief Program was made available to General Motors and Chrysler.{{cite news | url=https://www.forbes.com/2008/12/20/auto-bailout-update-markets-equity-cx_cg_1219markets29.html | title=GM And Chrysler Covered By TARP | first=Carl | last=Gutierrez | work=Forbes | date=December 20, 2008}}

File:Payroll tax history.jpg provided a payroll tax credit repealed in late 2010.]]

• January 6, 2009: Citi claimed that Singapore would experience "the most severe recession in Singapore's history" in 2009. In the end the economy grew in 2009 by 0.1% and in 2010 by 14.5%.{{Cite journal|last1=Chen|first1=Xiaoping|last2=Shao|first2=Yuchen|date=September 11, 2017|title=Trade policies for a small open economy: The case of Singapore|journal=The World Economy|volume=40 |issue=11 |pages=2500–2511 |doi=10.1111/twec.12555|issn=0378-5920|s2cid=158182047}}{{Cite news|last=Lim|first=Kevin|date=January 2, 2009|title=Singapore recession deepens, government cuts 09 outlook|language=en|work=Reuters|url=https://www.reuters.com/article/us-singapore-economy-gdp-sb-idUSTRE5010CK20090102|access-date=December 19, 2023}}{{Cite web|title=GDP growth (annual %) – Singapore|url=https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=SG|access-date=December 19, 2023}}
• January 20–26, 2009: The 2009 Icelandic financial crisis protests intensified and the Icelandic government collapsed.{{cite news | url=https://www.nytimes.com/2009/01/27/world/europe/27iceland.html | title=Iceland's Government Collapses | work=The New York Times | date=January 26, 2009 | url-access=subscription}}
• February 13, 2009: Congress approved the American Recovery and Reinvestment Act of 2009, a $787 billion economic stimulus package. President Barack Obama signed it February 17.{{Cite news | url=https://money.cnn.com/2009/02/13/news/economy/house_final_stimulus/index.htm | title=Senate passes $787 billion stimulus bill | first=Jeanne | last=Sahadi | work=CNN | date=February 15, 2009}}{{Cite journal |last=Wilson |first=Daniel J |date=2012-08-01 |title=Fiscal Spending Jobs Multipliers: Evidence from the 2009 American Recovery and Reinvestment Act |url=https://www.frbsf.org/economic-research/wp-content/uploads/sites/4/wp10-17bk.pdf |journal=American Economic Journal: Economic Policy |language=en |volume=4 |issue=3 |pages=251–282 |doi=10.1257/pol.4.3.251 |issn=1945-7731}}{{Cite news | url=https://www.reuters.com/article/us-usa-stimulus/congress-sends-787-billion-stimulus-to-obama-idUSTRE51A61L20090214 | title=Congress sends $787 billion stimulus to Obama | first1=Richard | last1=Cowan | first2=Susan | last2=Cornwell | work=Reuters | date=February 15, 2009}}{{Cite news |last1=Sahadi |first1=Jeanne |title=Stimulus: How to measure success |date=February 17, 2009 |url=https://money.cnn.com/2009/02/17/news/economy/obama_stimulus_meas_success/index.htm |work=CNN Money |access-date=2023-02-12}}
• February 20, 2009: The DJIA closed at a 6-year low amidst worries that the largest banks in the United States would have to be nationalized.{{cite news | url=https://money.cnn.com/2009/02/20/markets/markets_newyork/ | title=Dow closes at 6-year low | first=Alexandra | last=Twin | work=CNN | date=February 20, 2009}}
• February 27, 2009: The DJIA closed its lowest value since 1997 as the U.S. government increased its stake in Citigroup to 36%, raising further fears of nationalization and a report showed that GDP shrank at the sharpest pace in 26 years.{{cite news | url=https://money.cnn.com/2009/02/27/markets/markets_newyork/index.htm | title=Stocks end at 12-year lows | first=Alexandra | last=Twin | work=CNN | date=February 27, 2009}}
• Early March 2009: The drop in stock prices was compared to that of the Great Depression.{{cite news |last=Kawamoto | first=Dawn| url=https://www.cnet.com/news/dow-jones-decline-rate-mimics-great-depression/ |title=Dow Jones decline rate mimics Great Depression | work=CNET |date=March 2, 2009}}{{Cite news| url=https://economix.blogs.nytimes.com//2009/03/05/plunging-markets-then-and-now/ |title=Plunging Markets, Then and Now | first=Floyd | last=Norris | author-link=Floyd Norris | work=The New York Times | date=March 5, 2009 | url-access=subscription}}
• March 3, 2009: President Obama stated that "Buying stocks is a potentially good deal if you've got a long-term perspective on it".{{cite news | first=Michael | last=Mcauliff | url=https://www.usnews.com/articles/news/obama/2009/03/04/obama-says-buy-stocks-now-good-deals-there-for-long-term-investors.html | title=Obama Says Buy Stocks Now: Good Deals There for Long-Term Investors | work=U.S. News & World Report | date=March 4, 2009}}
• March 6, 2009: The Dow Jones hit its lowest level of 6,469.95, a drop of 54% from its peak of 14,164 on October 9, 2007, over a span of 17 months, before beginning to recover.{{Cite book | url=https://books.google.com/books?id=nKk0DwAAQBAJ | title=Evolutions in Corporate Governance: Towards an Ethical Framework for Business Conduct | first=Alison L. | last=Dempsey | publisher=Routledge | date=2017| isbn=9781351277389 }}
• March 10, 2009: Shares of Citigroup rose 38% after the CEO said that the company was profitable in the first two months of the year and expressed optimism about its capital position going forward. Major stock market indices rose 5–7%, marking the bottom of the stock market decline.{{cite news | url=https://money.cnn.com/2009/03/10/markets/markets_newyork/index.htm | title=Stocks: Biggest gains of '09 | first=Alexandra | last=Twin | work=CNN | date=March 10, 2009}}
• March 12, 2009: Stock market indices in the U.S. rose another 4% after Bank of America said it was profitable in January and February and would likely not need more government funding. Bernie Madoff was convicted.{{cite news | url=https://money.cnn.com/2009/03/12/markets/markets_newyork/index.htm | title=A three-peat for Wall Street's bulls | first=Alexandra | last=Twin | work=CNN | date=March 12, 2009}}
• First quarter of 2009: For the first quarter of 2009, the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia,{{cite web | url=https://pulitzercenter.org/reporting/latvia-sobering-lessons-unregulated-lending | title=Untold Stories: Latvia: Sobering Lessons in Unregulated Lending | publisher=Pulitzer Center | date=May 18, 2009 | access-date=June 8, 2020 | archive-date=June 8, 2020 | archive-url=https://web.archive.org/web/20200608151958/https://pulitzercenter.org/reporting/latvia-sobering-lessons-unregulated-lending | url-status=dead }} 9.8% in the Euro area and 21.5% for Mexico.
• April 2, 2009: Unrest over economic policy and bonuses paid to bankers resulted in the 2009 G20 London summit protests.
• April 10, 2009: Time magazine declared "More Quickly Than It Began, The Banking Crisis Is Over".{{cite news | url=http://content.time.com/time/business/article/0,8599,1890560,00.html | title=More Quickly Than It Began, The Banking Crisis Is Over | magazine=Time | date=April 10, 2009}}
• April 29, 2009: The Federal Reserve projected GDP growth of 2.5–3% in 2010; an unemployment plateau in 2009 and 2010 around 10% with moderation in 2011; and inflation rates around 1–2%.{{cite web| url=https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20090429.pdf | title=Minutes of the Federal Open Market Committee | date=April 28–29, 2009}}
• May 1, 2009: People protested economic conditions globally during the 2009 May Day protests.
• May 20, 2009: President Obama signed the Fraud Enforcement and Recovery Act of 2009.
• June 2009: The National Bureau of Economic Research (NBER) declared June 2009 as the end date of the U.S. recession.{{Cite news |url=https://www.barrons.com/articles/SB50001424052970203983104575367471896032724 |title=It's Dippy to Fret About a Double-Dip Recession | author-link=Mark Hulbert | first=Mark | last=Hulbert | work=Barron's | date=July 15, 2010}} The Federal Open Market Committee release in June 2009 stated:{{Blockquote|... the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.{{cite web| url=https://www.federalreserve.gov/newsevents/pressreleases/monetary20090624a.htm| title=FOMC Statement June 24, 2009 |publisher=Federal Reserve |date=June 24, 2009}}}}
• June 17, 2009: Barack Obama and key advisers introduced a series of regulatory proposals that addressed consumer protection, executive pay, bank capital requirements, expanded regulation of the shadow banking system and derivatives, and enhanced authority for the Federal Reserve to safely wind down systemically important institutions.{{cite press release | url=https://obamawhitehouse.archives.gov/the-press-office/remarks-president-regulatory-reform |title=Remarks of the President on Regulatory Reform | publisher=White House |date=June 17, 2009}}{{cite news | url=https://www.washingtonpost.com/wp-dyn/content/article/2009/06/14/AR2009061402443_pf.html |title=A New Financial Foundation| first1=Timothy | last1=Geithner | first2=Lawrence | last2=Summers | author-link1=Timothy Geithner | author-link2=Lawrence Summers | newspaper=The Washington Post |date=June 14, 2009}}{{cite web| url=https://www.treasury.gov/initiatives/Documents/FinalReport_web.pdf |title=Treasury Department Report – Financial Regulatory Reform | publisher=United States Department of the Treasury}}
• December 11, 2009: United States House of Representatives passed bill H.R. 4173, a precursor to what became the Dodd–Frank Wall Street Reform and Consumer Protection Act.{{cite web| url=https://www.congress.gov/bill/111th-congress/house-bill/4173 | title=H.R.4173: Dodd-Frank Wall Street Reform and Consumer Protection Act |publisher=U.S. Congress |date=July 21, 2010}}

• January 22, 2010: President Obama introduced "The Volcker Rule" limiting the ability of banks to engage in proprietary trading, named after Paul Volcker, who publicly argued for the proposed changes.{{Cite news | url=https://economix.blogs.nytimes.com/2010/01/22/glass-steagall-vs-the-volcker-rule/ |title=Glass-Steagall vs. the Volcker Rule |work=The New York Times | first=Louis | last=Uchitelle |date=January 22, 2010}}{{cite news| url=https://www.washingtonpost.com/wp-dyn/content/article/2010/01/21/AR2010012104935.html |title=Obama's 'Volcker Rule' shifts power away from Geithner| first1=David | last1=Cho | author-link1=David Cho (journalist) |first2=Binyamin | last2=Appelbaum | author-link2=Binyamin Appelbaum| newspaper=The Washington Post |date=January 22, 2010}} Obama also proposed a Financial Crisis Responsibility Fee on large banks.
• January 27, 2010: President Obama declared on "the markets are now stabilized, and we've recovered most of the money we spent on the banks".{{Cite web | url=https://www.treasury.gov/initiatives/financial-stability/briefing-room/reports/agency_reports/Documents/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf | title=Troubled Asset Relief Program: Two Year Retrospective | publisher=United States Department of the Treasury}}
• First quarter 2010: Delinquency rates in the United States peaked at 11.54%.{{cite web | title=Delinquency Rate on Single-Family Residential Mortgages, Booked in Domestic Offices, All Commercial Banks | date=January 1991 | url=https://fred.stlouisfed.org/series/DRSFRMACBS | publisher=Federal Reserve Economic Data}}
• April 15, 2010: U.S. Senate introduced bill S.3217, Restoring American Financial Stability Act of 2010.{{cite web| url=https://www.congress.gov/bill/111th-congress/senate-bill/3217| title=S.3217: Restoring American Financial Stability Act of 2010 – U.S. Congress |publisher=Congress.gov |date=July 21, 2010}}
• May 2010: The U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Volcker Rule against proprietary trading was not part of the legislation.{{cite news | url=https://www.nytimes.com/interactive/2010/05/20/business/20100520-regulation-graphic.html |title=New York Times-Major Parts of the Financial Regulation Overhaul-May 2010|work=The New York Times |date=May 20, 2010 | url-access=subscription}}
• July 21, 2010: Dodd–Frank Wall Street Reform and Consumer Protection Act enacted.{{cite web | url=https://www.congress.gov/bill/111th-congress/house-bill/04173#major%20actions |title=Bill Summary & Status – 111th Congress (2009–2010) – H.R.4173 – All Information – THOMAS (Library of Congress) | publisher=Library of Congress | date=July 21, 2010}}{{cite news | url=https://www.marketwatch.com/story/senate-defeats-filibuster-threat-on-bank-bill-2010-07-15 | title=Bank-reform bill sent to Obama | first=Ronald D. | last=Orol | work=MarketWatch |date=December 29, 2010}}
• September 12, 2010: European regulators introduced Basel III regulations for banks, which increased capital ratios, limits on leverage, narrowed the definition of capital to exclude subordinated debt, limited counter-party risk, and added liquidity requirements.{{cite news| url=http://www.bis.org/press/p100912.pdf |title=Group of Governors and Heads of Supervision announces higher global minimum capital standards |date=September 12, 2010}}{{cite web| url=https://www.brookings.edu/research/basel-iii-the-banks-and-the-economy/ |title=Basel III, the Banks, and the Economy| publisher=Brookings Institution |date=July 26, 2010 |last=Elliott| first=Douglas J.}} Critics argued that Basel III didn't address the problem of faulty risk-weightings. Major banks suffered losses from AAA-rated created by financial engineering (which creates apparently risk-free assets out of high risk collateral) that required less capital according to Basel II. Lending to AA-rated sovereigns has a risk-weight of zero, thus increasing lending to governments and leading to the next crisis.{{cite news| url=https://www.economist.com/blogs/freeexchange/2010/09/basel_iii|title=Third time's the charm? | newspaper=The Economist |date=September 13, 2010}} Johan Norberg argued that regulations (Basel III among others) have indeed led to excessive lending to risky governments (see European sovereign-debt crisis) and the European Central Bank pursues even more lending as the solution.{{cite news |url=https://reason.com/2012/04/17/financial-crisis-ii/ |title=Financial Crisis II: European governments fail to learn from history |last=Norberg |first=Johan | work=Reason |date=May 2012}}
• November 3, 2010: To improve economic growth, the Federal Reserve announced another round of quantitative easing, dubbed QE2, which included the purchase of $600 billion in long-term Treasuries over the following eight months.{{cite news | url=https://money.cnn.com/2010/11/03/news/economy/fed_decision/index.htm | title=QE2: Fed pulls the trigger | first=Annalyn | last=Censky | work=CNN | date=November 3, 2010}}

• March 2011: Two years after the nadir of the crisis, many stock market indices were 75% above their lows set in March 2009. Nevertheless, the lack of fundamental changes in banking and financial markets worried many market participants, including the International Monetary Fund.{{cite news |last=Norris |first=Floyd| author-link=Floyd Norris | title=Crisis Is Over, but Where's the Fix?| work=The New York Times | url=https://www.nytimes.com/2011/03/11/business/economy/11norris.html | date=March 10, 2011 | url-access=subscription}}
• 2011: Median household wealth fell 35% in the U.S., from $106,591 to $68,839 between 2005 and 2011.{{cite news | last1=Kurtzleben | first1=Danielle | title=Middle class households' wealth fell 35 percent from 2005 to 2011 | url=https://www.vox.com/2014/8/23/6057467/middle-class-households-wealth-fell-35-percent-from-2005-to-2011 |work=Vox Media | date=August 23, 2014}}
• May 2012: The Manhattan District Attorney indicted Abacus Federal Savings Bank and 19 employees for selling fraudulent mortgages to Fannie Mae. The bank was acquitted in 2015. Abacus was the only bank prosecuted for misbehavior that precipitated the crisis.
• July 26, 2012: During the European debt crisis, President of the European Central Bank Mario Draghi announced that "The ECB is ready to do whatever it takes to preserve the euro".{{cite news | url=https://money.cnn.com/2012/07/26/investing/draghi-ecb/index.htm | title=Draghi to the rescue | first=Ben | last=Rooney | work=CNN | date=July 26, 2012}}
• August 2012: In the United States, many homeowners still faced foreclosure and could not refinance or modify their mortgages. Foreclosure rates remained high.{{cite news | title=Cautious Moves on Foreclosures Haunting Obama | url=https://www.nytimes.com/2012/08/20/business/economy/slow-response-to-housing-crisis-now-weighs-on-obama.html | author-link=Binyamin Appelbaum | first=Binyamin | last=Appelbaum | work=The New York Times |date=August 19, 2012 | url-access=subscription}}
• September 13, 2012: To improve lower interest rates, support mortgage markets, and make financial conditions more accommodative, the Federal Reserve announced another round of quantitative easing, dubbed QE3, which included the purchase of $40 billion in long-term Treasuries each month.{{cite news | url=https://money.cnn.com/2012/09/13/news/economy/federal-reserve-qe3/index.html | title=Federal Reserve launches QE3 | first=Annalyn | last=Censky | work=CNN | date=September 13, 2012}}
• 2014: A report showed that the distribution of household incomes in the United States became more unequal during the post-2008 economic recovery, a first for the United States but in line with the trend over the last ten economic recoveries since 1949.{{cite news | last1=Tcherneva | first1=Pavlina R. | title=This Chart Shows Just How (Un)Equal Things Are During A 'Champion' Of The 99%'s Administration | url=http://www.ijreview.com/2014/08/165868-chart-shows-just-unequal-things-champion-99s-administration/ |work=Independent Journal Review | date=August 2014 | archive-url=https://web.archive.org/web/20140913062459/http://www.ijreview.com/2014/08/165868-chart-shows-just-unequal-things-champion-99s-administration/ | archive-date=September 13, 2014 |url-status=dead}}{{cite news | last=Binyamin | first=Appelbaum | author-link=Binyamin Appelbaum | title=Fed Says Growth Lifts the Affluent, Leaving Behind Everyone Else | url=https://www.nytimes.com/2014/09/05/business/economy/least-affluent-families-incomes-are-declining-fed-survey-shows.html | work=The New York Times |date=September 4, 2014 | url-access=subscription}} Income inequality in the United States grew from 2005 to 2012 in more than 2 out of 3 metropolitan areas.{{cite news |last1=Chokshi | first1=Niraj| title=Income inequality seems to be rising in more than 2 in 3 metro areas | url=https://www.washingtonpost.com/blogs/govbeat/wp/2014/08/11/income-inequality-seems-to-be-rising-in-more-than-2-in-3-metro-areas/ | newspaper=The Washington Post | date=August 11, 2014}}
• June 2015: A study commissioned by the ACLU found that white home-owning households recovered from the financial crisis faster than black home-owning households, widening the racial wealth gap in the U.S.{{cite web | first1=Sarah | last1=Burd-Sharps | first2=Rebecca | last2=Rasch | url=https://www.ssrc.org/publications/view/impact-of-the-us-housing-crisis-on-the-racial-wealth-gap-across-generations/ | title=Impact of the US Housing Crisis on the Racial Wealth Gap Across Generations | publisher=Social Science Research Council and the ACLU. | date=June 2015}}
• 2017: Per the International Monetary Fund, from 2007 to 2017, "advanced" economies accounted for only 26.5% of global GDP (PPP) growth while emerging and developing economies accounted for 73.5% of global GDP (PPP) growth.{{cite web| url=https://www.imf.org/external/pubs/ft/weo/2018/01/weodata/index.aspx |title=International Monetary Fund, World Economic Outlook Database | publisher=International Monetary Fund}}
• August 2023: UBS reaches an agreement with the United States Department of Justice to pay a combined $1.435 billion in civil penalties to settle a legacy matter from 2006–2007 related to the issuance, underwriting and sale of residential mortgage-backed securities.{{cite web |url=https://www.cnbc.com/2023/08/14/ubs-to-pay-1point4-billion-for-fraud-in-mortgage-backed-securities.html |title=UBS to pay $1.4 billion over fraud in residential mortgage-backed securities |work=CNBC |last=Goswami |first=Rohan |date=August 14, 2023 |access-date=August 22, 2023}}

In the table, the names of emerging and developing economies are shown in boldface type, while the names of developed economies are in Roman (regular) type.

{{Bar chart|float=left

| title = The top twenty growing economies (by increase in GDP (PPP) from 2007 to 2017)

| table_width = 50

| bar_width = 35

| data_max = 14,148

| label_type = Economy

| data_type = {{center|Incremental GDP (billions in USD)}}

| label1 = (01) {{Flagu|China}} | data1 = 14,147

| label2 = (02) {{Flagu|India}} | data2 = 5,348

| label3 = (03) {{Flagu|United States}} | data3 = 4,913

| label4 = (—) {{Flagu|European Union}} | data4 = 4,457

| label5 = (04) {{Flagu|Indonesia}} | data5 = 1,632

| label6 = (05) {{Flagu|Turkey}} | data6 = 1,024

| label7 = (06) {{Flagu|Japan}} | data7 = 1,003

| label8 = (07) {{Flagu|Germany}} | data8 = 984

| label9 = (08) {{Flagu|Russia}} | data9 = 934

| label10 = (09) {{Flagu|Brazil}} | data10 = 919

| label11 = (10) {{Flagu|South Korea}} | data11 = 744

| label12 = (11) {{Flagu|Mexico}} | data12 = 733

| label13 = (12) {{Flagu|Saudi Arabia}} | data13 = 700

| label14 = {{nowrap|(13) {{Flagu|United Kingdom}}}} | data14 = 671

| label15 = (14) {{Flagu|France}} | data15 = 566

| label16 = (15) {{Flagu|Nigeria}} | data16 = 523

| label17 = (16) {{Flagu|Egypt}} | data17 = 505

| label18 = (17) {{Flagu|Canada}} | data18 = 482

| label19 = (18) {{Flagu|Iran}} | data19 = 462

| label20 = (19) {{Flagu|Thailand}} | data20 = 447

| label21 = (20) {{Flagu|Philippines}} | data21 = 440

| caption = {{resize|88%|The twenty largest economies contributing to global GDP (PPP) growth (2007–2017)}}{{Cite web | url=https://www.imf.org/external/pubs/ft/weo/2020/01/weodata/index.aspx | title=World Economic Outlook Database | publisher=International Monetary Fund}}

}}{{clear left}}

File:HOUSING FINANCE REFORM- ESSENTIAL ELEMENTS OF A GOVERNMENT GUARANTEE FOR MORTGAGE-BACKED SECURITIES (IA gov.gpo.fdsys.CHRG-113shrg86598).pdf

The expansion of central bank lending in response to the crisis was not confined to the Federal Reserve's provision of aid to individual financial institutions. The Federal Reserve has also conducted several innovative lending programs to improve liquidity and strengthen different financial institutions and markets, such as Freddie Mac and Fannie Mae. In this case, the major problem in the market is the lack of free cash reserves and flows to secure the loans. The Federal Reserve took many steps to deal with financial market liquidity worries. One of these steps was a credit line for major traders, who act as the Fed's partners in open market activities.{{Cite news |last=Fox |first=Justin |date=2013-11-01 |title=What We've Learned from the Financial Crisis |work=Harvard Business Review |url=https://hbr.org/2013/11/what-weve-learned-from-the-financial-crisis |access-date=2023-09-29 |issn=0017-8012}} Also, loan programs were set up to make the money market mutual funds and commercial paper market more flexible. Also, the Term Asset-Backed Securities Loan Facility (TALF) was put in place thanks to a joint effort with the US Department of the Treasury. This plan made it easier for consumers and businesses to get credit by giving Americans who owned high-quality asset-backed securities more credit.

Before the crisis, the Federal Reserve's stocks of Treasury securities were sold to pay for the increase in credit. This method was meant to keep banks from trying to give out their extra savings, which could cause the federal funds rate to drop below where it was supposed to be.{{Cite web |date=2023-08-14 |title=Financial crisis of 2007–08 {{!}} Definition, Causes, Effects, & Facts |website=Britannica Money |url=https://www.britannica.com/money/topic/financial-crisis-of-2007-2008 |access-date=2023-09-29 |language=en}} However, in October 2008, the Federal Reserve was granted the power to provide banks with interest payments on their surplus reserves. This created a motivation for banks to retain their reserves instead of disbursing them, thus reducing the need for the Federal Reserve to hedge its increased lending by decreases in alternative assets.{{Cite web |title=Visualizing the Financial Crisis |publisher=Yale School of Management |url=https://som.yale.edu/centers/program-on-financial-stability/the-global-financial-crisis/financialcrisischarts |access-date=2023-09-29 |language=en}}

Money market funds also went through runs when people lost faith in the market. To keep it from getting worse, the Fed said it would give money to mutual fund companies. Also, Department of Treasury said that it would briefly cover the assets of the fund. Both of these things helped get the fund market back to normal, which helped the commercial paper market, which most businesses use to run. The FDIC also did several things, such as raising the insurance cap from $100,000 to $250,000, to boost customer trust.

File:Marriner S. Eccles Federal Reserve Board Building.jpg

They engaged in quantitative easing, which added more than $4 trillion to the financial system and got banks to start lending again, both to each other and to people. Many homeowners who were trying to keep their homes from going into default got housing credits. A package of policies was passed that let borrowers refinance their loans even though the value of their homes was less than what they still owed on their mortgages.{{Cite web |last=Novik |first=Vitaliy |date=2020-11-15 |title=How The 2008 Financial Crisis Was Solved |url=https://bigeconomics.org/how-the-2008-financial-crisis-was-solved/ |access-date=2023-10-05 |website=Big Economics |language=en-US}}

{{See also|Subprime crisis background information|Subprime crisis impact timeline|Subprime mortgage crisis solutions debate|Indirect economic effects of the subprime mortgage crisis|Great Recession|Inverted yield curve}}

File:FFR treasuries.webp raised the Federal funds rate causing an Inverted yield curve to slow inflation and get prices and commodity prices down, that usually puts the economy into a recession.

{{legend-line|#F5A623 solid 3px|30 year mortgage average}}

{{legend-line|#F8E71C solid 3px|30 Year Treasury Bond}}

{{legend-line|#000000 solid 3px| 10 Year Treasury Bond}}

{{legend-line|#9013FE solid 3px| 2 Year Treasury Bond}}

{{legend-line|#4A90E2 solid 3px| 3 month Treasury Bond}}

{{legend-line|#D0021B solid 4px| Effective Federal Funds Rate}}

{{legend-line|#E786F9 solid 4px| CPI inflation year/year}}

{{color box|lightgrey}} Recessions

]]

While the causes of the bubble and subsequent crash are disputed, the precipitating factor for the Financial Crisis of 2007–2008 was the bursting of the United States housing bubble and the subsequent subprime mortgage crisis, which occurred due to a high default rate and resulting foreclosures of mortgage loans, particularly adjustable-rate mortgages. Some or all of the following factors contributed to the crisis:

• In its January 2011 report, the Financial Crisis Inquiry Commission (FCIC, a committee of U.S. congressmen) concluded that the financial crisis was avoidable and was caused by:{{Cite web | url=https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf | title= Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States}}{{cite web | url=https://cybercemetery.unt.edu/archive/fcic/20110310173538/http://www.fcic.gov/report | title=Financial Crisis Inquiry Commission – Get the Report}}{{cite news | url=https://www.nytimes.com/2011/01/26/business/economy/26inquiry.html | title=Financial Crisis Was Avoidable, Inquiry Concludes | first=Sewell| last=Chan | author-link=Sewell Chan | work=The New York Times | date=January 25, 2011 | url-access=subscription}}{{cite web | url=http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_conclusions.pdf |title=Conclusions of the Financial Crisis Inquiry Commission | website=Stanford University}}{{cite web | url=https://www.lexisnexis.com/LegalNewsRoom/financial-fraud-law/b/blog/posts/financial-meltdown-was-avoidable-crisis-commission-finds | title=Financial Meltdown Was Avoidable, Crisis Commission Finds | publisher=LexisNexis}}
• "widespread failures in financial regulation and supervision", including the Federal Reserve's failure to stem the tide of toxic assets.
• "dramatic failures of corporate governance and risk management at many systemically important financial institutions" including too many financial firms acting recklessly and taking on too much risk.
• "a combination of excessive borrowing, risky investments, and lack of transparency" by financial institutions and by households that put the financial system on a collision course with crisis.
• ill preparation and inconsistent action by government and key policy makers lacking a full understanding of the financial system they oversaw that "added to the uncertainty and panic".
• a "systemic breakdown in accountability and ethics" at all levels.
• "collapsing mortgage-lending standards and the mortgage securitization pipeline".
• deregulation of 'over-the-counter' derivatives, especially credit default swaps.
• "the failures of credit rating agencies" to correctly price risk.
• "Wall Street and the Financial Crisis: Anatomy of a Financial Collapse" (known as the Levin–Coburn Report) by the United States Senate concluded that the crisis was the result of "high risk, complex financial products; undisclosed conflicts of interest; the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street".{{cite web | url=https://www.hsgac.senate.gov//imo/media/doc/Financial_Crisis/FinancialCrisisReport.pdf | title=Senate Financial Crisis Report, 2011 | date=April 13, 2011}}
• The high delinquency and default rates by homeowners, particularly those with subprime credit, led to a rapid devaluation of mortgage-backed securities including bundled loan portfolios, derivatives and credit default swaps. As the value of these assets plummeted, buyers for these securities evaporated and banks who were heavily invested in these assets began to experience a liquidity crisis.
• Securitization, a process in which many mortgages were bundled together and formed into new financial instruments called mortgage-backed securities, allowed for shifting of risk and lax underwriting standards. These bundles could be sold as (ostensibly) low-risk securities partly because they were often backed by credit default swap insurance.{{cite journal| title=Credit Default Swaps and the Credit Crisis |doi=10.1257/jep.24.1.73 |first=René M. |last=Stulz |journal=Journal of Economic Perspectives |volume =24 |issue=1 |pages=73–92 |date=Winter 2010 |s2cid=154418474 |doi-access=free }} Because mortgage lenders could pass these mortgages (and the associated risks) on in this way, they could and did adopt loose underwriting criteria.
• Lax regulation allowed predatory lending in the private sector,{{Cite web |title=The 2008 Housing Crisis| url=https://www.americanprogress.org/issues/economy/reports/2017/04/13/430424/2008-housing-crisis/ | work=Center for American Progress | first1=Colin | last1=McArthur | first2=Sarah | last2=Edelman | date=April 13, 2017}}{{Cite web| title=Victimizing the Borrowers: Predatory Lending's Role in the Subprime Mortgage Crisis |url=https://knowledge.wharton.upenn.edu/article/victimizing-the-borrowers-predatory-lendings-role-in-the-subprime-mortgage-crisis/ | work=Wharton School of the University of Pennsylvania | date=February 20, 2008}} especially after the federal government overrode anti-predatory state laws in 2004.{{Cite web |title=Lest We Forget: Why We Had A Financial Crisis | url=https://www.forbes.com/sites/stevedenning/2011/11/22/5086/ | first=Steve | last=Denning | work=Forbes | date=November 22, 2011}}
• The Community Reinvestment Act (CRA),{{cite web |url=https://www.federalreserve.gov/consumerscommunities/cra_about.htm |title=The Fed – Community Reinvestment Act | publisher=Federal Reserve Board of Governors }} a 1977 U.S. federal law designed to help low- and moderate-income Americans get mortgage loans required banks to grant mortgages to higher risk families.{{Cite news| title=The Clinton-Era Roots of the Financial Crisis| url=https://www.wsj.com/articles/the-clintonera-roots-of-the-financial-crisis-1376348141 | first1=Phil | last1=Gramm | first2=Mike | last2=Solon | author-link1=Phil Gramm | work=The Wall Street Journal | date=August 12, 2013 | url-access=subscription}}{{Cite news |title=Here's How The Community Reinvestment Act Led To The Housing Bubble's Lax Lending |url=https://www.businessinsider.com/the-cra-debate-a-users-guide-2009-6 | first=John |last=Carney | work=Business Insider | date=June 27, 2009}}{{cite web | url=https://communitycapital.unc.edu/research/debunking-the-cra-myth-again/ | title=UNC Center Study Debunks Role of CRA in Housing Crisis | first1=Carolina | last1=Reid | first2=Ellen | last2=Seidman | first3=Janneke | last3=Ratcliffe | first4=Josh | last4=Silver | first5=Lei | last5=Ding | first6=Mark | last6=Willis | publisher=University of North Carolina at Chapel Hill | date=January 2013 | access-date=June 8, 2020 | archive-date=August 17, 2020 | archive-url=https://web.archive.org/web/20200817140907/https://communitycapital.unc.edu/research/debunking-the-cra-myth-again/ | url-status=dead }}{{Cite web|title=Federal Reserve Board – Community Reinvestment Act (CRA)|url=https://www.federalreserve.gov/consumerscommunities/cra_about.htm|access-date=May 25, 2021|website=Board of Governors of the Federal Reserve System|language=en}} Granted, in 2009, Federal Reserve economists found that, "only a small portion of subprime mortgage originations [related] to the CRA", and that "CRA-related loans appear[ed] to perform comparably to other types of subprime loans". These findings "run counter to the contention that the CRA contributed in any substantive way to the [mortgage crisis]."{{Cite web |last1=Bhutta |first1=Neil |last2=Canner |first2=Glenn B. |date=March 1, 2009 |title=Did the CRA cause the mortgage market meltdown? |publisher=Federal Reserve Bank of Minneapolis |url=https://www.minneapolisfed.org:443/article/2009/did-the-cra-cause-the-mortgage-market-meltdown |access-date=2023-02-01 |language=en}}
• Reckless lending by lenders such as Bank of America's Countrywide Financial unit was increasingly incentivized and even mandated by government regulation.{{Cite web|last1=Perry|first1=Mark J.|last2=Dell|first2=Robert|date=January 18, 2011|title=How Government Failure Caused the Great Recession|url=https://www.huffpost.com/entry/post_1596_b_810563|access-date=May 25, 2021|website=HuffPost|language=en}} This may have caused Fannie Mae and Freddie Mac to lose market share and to respond by lowering their own standards.{{cite book | url=https://books.google.com/books?id=pTgiRDj-uIYC&pg=PA62 | title=Zombie Economics: How Dead Ideas Still Walk among Us | first=John | last=Quiggin | publisher=Princeton University Press | date=2010 | page=62| isbn=978-1400842087 }}
• Mortgage guarantees by Fannie Mae and Freddie Mac, quasi-government agencies, which purchased many subprime loan securitizations.{{cite web | url=https://www.cato.org/sites/cato.org/files/pubs/pdf/bp120.pdf | title=Fannie, Freddie, and the Subprime Mortgage Market | last=Calabria | first=Mark | work=Cato Institute | date=March 7, 2011}} The implicit guarantee by the U.S. federal government created a moral hazard and contributed to a glut of risky lending.
• Government policies that encouraged home ownership, providing easier access to loans for subprime borrowers; overvaluation of bundled subprime mortgages based on the theory that housing prices would continue to escalate; questionable trading practices on behalf of both buyers and sellers; compensation structures by banks and mortgage originators that prioritize short-term deal flow over long-term value creation; and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making.{{cite web | title=Money, Power and Wall Street, Part 1| url=https://www.pbs.org/wgbh/frontline/film/money-power-wall-street/ | publisher=PBS | year=2012}}{{cite magazine | last1=Keller | first1=Christopher | last2=Stocker | first2=Michael | title=Executive Compensation's Role in the Financial Crisis| url=https://www.law.com/corpcounsel/almID/1202426091714&slreturn=20121002110606/?slreturn=20200507194358# |magazine=The National Law Journal | date=November 18, 2008}}
• The 1999 Gramm-Leach-Bliley Act, which partially repealed the Glass-Steagall Act, effectively removed the separation between investment banks and depository banks in the United States and increased speculation on the part of depository banks.{{cite web | url=https://www.commondreams.org/views/2009/11/12/reflections-glass-steagall-and-maniacal-deregulation | title=Reflections on Glass-Steagall and Maniacal Deregulation |last=Weissman | first=Robert | website=Common Dreams | date=November 12, 2009 }}
• Credit rating agencies and investors failed to accurately price the financial risk involved with mortgage loan-related financial products, and governments did not adjust their regulatory practices to address changes in financial markets.{{lang|la|Strategische Unternehmensfuehrung}} Nr. 1, 1999. Munich, St. Gallen 1999, {{ISSN|1436-5812}}{{cite news | url=https://www.faz.net/aktuell/wirtschaft/unternehmen/alan-greenspan-die-ratingagenturen-wissen-nicht-was-sie-tun-1464553.html | title=Alan Greenspan: 'Die Ratingagenturen wissen nicht was sie tun' | work=Frankfurter Allgemeine Zeitung |date=September 22, 2007| last1=Kuls | first1=Norbert | last2=Tigges | first2=Claus }}{{cite web| url=https://georgewbush-whitehouse.archives.gov/news/releases/2008/11/20081115-1.html |title=Declaration of the Summit on Financial Markets and the World Economy |publisher=White House | date=November 15, 2008}}
• Variations in the cost of borrowing.{{cite web | url=https://www.minneapolisfed.org/research/wp/wp666.pdf | work=Federal Reserve Bank of Minneapolis | title=Facts and Myths about the Financial Crisis of 2008 | first1=V. V. | last1=Chari | first2=Lawrence | last2=Christiano | first3=Patrick J. | last3=Kehoe | date=October 2008}}
• Fair value accounting was issued as U.S. accounting standard SFAS 157 in 2006 by the privately run Financial Accounting Standards Board (FASB)—delegated by the SEC with the task of establishing financial reporting standards.{{citation| url=https://www.nber.org/papers/w15515 |title=Did Fair-Value Accounting Contribute to the Financial Crisis? | first=Christian | last=Laux |series=Working Paper Series | publisher=National Bureau of Economic Research | date=November 2009|doi=10.3386/w15515 | doi-access=free }} This required that tradable assets such as mortgage securities be valued according to their current market value rather than their historic cost or some future expected value. When the market for such securities became volatile and collapsed, the resulting loss of value had a major financial effect upon the institutions holding them even if they had no immediate plans to sell them.{{cite journal |title=The role of fair value accounting in the subprime mortgage meltdown| first1=M. R. |last1=Young |first2=P. B. W. |last2=Miller|journal=Journal of Accountancy |pages=34–38|date=May 2008}}
• Easy availability of credit in the US, fueled by large inflows of foreign funds after the 1998 Russian financial crisis and 1997 Asian financial crisis of the 1997–1998 period, led to a housing construction boom and facilitated debt-financed consumer spending. As banks began to give out more loans to potential home owners, housing prices began to rise. Lax lending standards and rising real estate prices also contributed to the real estate bubble. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load.{{cite news| url=https://www.nytimes.com/2008/09/24/business/economy/24text-bush.html |title=President Bush's Address to Nation| work=The New York Times |date=September 24, 2008 | url-access=subscription}}{{cite web |url=https://www.federalreserve.gov/newsevents/speech/bernanke20090414a.htm | title=Four Questions About the Financial Crisis | first=Ben S. | last=Bernanke | author-link=Ben Bernanke | publisher=Federal Reserve Board of Governors |date=April 14, 2009}}{{cite news | url=https://www.nytimes.com/2009/03/02/opinion/02krugman.html | last=Krugman| first=Paul| author-link=Paul Krugman | title=Revenge of the Glut |work=The New York Times| date=March 2, 2009 | url-access=subscription}}
• As part of the housing and credit booms, the number of mortgage-backed securities (MBS) and collateralized debt obligations (CDO), which derived their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors to invest in the U.S. housing market. As housing prices declined, these investors reported significant losses.{{cite web| url=http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/exesum.pdf |title=IMF Loss Estimates | publisher=International Monetary Fund | date=April 2009}}
• Falling prices also resulted in homes worth less than the mortgage loans, providing borrowers with a financial incentive to enter foreclosure. Foreclosure levels were elevated until early 2014.{{cite web | url=https://www.forbes.com/sites/erincarlyle/2015/01/15/foreclosure-filings-drop-by-18-in-2014-hit-lowest-level-since-2006-realtytrac-says/?sh=32f65d3948e5| title=2014 Foreclosure Filings Hit Lowest Level Since 2006, RealtyTrac Says | work=Forbes |date=January 15, 2015 }} drained significant wealth from consumers, losing up to $4.2 trillion{{cite web| url=http://www.mybudget360.com/the-balance-sheet-recession-42-trillion-lost-in-residential-real-estate-value-yet-mortgage-debt-down-by-140-billion/ |title=Estimate of Household Wealth Lost }} Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses were estimated in the trillions of U.S. dollars globally.
• Financialization – the increased use of leverage in the financial system.
• Financial institutions such as investment banks and hedge funds, as well as certain, differently regulated banks, assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or losses.{{cite web| url=https://www.ft.com/content/9c158a92-1a3c-11de-9f91-0000779fd2ac |title=We Need a Better Cushion Against Risk| work=Financial Times |date=March 26, 2009 | url-access=subscription}} These losses affected the ability of financial institutions to lend, slowing economic activity.
• Some critics contend that government mandates forced banks to extend loans to borrowers previously considered uncreditworthy, leading to increasingly lax underwriting standards and high mortgage approval rates.{{Cite web|title=How Government Created the Financial Crisis|url=https://www.hoover.org/research/how-government-created-financial-crisis|access-date=May 25, 2021|publisher=Hoover Institution|language=en}}{{Cite web|first=Joe|last=Carter|date=July 31, 2017|title=How government regulation—not free markets—caused the financial crisis|url=https://blog.acton.org/archives/97027-how-government-regulation-not-free-markets-caused-the-financial-crisis.html|access-date=May 25, 2021|website=Acton Institute PowerBlog|language=en-US}}{{Cite web|date=February 20, 2009|title=Altruism: The Moral Root of the Financial Crisis|url=https://theobjectivestandard.com/2009/02/altruism-financial-crisis/|access-date=May 25, 2021|website=The Objective Standard|language=en-US |last1=Salsman |first1=Richard M. }}{{Cite web|last=Michel|first=Norbert|title=Government Policies Caused The Financial Crisis And Made the Recession Worse|url=https://www.forbes.com/sites/norbertmichel/2015/01/26/government-policies-caused-the-financial-crisis-and-made-the-recession-worse/|access-date=May 25, 2021|website=Forbes|language=en}} These, in turn, led to an increase in the number of homebuyers, which drove up housing prices. This appreciation in value led many homeowners to borrow against the equity in their homes as an apparent windfall, leading to over-leveraging.

File:U.S. Home Ownership and Subprime Origination Share.png

{{Main|Subprime mortgage crisis}}

The relaxing of credit lending standards by investment banks and commercial banks allowed for a significant increase in subprime lending. Subprime had not become less risky; Wall Street just accepted this higher risk.{{Cite book | url=https://books.google.com/books?id=HSkjB_PGp98C | title=Uncontrolled Risk| last=Williams |first=Mark| publisher=McGraw-Hill Education |date=April 12, 2010|isbn=978-0-07-163829-6 |pages=125}}

Due to competition between mortgage lenders for revenue and market share, and when the supply of creditworthy borrowers was limited, mortgage lenders relaxed underwriting standards and originated riskier mortgages to less creditworthy borrowers. In the view of some analysts, the relatively conservative government-sponsored enterprises (GSEs) policed mortgage originators and maintained relatively high underwriting standards prior to 2003. However, as market power shifted from securitizers to originators, and as intense competition from private securitizers undermined GSE power, mortgage standards declined and risky loans proliferated. The riskiest loans were originated in 2004–2007, the years of the most intense competition between securitizers and the lowest market share for the GSEs. The GSEs eventually relaxed their standards to try to catch up with the private banks.{{cite news |last=Labaton |first=Stephen| url=https://www.nytimes.com/2008/10/03/business/03sec.html |title=The Reckoning-Agency 04 Rule Lets Banks Pile on Debt |work=The New York Times |date=October 2, 2008 | url-access=subscription}}{{cite news |last=Duhigg |first=Charles | author-link=Charles Duhigg |url=https://www.nytimes.com/2008/10/05/business/05fannie.html |title=The Reckoning-Pressured to Take More Risk, Fannie Reached Tipping Point| work=The New York Times |date=October 4, 2008 | url-access=subscription}}

A contrarian view is that Fannie Mae and Freddie Mac led the way to relaxed underwriting standards, starting in 1995, by advocating the use of easy-to-qualify automated underwriting and appraisal systems, by designing no-down-payment products issued by lenders, by the promotion of thousands of small mortgage brokers, and by their close relationship to subprime loan aggregators such as Countrywide.{{cite book | url=https://books.google.com/books?id=H0ceRXT8Hc8C | first=Joseph | last=Fried | title=Who Really Drove the Economy into the Ditch? | location=New York City | publisher=Algora Publishing | year=2012 | pages=16–42, 67–119| isbn=9780875869445 }}{{cite news |title=Housing in the New Millennium: A Home without Equity Is Just a Rental with debt |publisher=Ssrn.com| first=Graham | last=Fisher |date=June 29, 2001 |ssrn=1162456}}

Depending on how "subprime" mortgages are defined, they remained below 10% of all mortgage originations until 2004, when they rose to nearly 20% and remained there through the 2005–2006 peak of the United States housing bubble.{{cite web | url=https://www.jchs.harvard.edu/research-areas/reports/state-nations-housing-2008 | title=The State of the Nation's Housing 2008 | publisher=Joint Center for Housing Studies | date=June 23, 2008}}

The majority report of the Financial Crisis Inquiry Commission, written by the six Democratic appointees, the minority report, written by three of the four Republican appointees, studies by Federal Reserve economists, and the work of several independent scholars generally contend that government affordable housing policy was not the primary cause of the financial crisis. Although they concede that governmental policies had some role in causing the crisis, they contend that GSE loans performed better than loans securitized by private investment banks, and performed better than some loans originated by institutions that held loans in their own portfolios.

In his dissent to the majority report of the Financial Crisis Inquiry Commission, conservative American Enterprise Institute fellow Peter J. Wallison{{cite web| last=Wallison| first=Peter J.| author-link=Peter J. Wallison | url=https://www.aei.org/research-products/book/dissent-from-the-majority-report-of-the-financial-crisis-inquiry-commission-2/ |title=Dissent from the Majority Report of the Financial Crisis Inquiry Commission | work=American Enterprise Institute - AEI|publisher=American Enterprise Institute |date=December 9, 2008}} stated his belief that the roots of the financial crisis can be traced directly and primarily to affordable housing policies initiated by the United States Department of Housing and Urban Development (HUD) in the 1990s and to massive risky loan purchases by government-sponsored entities Fannie Mae and Freddie Mac. Based upon information in the SEC's December 2011 securities fraud case against six former executives of Fannie and Freddie, Peter Wallison and Edward Pinto estimated that, in 2008, Fannie and Freddie held 13 million substandard loans totaling over $2 trillion.{{cite web |url=https://www.aei.org/articles/why-the-left-is-losing-the-argument-over-the-financial-crisis/ |first1=Peter J. | last1=Wallison | author-link1=Peter J. Wallison | first2=Edward | last2=Pinto |title=Why the Left Is Losing the Argument over the Financial Crisis |work=American Enterprise Institute - AEI |publisher=American Enterprise Institute |date=December 27, 2011}}

In the early and mid-2000s, the Bush administration called numerous times for investigations into the safety and soundness of the GSEs and their swelling portfolio of subprime mortgages. On September 10, 2003, the United States House Committee on Financial Services held a hearing, at the urging of the administration, to assess safety and soundness issues and to review a recent report by the Office of Federal Housing Enterprise Oversight (OFHEO) that had uncovered accounting discrepancies within the two entities.{{cite web| title=Just the Facts: The Administration's Unheeded Warnings About the Systemic Risk Posed by the GSEs| url=https://georgewbush-whitehouse.archives.gov/news/releases/2008/09/20080919-15.html |publisher=White House | date=September 19, 2008}}{{cite web | title=OFHEO Report on Systemic Risk | url=https://www.fhfa.gov/PolicyProgramsResearch/Research/Pages/Systemic-Risk-Fannie-Mae,-Freddie-Mac-and-the-Role-of-OFHEO.aspx | publisher=Federal Housing Finance Agency | date=February 4, 2003 | access-date=June 10, 2020 | archive-date=September 4, 2020 | archive-url=https://web.archive.org/web/20200904010022/https://www.fhfa.gov/PolicyProgramsResearch/Research/Pages/Systemic-Risk-Fannie-Mae,-Freddie-Mac-and-the-Role-of-OFHEO.aspx | url-status=dead }} The hearings never resulted in new legislation or formal investigation of Fannie Mae and Freddie Mac, as many of the committee members refused to accept the report and instead rebuked OFHEO for their attempt at regulation.{{cite web| title=House Hearing on OFHEO Report |url=http://commdocs.house.gov/committees/bank/hba97754.000/hba97754_0f.htm | publisher=United States House of Representatives}} Some, such as Wallison, believe this was an early warning to the systemic risk that the growing market in subprime mortgages posed to the U.S. financial system that went unheeded.{{cite news | first=Peter J. | last=Wallison | author-link=Peter J. Wallison |title=Ominous Signs |url=http://www.international-economy.com/TIE_Su04_Wallison.pdf |publisher=The International Economy}}

A 2000 United States Department of the Treasury study of lending trends for 305 cities from 1993 to 1998 showed that $467 billion of mortgage lending was made by Community Reinvestment Act (CRA)-covered lenders into low and mid-level income (LMI) borrowers and neighborhoods, representing 10% of all U.S. mortgage lending during the period. The majority of these were prime loans. Sub-prime loans made by CRA-covered institutions constituted a 3% market share of LMI loans in 1998,{{cite web| url=https://www.treasury.gov/press-center/press-releases/Documents/crareport.pdf |title=The Community Reinvestment Act After Financial Modernization | first1=Robert E. | last1=Litan | first2=Nicolas P. | last2=Retsinas | first3=Eric S. | last3=Belsky | first4=Susan | last4=White Haag | publisher=United States Department of the Treasury |date=April 15, 2000}} but in the run-up to the crisis, fully 25% of all subprime lending occurred at CRA-covered institutions and another 25% of subprime loans had some connection with CRA.{{cite web| url=https://prospect.org/article/liberals-cause-sub-prime-crisis/ | first=Robert | last=Gordon |title=Did Liberals Cause the Sub-Prime Crisis? |work=The American Prospect | date=April 7, 2008}} However, most sub-prime loans were not made to the LMI borrowers targeted by the CRA,{{citation needed|date=November 2018}}{{Cite book |last=Robert |first=W. K.| title=Fiscal Aspects of Aviation Management |publisher=Southern Illinois University Press| year=2000}}{{Cite journal |last1=Demyanyk |first1=Yuliya |last2=Van Hemert |first2=Otto |date=2011 |title=Understanding the Subprime Mortgage Crisis |url=https://www.jstor.org/stable/20869292 |journal=The Review of Financial Studies |volume=24 |issue=6 |pages=1848–1880 |doi=10.1093/rfs/hhp033 |jstor=20869292 |issn=0893-9454}} especially in the years 2005–2006 leading up to the crisis,{{citation needed|date=November 2018}}{{Cite journal| last=Wray |first=Randall L. |date=2007 |title=Lessons from the Subprime Meltdown.| url=https://www.frbsf.org/economic-research/files/Kojucharov-Martin-Martin-Xu.pdf |journal=Working Paper No. 522 |via=Levy Economics Institute of Bard College}}{{Cite journal |last1=Avery |first1=Robert B. |last2=Brevoort |first2=Kenneth P. |date=2015 |title=The Subprime Crisis: Is Government Housing Policy to Blame? |url=https://www.jstor.org/stable/43556179 |journal=The Review of Economics and Statistics |volume=97 |issue=2 |pages=352–363 |doi=10.1162/REST_a_00491 |jstor=43556179 |issn=0034-6535}} nor did it find any evidence that lending under the CRA rules increased delinquency rates or that the CRA indirectly influenced independent mortgage lenders to ramp up sub-prime lending.{{Cite journal |last1=Demyank |first1= Y.| last2=Hemert |first2=V. O. |title=Understanding the subprime mortgage crisis| journal=Review of Financial Studies |volume=24 |issue=6 |doi=10.1093/rfs/hhp033 |date=June 2011 |pages=1848–1880}}{{verify source|reason=There was "citation needed" just before this. Does this source not support the text?|date=January 2024}}

To other analysts the delay between CRA rule changes in 1995 and the explosion of subprime lending is not surprising, and does not exonerate the CRA. They contend that there were two, connected causes to the crisis: the relaxation of underwriting standards in 1995 and the ultra-low interest rates initiated by the Federal Reserve after the terrorist attack on September 11, 2001. Both causes had to be in place before the crisis could take place.{{cite book | url=https://books.google.com/books?id=H0ceRXT8Hc8C | first=Joseph | last=Fried | title=Who Really Drove the Economy into the Ditch? | location=New York City | publisher=Algora | year=2012 | pages=5| isbn=9780875869445 }} Critics also point out that publicly announced CRA loan commitments were massive, totaling $4.5 trillion in the years between 1994 and 2007.{{cite book | url=https://books.google.com/books?id=H0ceRXT8Hc8C | first=Joseph | last=Fried | title=Who Really Drove the Economy into the Ditch? | location=New York City | publisher=Algora | year=2012 | pages=148| isbn=9780875869445 }} They also argue that the Federal Reserve's classification of CRA loans as "prime" is based on the faulty and self-serving assumption that high-interest-rate loans (3 percentage points over average) equal "subprime" loans.{{cite book | url=https://books.google.com/books?id=H0ceRXT8Hc8C | first=Joseph | last=Fried | title=Who Really Drove the Economy into the Ditch? | location=New York City | publisher=Algora | year=2012 | pages=140–141| isbn=9780875869445 }}

Others have pointed out that there were not enough of these loans made to cause a crisis of this magnitude. In an article in Portfolio magazine, Michael Lewis spoke with one trader who noted that "There weren't enough Americans with [bad] credit taking out [bad loans] to satisfy investors' appetite for the end product." Essentially, investment banks and hedge funds used financial innovation to enable large wagers to be made, far beyond the actual value of the underlying mortgage loans, using derivatives called credit default swaps, collateralized debt obligations and synthetic CDOs.

By March 2011, the FDIC had paid out $9 billion (c. ${{Format price|{{Inflation|index=US-GDP|value=9000000000|start_year=2011}}}} in {{Inflation/year|US-GDP}}{{inflation/fn|US-GDP}}) to cover losses on bad loans at 165 failed financial institutions.{{cite news |title=FDIC's Tab For Failed U.S. Banks Nears $9 Billion| work=The Wall Street Journal |date=March 16, 2011 |url=https://www.wsj.com/articles/SB10001424052748704396504576204752754667840 |first=Robin| last=Sidel | url-access=subscription}}{{Cite news | url=https://www.seacoastonline.com/article/20110317/NEWS/110319829 | title=US banking regulator's tab for failed banks nears $9B | work=The Portsmouth Herald | date=March 17, 2011}} The Congressional Budget Office estimated, in June 2011, that the bailout to Fannie Mae and Freddie Mac exceeds $300 billion (c. ${{Format price|{{Inflation|index=US-GDP|value=300000000000|start_year=2011}}}} in {{Inflation/year|US-GDP}}{{inflation/fn|US-GDP}}) (calculated by adding the fair value deficits of the entities to the direct bailout funds at the time).{{cite book | url=https://books.google.com/books?id=H0ceRXT8Hc8C | first=Joseph | last=Fried | title=Who Really Drove the Economy into the Ditch? | location=New York City | publisher=Algora | year=2012 | page=75| isbn=9780875869445 }}

Economist Paul Krugman argued in January 2010 that the simultaneous growth of the residential and commercial real estate pricing bubbles and the global nature of the crisis undermines the case made by those who argue that Fannie Mae, Freddie Mac, CRA, or predatory lending were primary causes of the crisis. In other words, bubbles in both markets developed even though only the residential market was affected by these potential causes.{{cite news| url=https://krugman.blogs.nytimes.com/2010/01/07/cre-ative-destruction/ | title=CRE-ative destruction| first=Paul | last=Krugman | author-link=Paul Krugman | work=The New York Times |date=January 7, 2010}}

Countering Krugman, Wallison wrote: "It is not true that every bubble—even a large bubble—has the potential to cause a financial crisis when it deflates." Wallison notes that other developed countries had "large bubbles during the 1997–2007 period" but "the losses associated with mortgage delinquencies and defaults when these bubbles deflated were far lower than the losses suffered in the United States when the 1997–2007 [bubble] deflated." According to Wallison, the reason the U.S. residential housing bubble (as opposed to other types of bubbles) led to financial crisis was that it was supported by a huge number of substandard loans—generally with low or no downpayments.{{cite web | url=https://www.aei.org/research-products/book/dissent-from-the-majority-report-of-the-financial-crisis-inquiry-commission-2/ | first=Peter J. | last=Wallison | author-link=Peter J. Wallison| title=Dissent from the Majority Report of the Financial Crisis Inquiry Commission| publisher=American Enterprise Institute | date=January 2011}}

Krugman's contention (that the growth of a commercial real estate bubble indicates that U.S. housing policy was not the cause of the crisis) is challenged by additional analysis. After researching the default of commercial loans during the financial crisis, Xudong An and Anthony B. Sanders reported (in December 2010): "We find limited evidence that substantial deterioration in CMBS [commercial mortgage-backed securities] loan underwriting occurred prior to the crisis."{{Cite conference | conference=46th Annual AREUEA Conference Paper| last1=Sanders | first1=Anthony B. | last2=An | first2=Xudong | title=Default of CMBS Loans During the Crisis |date=November 29, 2010| ssrn=1717062 | url=https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1717062}} Other analysts support the contention that the crisis in commercial real estate and related lending took place after the crisis in residential real estate. Business journalist Kimberly Amadeo reported: "The first signs of decline in residential real estate occurred in 2006. Three years later, commercial real estate started feeling the effects."{{verify source|reason=Closing quotation mark was missing, unclear where quotation should end|date=January 2024}}{{Cite news | last=Amadeo | first=Kimberly | title=Commercial Real Estate and the Economy | url=https://www.thebalance.com/what-is-commercial-real-estate-3305914 | publisher=Dotdash | date=February 28, 2019}} Denice A. Gierach, a real estate attorney and CPA, wrote:

{{blockquote|... most of the commercial real estate loans were good loans destroyed by a really bad economy. In other words, the borrowers did not cause the loans to go bad-it was the economy.{{cite web | url=https://www.hg.org/legal-articles/waiting-for-the-other-shoe-to-drop-in-commercial-real-estate-18275 | last=Gierach | first=Denice A.| title=Waiting for the other shoe to drop in commercial real estate | website=hg.org}}}}

{{Main|2000s United States housing bubble}}

File:Median and Average Sales Prices of New Homes Sold in United States 1963-2016 annual.svg

Between 1998 and 2006, the price of the typical American house increased by 124%.{{cite news |title=CSI: credit crunch | url=https://www.economist.com/special-report/2007/10/20/csi-credit-crunch | magazine=The Economist |date=October 18, 2007}} During the 1980s and 1990s, the national median home price ranged from 2.9 to 3.1 times median household income. By contrast, this ratio increased to 4.0 in 2004, and 4.6 in 2006.{{cite news |url=https://economictimes.indiatimes.com/the-financial-crisis-blame-game/articleshow/3617818.cms |title=The Financial Crisis Blame Game | first1=Ben | last1=Steverman | first2=David | last2=Bogoslaw | work=The Economic Times | date=October 18, 2008}} This housing bubble resulted in many homeowners refinancing their homes at lower interest rates, or financing consumer spending by taking out second mortgages secured by the price appreciation.

In a Peabody Award-winning program, NPR correspondents argued that a "Giant Pool of Money" (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. This pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with products such as the mortgage-backed security and the collateralized debt obligation that were assigned safe ratings by the credit rating agencies.{{cite web |date=May 9, 2008 |title=The Giant Pool of Money |url=https://www.thisamericanlife.org/355/the-giant-pool-of-money |work=This American Life}}

In effect, Wall Street connected this pool of money to the mortgage market in the US, with enormous fees accruing to those throughout the mortgage supply chain, from the mortgage broker selling the loans to small banks that funded the brokers and the large investment banks behind them. By approximately 2003, the supply of mortgages originated at traditional lending standards had been exhausted, and continued strong demand began to drive down lending standards.

The collateralized debt obligation in particular enabled financial institutions to obtain investor funds to finance subprime and other lending, extending or increasing the housing bubble and generating large fees. This essentially places cash payments from multiple mortgages or other debt obligations into a single pool from which specific securities draw in a specific sequence of priority. Those securities first in line received investment-grade ratings from rating agencies. Securities with lower priority had lower credit ratings but theoretically a higher rate of return on the amount invested.{{cite news|last=Eavis|first=Peter| url=https://money.cnn.com/2007/11/24/magazines/fortune/eavis_cdo.fortune/index.htm |title=CDO Explained| work=CNN| date=November 25, 2007}}

By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak.{{cite book | url=https://books.google.com/books?id=_4Nkye6tpWcC&pg=PA128 | title=Banking and Finance: Theory, Law and Practice | first=Gomez | last=Clifford | publisher=PHI Learning | date=November 30, 2011| isbn=9788120342378 }}{{cite news| url=https://www.economist.com/finance-and-economics/2008/10/23/a-helping-hand-to-homeowners |title= A Helping Hand to Homeowners|magazine=The Economist|date=October 23, 2008 | url-access=subscription}} As prices declined, borrowers with adjustable-rate mortgages could not refinance to avoid the higher payments associated with rising interest rates and began to default. During 2007, lenders began foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006.{{cite news | url=https://www.reuters.com/article/us-usa-housing-foreclosures/foreclosure-rate-almost-doubled-in-2007-report-idUSN2849823320080129 | title=Foreclosure rate almost doubled in 2007: report | first=Al | last=Yoon | work=Reuters | date=January 29, 2008}} This increased to 2.3 million in 2008, an 81% increase vs. 2007.{{cite news | url=https://www.reuters.com/article/us-usa-mortgages-foreclosures/foreclosures-soar-81-percent-in-2008-idUSTRE50E1KV20090115 | title=Foreclosures soar 81 percent in 2008 | first=Lynn | last=Adler | work=Reuters | date=January 15, 2009}} By August 2008, approximately 9% of all U.S. mortgages outstanding were either delinquent or in foreclosure.{{cite web |url=https://www.bespacific.com/delinquencies-and-foreclosures-increase-in-latest-mba-national-delinquency-survey/ | title=Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey | first=Sabrina I. | last=Pacifici | work=Bespacific | date=September 6, 2008}} By September 2009, this had risen to 14.4%.{{cite news | url=https://www.reuters.com/article/usa-housing-foreclosures/update-4-one-in-7-u-s-mortgages-foreclosing-or-delinquent-idUSN1937065020091119 | title=Update 4—One in 7 U.S. mortgages foreclosing or delinquent | first=Julie | last=Haviv | work=Reuters | date=November 19, 2009}}{{cite news | url=https://www.nytimes.com/2009/11/20/business/20mortgage.html | title=U.S. Mortgage Delinquencies Reach a Record High | first=David | last=Streitfeld | author-link=David Streitfeld | work=The New York Times | date=November 20, 2009 | url-access=subscription}}

After the bubble burst, Australian economist John Quiggin wrote, "And, unlike the Great Depression, this crisis was entirely the product of financial markets. There was nothing like the postwar turmoil of the 1920s, the struggles over gold convertibility and reparations, or the Smoot-Hawley tariff, all of which have shared the blame for the Great Depression." Instead, Quiggin lays the blame for the 2008 near-meltdown on financial markets, on political decisions to lightly regulate them, and on rating agencies which had self-interested incentives to give good ratings.{{cite book | url=https://books.google.com/books?id=pTgiRDj-uIYC&pg=PA62 | title=Zombie Economics: How Dead Ideas Still Walk among Us | first=John | last=Quiggin | publisher=Princeton University Press | date=2010 | pages=63–64| isbn=978-1400842087 }}

Lower interest rates encouraged borrowing. From 2000 to 2003, the Federal Reserve lowered the federal funds rate target from 6.5% to 1.0%.{{cite web |title=Open Market Operations Archive |url=https://www.federalreserve.gov/monetarypolicy/openmarket_archive.htm | publisher=Federal Reserve Board of Governors}}{{cite web |title=Open Market Operations |url=https://www.federalreserve.gov/monetarypolicy/openmarket.htm | publisher=Federal Reserve Board of Governors}} This was done to soften the effects of the collapse of the dot-com bubble and the September 11 attacks, as well as to combat a perceived risk of deflation.{{cite book | url=https://books.google.com/books?id=oGKpAgAAQBAJ&pg=PT38 | title=China's Role in Global Economic Recovery | first=Xiaolan | last=Fu | publisher=Routledge | date= March 12, 2012| isbn=9781136632488 }} As early as 2002, it was apparent that credit was fueling housing instead of business investment as some economists went so far as to advocate that the Fed "needs to create a housing bubble to replace the Nasdaq bubble".{{cite news| url=https://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html |title=Dubya's Double Dip?| last=Krugman| first=Paul| author-link=Paul Krugman | work=The New York Times | date=August 2, 2002 | url-access=subscription}} Moreover, empirical studies using data from advanced countries show that excessive credit growth contributed greatly to the severity of the crisis.{{cite journal| url=https://ideas.repec.org/a/eee/jimfin/v35y2013icp1-19.html| title=Leading indicators of crisis incidence: Evidence from developed countries| first1=Jan| last1=Babecký |first2=Tomáš |last2=Havránek| first3=Jakub| last3=Matějů |first4=Marek |last4=Rusnák |first5=Kateřina |last5=Šmídková| first6=Bořek| last6=Vašíček| date=July 11, 2017| journal=Journal of International Money and Finance| volume=35|issue=C| pages=1–19 |via=RePEc – IDEAS| doi=10.1016/j.jimonfin.2013.01.001| hdl=10419/153919| s2cid=18761719| hdl-access=free}}

File:U.S. Trade Deficit Dollars and % GDP.png

Additional downward pressure on interest rates was created by rising U.S. current account deficit, which peaked along with the housing bubble in 2006. Federal Reserve chairman Ben Bernanke explained how trade deficits required the U.S. to borrow money from abroad, in the process bidding up bond prices and lowering interest rates.{{cite web |url=https://www.federalreserve.gov/boarddocs/speeches/2005/20050414/default.htm |title=The Global Saving Glut and U.S. Current Account Deficit| first=Ben | last=Bernanke | author-link=Ben Bernanke | publisher=Federal Reserve Board of Governors | date=April 14, 2005}}

Bernanke explained that between 1996 and 2004, the U.S. current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. Financing these deficits required the country to borrow large sums from abroad, much of it from countries running trade surpluses. These were mainly the emerging economies in Asia and oil-exporting nations. The balance of payments identity requires that a country (such as the US) running a current account deficit also have a capital account (investment) surplus of the same amount. Hence large and growing amounts of foreign funds (capital) flowed into the U.S. to finance its imports.

All of this created demand for various types of financial assets, raising the prices of those assets while lowering interest rates. Foreign investors had these funds to lend either because they had very high personal savings rates (as high as 40% in China) or because of high oil prices. Ben Bernanke referred to this as a "saving glut".{{cite web |url=https://www.federalreserve.gov/newsevents/speech/bernanke20070911a.htm |title=Global Imbalances: Recent Developments and Prospects | first=Ben S. |last=Bernanke | author-link=Ben S. Bernanke | publisher=Federal Reserve Board of Governors | date=September 11, 2007}}

A flood of funds (capital or liquidity) reached the U.S. financial markets. Foreign governments supplied funds by purchasing Treasury bonds and thus avoided much of the direct effect of the crisis. U.S. households, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets. Financial institutions invested foreign funds in mortgage-backed securities.{{Citation needed|reason=No source|date=September 2019}}

The Fed then raised the Fed funds rate significantly between July 2004 and July 2006.{{cite web |url=https://www.federalreserve.gov/releases/h15/data.htm |title=Fed Historical Data-Fed Funds Rate |publisher=Federal Reserve Board of Governors}} This contributed to an increase in one-year and five-year adjustable-rate mortgage (ARM) rates, making ARM interest rate resets more expensive for homeowners.{{cite magazine| first=John | last=Mastrobattista | url=https://www.nationalreview.com/2009/02/fixing-mortgages-john-mastrobattista/ | title=Fixing Mortgages | magazine=National Review | date=February 17, 2009}} This may have also contributed to the deflating of the housing bubble, as asset prices generally move inversely to interest rates, and it became riskier to speculate in housing.{{cite news | last=Max | first=Sarah | url=https://money.cnn.com/2004/07/13/real_estate/buying_selling/risingrates/ |title=The Bubble Question | work=CNN| date=July 27, 2004}}{{cite news |url=https://www.bloomberg.com/news/articles/2004-07-18/is-a-housing-bubble-about-to-burst |title=Is a Housing Bubble About to Burst? |work=Bloomberg News | date=July 19, 2004 | url-access=subscription}} U.S. housing and financial assets dramatically declined in value after the housing bubble burst.{{cite news |url=https://www.economist.com/briefing/2009/01/22/when-a-flow-becomes-a-flood |title=When a Flow Becomes a Flood |magazine=The Economist |date=January 22, 2009 | url-access=subscription}}{{cite magazine |last=Altman |first=Roger C. |author-link=Roger Altman |date=January 2009 |title=The Great Crash of 2008 |url=https://www.foreignaffairs.com/articles/united-states/2009-01-01/great-crash-2008 |archive-url=https://web.archive.org/web/20250214112812/https://www.foreignaffairs.com/articles/united-states/2009-01-01/great-crash-2008 |archive-date=2025-02-14 |magazine=Foreign Affairs}}

Subprime lending standards declined in the U.S.: in early 2000, a subprime borrower had a FICO score of 660 or less. By 2005, many lenders dropped the required FICO score to 620, making it much easier to qualify for prime loans and making subprime lending a riskier business. Proof of income and assets were de-emphasized. Loans at first required full documentation, then low documentation, then no documentation. One subprime mortgage product that gained wide acceptance was the no income, no job, no asset verification required (NINJA) mortgage. Informally, these loans were aptly referred to as "liar loans" because they encouraged borrowers to be less than honest in the loan application process.{{Cite book| url=https://books.google.com/books?id=HSkjB_PGp98C | title=Uncontrolled Risk |last=Williams |first=Mark |publisher=McGraw-Hill Education |date=April 12, 2010 |isbn=978-0-07-163829-6 |pages=124 }} Testimony given to the Financial Crisis Inquiry Commission by whistleblower Richard M. Bowen III, on events during his tenure as the Business Chief Underwriter for Correspondent Lending in the Consumer Lending Group for Citigroup, where he was responsible for over 220 professional underwriters, suggests that by 2006 and 2007, the collapse of mortgage underwriting standards was endemic. His testimony stated that by 2006, 60% of mortgages purchased by Citigroup from some 1,600 mortgage companies were "defective" (were not underwritten to policy, or did not contain all policy-required documents)—this, despite the fact that each of these 1,600 originators was contractually responsible (certified via representations and warrantees) that its mortgage originations met Citigroup standards. Moreover, during 2007, "defective mortgages (from mortgage originators contractually bound to perform underwriting to Citi's standards) increased ... to over 80% of production".{{cite web| url=http://fcic-static.law.stanford.edu/cdn_media/fcic-testimony/2010-0407-Bowen.pdf | title=Hearing on Subprime Lending And Securitization And Government Sponsored Enterprises | publisher=Stanford University | date=April 7, 2010}}

In separate testimony to the Financial Crisis Inquiry Commission, officers of Clayton Holdings, the largest residential loan due diligence and securitization surveillance company in the United States and Europe, testified that Clayton's review of over 900,000 mortgages issued from January 2006 to June 2007 revealed that scarcely 54% of the loans met their originators' underwriting standards. The analysis (conducted on behalf of 23 investment and commercial banks, including 7 "too big to fail" banks) additionally showed that 28% of the sampled loans did not meet the minimal standards of any issuer. Clayton's analysis further showed that 39% of these loans (i.e. those not meeting any issuer's minimal underwriting standards) were subsequently securitized and sold to investors.{{cite news |title=Raters Ignored Proof of Unsafe Loans, Panel Is Told |url=https://www.nytimes.com/2010/09/27/business/27ratings.html |work=The New York Times |first=Gretchen |last=Morgenson| author-link=Gretchen Morgenson | date=September 26, 2010 | url-access=subscription}}{{cite web| title=All Clayton Trending Reports 1st quarter 2006 – 2nd quarter 2007 | url=https://fraser.stlouisfed.org/files/docs/historical/fct/fcic/fcic_docs_clayton_alltrending_20100923.pdf | publisher=FRASER | year=2007}}

Predatory lending refers to the practice of unscrupulous lenders, enticing borrowers to enter into "unsafe" or "unsound" secured loans for inappropriate purposes.{{cite web| url=https://www.thestreet.com/personal-finance/mortgages/what-is-predatory-lending-14953861 | title=What Is Predatory Lending? | first=Brian | last=O'Connell | work=TheStreet | date=May 9, 2019 }}{{cite web | url=https://dfi.wa.gov/financial-education/information/predatory-lending | title=Predatory Lending | publisher=Washington State Department of Financial Institutions}}{{cite web | url=https://www.law.cornell.edu/wex/predatory_lending | title=predatory lending | publisher=Legal Information Institute}}

In June 2008, Countrywide Financial was sued by then California Attorney General Jerry Brown for "unfair business practices" and "false advertising", alleging that Countrywide used "deceptive tactics to push homeowners into complicated, risky, and expensive loans so that the company could sell as many loans as possible to third-party investors".{{cite press release | url=https://www.oag.ca.gov/news/press-releases/brown-sues-countrywide-mortgage-deception | title=Brown Sues Countrywide For Mortgage Deception | publisher=Attorney General of California | date=June 25, 2008}} In May 2009, Bank of America modified 64,000 Countrywide loans as a result.{{cite news | url=https://dsnews.com/news/loss-mitigation/05-31-2009/bofa-modifies-64000-countrywide-loans-2009-06-01 | title=BofA Modifies 64,000 Countrywide Loans | work=DS News | date=May 31, 2009}} When housing prices decreased, homeowners in ARMs then had little incentive to pay their monthly payments, since their home equity had disappeared. This caused Countrywide's financial condition to deteriorate, ultimately resulting in a decision by the Office of Thrift Supervision to seize the lender. One Countrywide employee—who would later plead guilty to two counts of wire fraud and spent 18 months in prison—stated that, "If you had a pulse, we gave you a loan."{{cite web |url=https://www.nbcnews.com/id/wbna29827248 |title=If you had a pulse, we gave you a loan | first1=Richard | last1=Greenberg | author-link1=Richard Greenberg | first2=Chris | last2=Hansen | author-link2=Chris Hansen | work=NBC News | date=March 22, 2009}}

Former employees from Ameriquest, which was United States' leading wholesale lender, described a system in which they were pushed to falsify mortgage documents and then sell the mortgages to Wall Street banks eager to make fast profits. There is growing evidence that such mortgage frauds may be a cause of the crisis.{{cite news | url=https://www.thenation.com/article/archive/road-ruin-mortgage-fraud-scandal-brewing/ | title=Road to Ruin: Mortgage Fraud Scandal Brewing | date=May 13, 2009 | work=American News Project}}

{{Further|Government policies and the subprime mortgage crisis}}

According to Barry Eichengreen, the roots of the financial crisis lay in the deregulation of financial markets.{{Cite book|last=Eichengreen|first=Barry|url=https://www.jstor.org/stable/j.ctvd58rxg|title=Globalizing Capital: A History of the International Monetary System|date=2019|publisher=Princeton University Press|isbn=978-0-691-19390-8|edition=3rd|pages=216|doi=10.2307/j.ctvd58rxg|jstor=j.ctvd58rxg|s2cid=240840930}} A 2012 OECD study{{cite journal|title=Systemically Important Banks and Capital Regulation Challenges |doi=10.1787/5kg0ps8cq8q6-en| journal=OECD Economics Department Working Papers |year=2012 | last1=Slovik | first1=Patrick|doi-access=free }} suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced the financial crisis. In other cases, laws were changed or enforcement weakened in parts of the financial system. Key examples include:

• Jimmy Carter's Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) phased out several restrictions on banks' financial practices, broadened their lending powers, allowed credit unions and savings and loans to offer checkable deposits, and raised the deposit insurance limit from $40,000 to $100,000 (thereby potentially lessening depositor scrutiny of lenders' risk management policies).{{cite web | publisher=Federal Deposit Insurance Corporation | title=History of the Eighties – Lessons for the Future | date=December 1997 | url=https://www.fdic.gov/bank/historical/history/3_85.pdf}}
• In October 1982, U.S. President Ronald Reagan signed into law the Garn–St. Germain Depository Institutions Act, which provided for adjustable-rate mortgage loans, began the process of banking deregulation, and contributed to the savings and loan crisis of the late 1980s/early 1990s.{{cite book| last=Leibold|first=Arthur| editor1-last=Barth|editor1-first=James R.| editor2-last=Trimbath| editor2-first=Susanne| editor3-last=Yago| editor3-first=Glenn| chapter=Some Hope for the Future After a Failed National Policy for Thrifts| title=The Savings and Loan Crisis: Lessons from a Regulatory Failure| publisher=Milken Institute|isbn=978-1-4020-7871-2| pages=58–59 |date=July 29, 2004 | chapter-url=https://archive.org/details/savingsloancrisi00jame/page/58}}{{cite book|last1=Strunk|last2=Case|title=Where Deregulation Went Wrong: A Look at the Causes Behind the Savings and Loan Failures in the 1980s|publisher=U.S. League of Savings Institutions|pages=[https://archive.org/details/wherederegulatio0000stru/page/14 14–16] |isbn=978-0-929097-32-9|year=1988| url=https://archive.org/details/wherederegulatio0000stru/page/14}})
• In November 1999, U.S. President Bill Clinton signed into law the Gramm–Leach–Bliley Act, which repealed provisions of the Glass-Steagall Act that prohibited a bank holding company from owning other financial companies. The repeal effectively removed the separation that previously existed between Wall Street investment banks and depository banks, providing a government stamp of approval for a universal risk-taking banking model. Investment banks such as Lehman became competitors with commercial banks.{{Cite book| url=https://books.google.com/books?id=HSkjB_PGp98C | title=Uncontrolled Risk |last=Williams |first=Mark |publisher=McGraw-Hill Education |date=April 12, 2010 |isbn=978-0-07-163829-6 |pages=44 }} Some analysts say that this repeal directly contributed to the severity of the crisis, while others downplay its impact since the institutions that were greatly affected did not fall under the jurisdiction of the act itself.{{Cite book |last=Edey| first=M.| title=The global financial crisis and its effects| publisher=Economics papers: A journal of applied economics and policy |year=2009}}{{cite news| url=https://dealbook.nytimes.com/2012/05/21/reinstating-an-old-rule-is-not-a-cure-for-crisis/ |title=Reinstating an Old Rule Is Not a Cure for Crisis| first=Andrew Ross | last=Sorkin | author-link=Andrew Ross Sorkin | work=The New York Times |date=May 22, 2012 | url-access=subscription}}
• In 2004, the U.S. Securities and Exchange Commission relaxed the net capital rule, which enabled investment banks to substantially increase the level of debt they were taking on, fueling the growth in mortgage-backed securities supporting subprime mortgages. The SEC conceded that self-regulation of investment banks contributed to the crisis.{{cite news |url=https://www.nytimes.com/2008/09/27/business/27sec.html?em |title=SEC Concedes Oversight Flaws |work=The New York Times |first=Stephen | last=Labaton| date=September 27, 2008 | url-access=subscription}}{{cite news |url=https://www.nytimes.com/2008/10/03/business/03sec.html?em|title=The Reckoning |work=The New York Times |first=Stephen| last=Labaton| date=October 3, 2008 | url-access=subscription}}
• Financial institutions in the shadow banking system are not subject to the same regulation as depository banks, allowing them to assume additional debt obligations relative to their financial cushion or capital base.{{cite book| last=Krugman |first=Paul | author-link=Paul Krugman |year=2009| title=The Return of Depression Economics and the Crisis of 2008 |publisher=W. W. Norton Company Limited |isbn=978-0-393-07101-6| url=https://archive.org/details/returnofdepressi00krug}} This was the case despite the Long-Term Capital Management debacle in 1998, in which a highly leveraged shadow institution failed with systemic implications and was bailed out.
• Regulators and accounting standard-setters allowed depository banks such as Citigroup to move significant amounts of assets and liabilities off-balance sheet into complex legal entities called structured investment vehicles, masking the weakness of the capital base of the firm or degree of leverage or risk taken. Bloomberg News estimated that the top four U.S. banks will have to return between $500 billion and $1 trillion to their balance sheets during 2009.{{cite news| url=https://quantnet.com/threads/banks-hidden-junk-menaces-1-trillion-purge.2444/ | title=Banks' Hidden Junk Menaces $1 Trillion Purge | work=Bloomberg News}} This increased uncertainty during the crisis regarding the financial position of the major banks.{{cite news| url=https://bazaarmodel.net/phorum/read.php?1,5059 |title=Citigroup SIV Accounting Tough to Defend | work=Bloomberg News | first=Jonathan | last=Weil | author-link=Jonathan Weil | date=October 24, 2007}} Off-balance sheet entities were also used in the Enron scandal, which brought down Enron in 2001.{{cite journal |last1=Healy |first1=Paul M. |last2=Palepu |first2=Krishna G. |title=The Fall of Enron |journal=Journal of Economics Perspectives |volume=17 |issue=2 |date=Spring 2003 |page=13|doi=10.1257/089533003765888403 }}
• As early as 1997, Federal Reserve chairman Alan Greenspan fought to keep the derivatives market unregulated.{{cite speech| title=Government regulation and derivative contracts |first=Alan| last=Greenspan| author-link=Alan Greenspan |location=Coral Gables, Florida| url=https://www.federalreserve.gov/boarddocs/speeches/1997/19970221.htm | date=February 21, 1997}} With the advice of the Working Group on Financial Markets,{{Cite web | url=https://home.treasury.gov/system/files/236/Over-the-Counter-Derivatives-Market-Commodity-Exchange-Act.pdf |first1=Lawrence |last1=Summers| author-link1=Lawrence Summers | first2=Alan | last2=Greenspan | author-link2=Alan Greenspan | first3=Arthur | last3=Levitt | author-link3=Arthur Levitt| first4=William | last4=Ranier |title=Over-the-Counter Derivatives Markets and the Commodity Exchange Act: Report of The President's Working Group on Financial Markets | publisher=United States Department of the Treasury | date=November 1999 }} the U.S. Congress and President Bill Clinton allowed the self-regulation of the over-the-counter derivatives market when they enacted the Commodity Futures Modernization Act of 2000. Written by Congress with lobbying from the financial industry, it banned the further regulation of the derivatives market. Derivatives such as credit default swaps (CDS) can be used to hedge or speculate against particular credit risks without necessarily owning the underlying debt instruments. The volume of CDS outstanding increased 100-fold from 1998 to 2008, with estimates of the debt covered by CDS contracts, as of November 2008, ranging from US$33 to $47 trillion. Total over-the-counter (OTC) derivative notional value rose to $683 trillion by June 2008.{{cite news| url=https://www.forbes.com/2009/05/18/geithner-derivatives-plan-opinions-contributors-figlewski.html |title=Forbes-Geithner's Plan for Derivatives| first1=Stephen| last1=Figlewski |work=Forbes |date=May 18, 2009}} Warren Buffett famously referred to derivatives as "financial weapons of mass destruction" in early 2003.{{cite news| url=https://www.economist.com/finance-and-economics/2008/09/18/a-nuclear-winter |title=A Nuclear Winter?| newspaper=The Economist |date=September 18, 2008 | url-access=subscription}}{{cite news| url=http://news.bbc.co.uk/2/hi/business/2817995.stm |title=Buffett warns on investment 'time bomb'| work=BBC News |date=March 4, 2003}}

A 2011 paper suggested that Canada's avoidance of a banking crisis in 2008 (as well as in prior eras) could be attributed to Canada possessing a single, powerful, overarching regulator, while the United States had a weak, crisis prone and fragmented banking system with multiple competing regulatory bodies.{{cite journal | last1=Bordo | first1=Michael D. | last2=Redish | first2=Angela | last3=Rockoff | first3=Hugh | year=2015 | title=Why didn't Canada have a banking crisis in 2008 (or in 1930, or 1907, or...)? | url=https://www.nber.org/papers/w17312 | journal=The Economic History Review | volume=68 | issue=1 | pages=218–243 | doi=10.1111/1468-0289.665 | s2cid=154482588 }}

File:Leverage ratios for major investment banks.svg

File:U.S. Household Debt Relative to Disposable Income and GDP.png relative to disposable income and GDP]]

Prior to the crisis, financial institutions became highly leveraged, increasing their appetite for risky investments and reducing their resilience in case of losses. Much of this leverage was achieved using complex financial instruments such as off-balance sheet securitization and derivatives, which made it difficult for creditors and regulators to monitor and try to reduce financial institution risk levels.{{Cite book| last1=Chang | first1=V. | last2=Newman | first2=R. | last3=Walters | first3=R.J. | last4=Wills | first4=G.B. |title=Review of economic bubbles| publisher=International Journal of Information Management: The Journal for Information Professionals| year=2016 |pages=497–506}}{{verify source|reason="Citation needed" template removed because this citation was immediately after it. Does it not support the text?|date=September 2019}}

U.S. households and financial institutions became increasingly indebted or overleveraged during the years preceding the crisis.{{cite news| url=https://www.economist.com/united-states/2008/11/20/the-end-of-the-affair |title=The End of the Affair| magazine=The Economist |date=October 30, 2008 | url-access=subscription}} This increased their vulnerability to the collapse of the housing bubble and worsened the ensuing economic downturn.{{cite web| url=http://www.frbsf.org/our-district/press/presidents-speeches/yellen-speeches/2009/april/yellen-minsky-meltdown-central-bankers/ |first=Janet L. |last=Yellen |title=A Minsky Meltdown: Lessons for Central Bankers | publisher=Federal Reserve Bank of San Francisco | date=April 16, 2009}} Key statistics include:

Free cash used by consumers from home equity extraction doubled from $627 billion in 2001 to $1,428 billion in 2005 as the housing bubble built, a total of nearly $5 trillion over the period, contributing to economic growth worldwide.{{cite web |last1=Greenspan |first1=Alan |author-link1=Alan Greenspan |last2=Kennedy |first2=James |date=March 2007 |title=Sources and Uses of Equity Extracted from Homes |url=https://www.federalreserve.gov/pubs/feds/2007/200720/200720pap.pdf |archive-url=https://web.archive.org/web/20250209071858/https://www.federalreserve.gov/pubs/feds/2007/200720/200720pap.pdf |archive-date=2025-02-09 |publisher=Federal Reserve Board of Governors}}{{cite web| url=https://seekingalpha.com/article/33336-home-equity-extraction-the-real-cost-of-free-cash| title=Home Equity Extraction: The Real Cost of 'Free Cash' |work=Seeking Alpha | date=April 25, 2007 | last1=Iacono | first1=Tim }}{{cite news |date=April 23, 2007 |title=Spending boosted by home equity loans: Greenspan |url=https://www.reuters.com/article/us-usa-greenspan-equity/spending-boosted-by-home-equity-loans-greenspan-idUSN2330071920070423 |work=Reuters}} U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 trillion (c. ${{Format price|{{Inflation|index=US-GDP|value=10500000000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}{{Inflation/fn|US-GDP}}).{{cite news | last=Barr |first=Colin| url=https://money.cnn.com/2009/05/27/news/mortgage.overhang.fortune/index.htm |title=The $4 trillion housing headache| work=CNN |date=May 27, 2009}}

U.S. household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990. In 1981, U.S. private debt was 123% of GDP; by the third quarter of 2008, it was 290%.{{cite web| url=https://www.ft.com/content/774c0920-fd1d-11dd-a103-000077b07658 |title=Japan's lessons for a world of balance-sheet deflation |work=Financial Times| date=February 17, 2009 | url-access=subscription}}

From 2004 to 2007, the top five U.S. investment banks each significantly increased their financial leverage, which increased their vulnerability to a financial shock. Changes in capital requirements, intended to keep U.S. banks competitive with their European counterparts, allowed lower risk weightings for AAA-rated securities. The shift from first-loss tranches to AAA-rated tranches was seen by regulators as a risk reduction that compensated the higher leverage.{{cite book| title=Unintended Consequences |url=https://archive.org/details/unintendedconseq0000cona |url-access=registration| first=Edward | last=Conard | author-link=Edward Conard|year=2012| publisher=Penguin Group |pages=[https://archive.org/details/unintendedconseq0000cona/page/145 145–155]| isbn=978-1-4708-2357-3}} These five institutions reported over $4.1 trillion in debt for fiscal year 2007, about 30% of U.S. nominal GDP for 2007. Lehman Brothers went bankrupt and was liquidated, Bear Stearns and Merrill Lynch were sold at fire-sale prices, and Goldman Sachs and Morgan Stanley became commercial banks, subjecting themselves to more stringent regulation. With the exception of Lehman, these companies required or received government support.{{cite news| url=https://www.nytimes.com/2008/10/03/business/03sec.html|title=Agency's '04 Rule Let Banks Pile Up New Debt, and Risk| work=The New York Times| first=Stephen |last=Labaton |date=October 3, 2008 | url-access=subscription}}

Fannie Mae and Freddie Mac, two U.S. government-sponsored enterprises, owned or guaranteed nearly $5 trillion (c. ${{Format price|{{Inflation|index=US-GDP|value=5000000000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}{{Inflation/fn|US-GDP}}) trillion in mortgage obligations at the time they were placed into conservatorship by the U.S. government in September 2008.{{cite web| url=https://www.aei.org/research-products/report/the-last-trillion-dollar-commitment/ |title=The Last Trillion Dollar Commitment | first=Charles W. | last=Calomiris |work=American Enterprise Institute - AEI | author-link=Charles Calomiris | publisher=American Enterprise Institute |date=September 30, 2008}}{{cite news| url=https://www.bloomberg.com/news/articles/2008-09-11/u-s-considers-bringing-fannie-freddie-on-to-budget |title=U.S. Considers Bringing Fannie & Freddie Onto Budget | first=Dawn | last=Kopecki | work=Bloomberg News |date=September 11, 2008 | url-access=subscription}}

These seven entities were highly leveraged and had $9 trillion in debt or guarantee obligations; yet they were not subject to the same regulation as depository banks.{{cite news | url=https://www.nytimes.com/2010/04/02/opinion/02krugman.html | first=Paul | last=Krugman | author-link=Paul Krugman | title=Financial Reform 101 | work=The New York Times | date=April 1, 2010 | url-access=subscription}}

Behavior that may be optimal for an individual, such as saving more during adverse economic conditions, can be detrimental if too many individuals pursue the same behavior, as ultimately one person's consumption is another person's income. Too many consumers attempting to save or pay down debt simultaneously is called the paradox of thrift and can cause or deepen a recession. Economist Hyman Minsky also described a "paradox of deleveraging" as financial institutions that have too much leverage (debt relative to equity) cannot all de-leverage simultaneously without significant declines in the value of their assets.

In April 2009, Federal Reserve vice-chair Janet Yellen discussed these paradoxes:

{{blockquote|Once this massive credit crunch hit, it didn't take long before we were in a recession. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year. A process of balance sheet deleveraging has spread to nearly every corner of the economy. Consumers are pulling back on purchases, especially on durable goods, to build their savings. Businesses are cancelling planned investments and laying off workers to preserve cash. And financial institutions are shrinking assets to bolster capital and improve their chances of weathering the current storm. Once again, Minsky understood this dynamic. He spoke of the paradox of deleveraging, in which precautions that may be smart for individuals and firms—and indeed essential to return the economy to a normal state—nevertheless magnify the distress of the economy as a whole.}}

File:CDO - FCIC and IMF Diagram.png

The term financial innovation refers to the ongoing development of financial products designed to achieve particular client objectives, such as offsetting a particular risk exposure (such as the default of a borrower) or to assist with obtaining financing. Examples pertinent to this crisis included: the adjustable-rate mortgage; the bundling of subprime mortgages into mortgage-backed securities (MBS) or collateralized debt obligations (CDO) for sale to investors, a type of securitization; and a form of credit insurance called credit default swaps (CDS). The usage of these products expanded dramatically in the years leading up to the crisis. These products vary in complexity and the ease with which they can be valued on the books of financial institutions.{{Citation needed|reason=No source|date=September 2019}}

CDO issuance grew from an estimated $20 billion in Q1 2004 to its peak of over $180 billion by Q1 2007, then declined back under $20 billion by Q1 2008. Further, the credit quality of CDO's declined from 2000 to 2007, as the level of subprime and other non-prime mortgage debt increased from 5% to 36% of CDO assets. As described in the section on subprime lending, the CDS and portfolio of CDS called synthetic CDO enabled a theoretically infinite amount to be wagered on the finite value of housing loans outstanding, provided that buyers and sellers of the derivatives could be found. For example, buying a CDS to insure a CDO ended up giving the seller the same risk as if they owned the CDO, when those CDO's became worthless.{{cite book| last=Lewis| first=Michael | author-link=Michael Lewis | date=March 15, 2010 | title=The Big Short | publisher=W. W. Norton & Company |isbn=978-0-393-07223-5}}

File:Complexity and the mortgage market - an example.svg

This boom in innovative financial products went hand in hand with more complexity. It multiplied the number of actors connected to a single mortgage (including mortgage brokers, specialized originators, the securitizers and their due diligence firms, managing agents and trading desks, and finally investors, insurances and providers of repo funding). With increasing distance from the underlying asset these actors relied more and more on indirect information (including FICO scores on creditworthiness, appraisals and due diligence checks by third party organizations, and most importantly the computer models of rating agencies and risk management desks). Instead of spreading risk this provided the ground for fraudulent acts, misjudgments and finally market collapse.{{cite web| url=http://fcic.law.stanford.edu/resource/staff-data-projects/story-of-a-security |title=Financial Crisis Inquiry Commission – story of a security | publisher=Stanford University}} Economists have studied the crisis as an instance of cascades in financial networks, where institutions' instability destabilized other institutions and led to knock-on effects.{{cite journal| last1=Elliott|first1=Matthew |last2=Golub |first2=Benjamin |last3=Jackson| first3=Matthew O.| title=Financial Networks and Contagion| journal=The American Economic Review |volume=104| issue=10| year=2014|pages=3115–3153 |issn=0002-8282 |doi=10.1257/aer.104.10.3115|url=https://resolver.caltech.edu/CaltechAUTHORS:20141114-080019333 }}{{Cite journal|last1=Gai|first1=Prasanna|last2=Kapadia|first2=Sujit|date=August 8, 2010|title=Contagion in financial networks|url=https://royalsocietypublishing.org/doi/10.1098/rspa.2009.0410|journal=Proceedings of the Royal Society A: Mathematical, Physical and Engineering Sciences|language=en|volume=466|issue=2120|pages=2401–2423|doi=10.1098/rspa.2009.0410|bibcode=2010RSPSA.466.2401G|s2cid=9945658|issn=1364-5021}}

Martin Wolf, chief economics commentator at the Financial Times, wrote in June 2009 that certain financial innovations enabled firms to circumvent regulations, such as off-balance sheet financing that affects the leverage or capital cushion reported by major banks, stating: "an enormous part of what banks did in the early part of this decade—the off-balance-sheet vehicles, the derivatives and the 'shadow banking system' itself—was to find a way round regulation."{{cite news | url=https://www.ft.com/content/095722f6-6028-11de-a09b-00144feabdc0| title=Reform of Regulation and Incentives | first=Martin | last=Wolf | author-link=Martin Wolf | work=Financial Times | date=June 23, 2009 | url-access=subscription}}

File:AIG Protester on Pine Street.jpg in the wake of the AIG bonus payments controversy is interviewed by news media.]]

Mortgage risks were underestimated by almost all institutions in the chain from originator to investor by underweighting the possibility of falling housing prices based on historical trends of the past 50 years. Limitations of default and prepayment models, the heart of pricing models, led to overvaluation of mortgage and asset-backed products and their derivatives by originators, securitizers, broker-dealers, rating-agencies, insurance underwriters and the vast majority of investors (with the exception of certain hedge funds).{{cite journal | url=https://claremontreviewofbooks.com/reckless-optimism/ |title=Reckless Optimism | last=Samuelson | first=Robert J. |journal=Claremont Review of Books | volume=XII | issue=1 |year=2011 | page=13}}{{cite web| last=Kourlas| first=James| title=Lessons Not Learned From the Housing Crisis| url=https://atlassociety.org/commentary/commentary-blog/4959-lessons-not-learned-from-the-housing-crisis-| publisher=The Atlas Society| date=April 12, 2012| access-date=June 8, 2020| archive-date=June 8, 2020| archive-url=https://web.archive.org/web/20200608160526/https://atlassociety.org/commentary/commentary-blog/4959-lessons-not-learned-from-the-housing-crisis-| url-status=dead}} While financial derivatives and structured products helped partition and shift risk between financial participants, it was the underestimation of falling housing prices and the resultant losses that led to aggregate risk.

For a variety of reasons, market participants did not accurately measure the risk inherent with financial innovation such as MBS and CDOs or understand its effect on the overall stability of the financial system. The pricing model for CDOs clearly did not reflect the level of risk they introduced into the system. Banks estimated that $450 billion of CDO were sold between "late 2005 to the middle of 2007"; among the $102 billion of those that had been liquidated, JPMorgan estimated that the average recovery rate for "high quality" CDOs was approximately 32 cents on the dollar, while the recovery rate for mezzanine capital CDO was approximately five cents for every dollar.

AIG insured obligations of various financial institutions through the usage of credit default swaps. The basic CDS transaction involved AIG receiving a premium in exchange for a promise to pay money to party A in the event party B defaulted. However, AIG did not have the financial strength to support its many CDS commitments as the crisis progressed and was taken over by the government in September 2008. U.S. taxpayers provided over $180 billion in government loans and investments in AIG during 2008 and early 2009, through which the money flowed to various counterparties to CDS transactions, including many large global financial institutions.{{cite news | url=https://www.bogleheads.org/forum/viewtopic.php?t=27156 | title=Credit Swap Disclosure Obscures True Financial Risk | first1=Shannon D. | last1=Harrington | first2=Abigail | last2=Moses | work=Bloomberg News | date=November 6, 2008}}{{unreliable source?|reason=This URL is not in fact Bloomberg but a forum post quoting it. Forums are not reliable sources. Cite the Bloomberg article directly instead|date=January 2024}}{{cite news |last=Byrnes| first=Nanette | url=https://www.bloomberg.com/news/articles/2009-03-17/whos-who-on-aigs-list-of-counterparties | title=Who's Who on AIG List of Counterparties | work=Bloomberg News |date=March 17, 2009}}

The Financial Crisis Inquiry Commission (FCIC) made the major government study of the crisis. It concluded in January 2011:

{{blockquote|The Commission concludes AIG failed and was rescued by the government primarily because its enormous sales of credit default swaps were made without putting up the initial collateral, setting aside capital reserves, or hedging its exposure—a profound failure in corporate governance, particularly its risk management practices. AIG's failure was possible because of the sweeping deregulation of over-the-counter (OTC) derivatives, including credit default swaps, which effectively eliminated federal and state regulation of these products, including capital and margin requirements that would have lessened the likelihood of AIG's failure.{{cite book| first=Phil |last=Angelides | author-link=Phil Angelides| title=Financial Crisis Inquiry Report| url=https://books.google.com/books?id=QIKfTVrhNfMC&pg=PA352 |year=2011| publisher=DIANE |page=352| isbn=9781437980721}}{{cite book| first=Jerry M. |last=Rosenberg |title=The Concise Encyclopedia of The Great Recession 2007–2012| url=https://archive.org/details/conciseencyclope0000rose|url-access=registration |year=2012| publisher=Scarecrow Press|page=[https://archive.org/details/conciseencyclope0000rose/page/244 244]|isbn=9780810883406}}{{cite book|first1=Asli Yüksel |last1=Mermod|first2=Samuel O. |last2=Idowu |title=Corporate Social Responsibility in the Global Business World| url=https://books.google.com/books?id=KVqRAAAAQBAJ&pg=PA127| year=2013|publisher=Springer| page=127| isbn=9783642376207}}}}

The limitations of a widely used financial model also were not properly understood.{{cite news | last=Regnier | first=Pat | url=https://money.com/new-theories-attempt-to-explain-the-financial-crisis/ | title=New theories attempt to explain the financial crisis | work=Money | date=February 27, 2009}}{{Cite news| last=Salmon |first=Felix| title=Recipe for Disaster: The Formula That Killed Wall Street| volume=17 | magazine=Wired|issue=3 |url=https://www.wired.com/2009/02/wp-quant/ | date=February 23, 2009 }} This formula assumed that the price of CDS was correlated with and could predict the correct price of mortgage-backed securities. Because it was highly tractable, it rapidly came to be used by a huge percentage of CDO and CDS investors, issuers, and rating agencies. According to one Wired article:

{{Blockquote|Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril ... Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees. }}

As financial assets became more complex and harder to value, investors were reassured by the fact that the international bond rating agencies and bank regulators accepted as valid some complex mathematical models that showed the risks were much smaller than they actually were.{{cite news| first=Floyd | last=Norris | author-link=Floyd Norris| url=https://www.nytimes.com/2008/11/25/business/25assess.html?hp|title=News Analysis: Another Crisis, Another Guarantee| work=The New York Times |date=November 24, 2008 | url-access=subscription}} George Soros commented that "The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility."{{Cite news| last=Soros| first=George | author-link=George Soros |title=The worst market crisis in 60 years | work=Financial Times |url=https://www.ft.com/content/24f73610-c91e-11dc-9807-000077b07658 | date=January 22, 2008 | url-access=subscription}}

A conflict of interest between investment management professional and institutional investors, combined with a global glut in investment capital, led to bad investments by asset managers in over-priced credit assets. Professional investment managers generally are compensated based on the volume of client assets under management. There is, therefore, an incentive for asset managers to expand their assets under management in order to maximize their compensation. As the glut in global investment capital caused the yields on credit assets to decline, asset managers were faced with the choice of either investing in assets where returns did not reflect true credit risk or returning funds to clients. Many asset managers continued to invest client funds in over-priced (under-yielding) investments, to the detriment of their clients, so they could maintain their assets under management. They supported this choice with a "plausible deniability" of the risks associated with subprime-based credit assets because the loss experience with early "vintages" of subprime loans was so low.{{Cite journal| last=Calomiris |first=Charles| author-link=Charles Calomiris | title=The Subprime Turmoil: What's Old, What's New, and What's Next |journal=Journal of Structured Finance| volume=15| issue=1|pages=6–52|date=Spring 2009 |url=https://www.imf.org/external/np/res/seminars/2008/arc/pdf/CWC.pdf |doi=10.3905/JSF.2009.15.1.006 |citeseerx=10.1.1.628.2224|s2cid=15660445}}

Despite the dominance of the above formula, there are documented attempts of the financial industry, occurring before the crisis, to address the formula limitations, specifically the lack of dependence dynamics and the poor representation of extreme events.{{Cite journal | last1=Lipton | first1=Alexander | first2=Andrew | last2=Rennie | year=2007| title=Credit Correlation: Life after Copulas| ssrn=1478374 |url=https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1478374|journal=World Scientific }} The volume Credit Correlation: Life After Copulas, published in 2007 by World Scientific, summarizes a 2006 conference held by Merrill Lynch in London where several practitioners attempted to propose models rectifying some of the copula limitations. See also the article by Donnelly and Embrechts{{Cite journal | last1=Donnelly | first1=Catherine | last2=Embrechts | first2=Paul | title=The devil is in the tails: actuarial mathematics and the subprime mortgage crisis | url=http://www.macs.hw.ac.uk/~cd134/2010/donemb.pdf | journal=ASTIN Bulletin |volume=40 |issue=1 |pages=1–33 | date=January 4, 2010| doi=10.2143/AST.40.1.2049222 | hdl=20.500.11850/20517 | s2cid=14201831 }} and the book by Brigo, Pallavicini and Torresetti, that reports relevant warnings and research on CDOs appeared in 2006.{{Cite book | last1=Brigo | first1=Damiano | last2=Pallavicini | first2=Andrea | last3=Torresetti | first3=Roberto | title=Credit Models and the Crisis: A Journey into CDOs, Copulas, Correlations and dynamic Models| publisher=Wiley | date=May 2010}}

File:Securitization Market Activity.png

There is strong evidence that the riskiest, worst performing mortgages were funded through the "shadow banking system" and that competition from the shadow banking system may have pressured more traditional institutions to lower their underwriting standards and originate riskier loans.

In a June 2008 speech, President and CEO of the Federal Reserve Bank of New York Timothy Geithner—who in 2009 became United States Secretary of the Treasury—placed significant blame for the freezing of credit markets on a run on the entities in the "parallel" banking system, also called the shadow banking system. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls. Further, these entities were vulnerable because of asset–liability mismatch, meaning that they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would force them to engage in rapid deleveraging, selling their long-term assets at depressed prices. He described the significance of these entities:

{{Blockquote|In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a combined asset size of roughly $2.2 trillion. Assets financed overnight in tri-party repo grew to $2.5 trillion. Assets held in hedge funds grew to roughly $1.8 trillion. The combined balance sheets of the five largest investment banks totaled $4 trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $6 trillion, and total assets of the entire banking system were about $10 trillion. The combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles.}}

Economist Paul Krugman, laureate of the Nobel Memorial Prize in Economic Sciences, described the run on the shadow banking system as the "core of what happened" to cause the crisis. He referred to this lack of controls as "malign neglect" and argued that regulation should have been imposed on all banking-like activity. Without the ability to obtain investor funds in exchange for most types of mortgage-backed securities or asset-backed commercial paper, investment banks and other entities in the shadow banking system could not provide funds to mortgage firms and other corporations.{{cite web|last=Geithner|first=Timothy F.|author-link=Timothy F. Geithner|date=June 9, 2008|title=Reducing Systemic Risk in a Dynamic Financial System|url=https://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html|publisher=Federal Reserve Bank of New York}}

This meant that nearly one-third of the U.S. lending mechanism was frozen and continued to be frozen into June 2009.{{cite news| url=https://www.city-journal.org/html/can-feds-uncrunch-credit-13139.html |title=Can the Fed's Uncrunch Credit? | first=Nicole | last=Gelinas | work=City Journal | date=Winter 2009}} According to the Brookings Institution, at that time the traditional banking system did not have the capital to close this gap: "It would take a number of years of strong profits to generate sufficient capital to support that additional lending volume." The authors also indicate that some forms of securitization were "likely to vanish forever, having been an artifact of excessively loose credit conditions". While traditional banks raised their lending standards, it was the collapse of the shadow banking system that was the primary cause of the reduction in funds available for borrowing.

{{Main|2000s commodities boom}}

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[[File:Fertilizer prices.webp|thumb|upright=1.4|right|Fertilizer prices

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]]

In a 2008 paper, Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas argued that the financial crisis was attributable to "global asset scarcity, which led to large capital flows toward the United States and to the creation of asset bubbles that eventually burst".{{cite journal |first1=Ricardo J. |last1=Caballero |first2=Emmanuel |last2=Farhi |first3=Pierre-Olivier |last3=Gourinchas |url=https://www.jstor.org/stable/27720394 |jstor=27720394 |title=Financial Crash, Commodity Prices and Global Imbalances |journal=Brookings Papers on Economic Activity |volume=2008 |date=Fall 2008 |issue=2 |pages=1–55|doi=10.1353/eca.0.0013 }} Caballero, Farhi, and Gourinchas argued "that the sharp rise in oil prices following the subprime crisis – nearly 100 percent in just a matter of months and on the face of recessionary shocks – was the result of a speculative response to the financial crisis itself, in an attempt to rebuild asset supply. That is, the global economy was subject to one shock with multiple implications rather than to two separate shocks (financial and oil)."

Long-only commodity index funds became popular – by one estimate investment increased from $90 billion in 2006 to $200 billion at the end of 2007, while commodity prices increased 71% – which raised concern as to whether these index funds caused the commodity bubble. The empirical research has been mixed.{{cite journal | last1=Irwin | first1=Scott H. | last2=Sanders | first2=Dwight R. | date=June 1, 2010 | title=The Impact of Index and Swap Funds on Commodity Futures Markets | url=https://www.oecd-ilibrary.org/agriculture-and-food/the-impact-of-index-and-swap-funds-on-commodity-futures-markets_5kmd40wl1t5f-en | journal=OECD Working Paper | series=OECD Food, Agriculture and Fisheries Papers | doi=10.1787/5kmd40wl1t5f-en }}

The cause of the global asset bubble can be partially attributable to the global savings glut. As theorized by Andrew Metrick, the demand for safe assets following the Asian Financial Crisis coupled with the lack of circulating treasuries created an unmet demand for "risk free" assets. Thus, institutional investors like sovereign wealth funds and pension funds began purchasing synthetic safe assets like Triple-A Mortgage Backed Securities.{{Cite report |url=http://dx.doi.org/10.3386/w17778 |title=Getting up to Speed on the Financial Crisis: A One-Weekend-Reader's Guide |last1=Gorton |first1=Gary |last2=Metrick |first2=Andrew |date=January 2012 |publisher=National Bureau of Economic Research |location=Cambridge, MA|doi=10.3386/w17778 }}

As a consequence, the demand for so-called safe assets fueled the free flow of capital into housing in the United States. This greatly worsened the crisis as banks and other financial institutions were incentivized to issue more mortgages than before.

In a 1998 book, John McMurtry suggested that a financial crisis is a systemic crisis of capitalism itself.{{cite book | url=https://books.google.com/books?id=m7Mbb1aMWAkC | last=McMurty| first=John | author-link=John McMurtry (academic) | date=December 10, 1998 | publisher=Pluto Press | title=The Cancer Stage of Capitalism | isbn=978-0-7453-1347-4}}

In his 1978 book, The Downfall of Capitalism and Communism, Ravi Batra suggests that growing inequality of financial capitalism produces speculative bubbles that burst and result in depression and major political changes. He also suggested that a "demand gap" related to differing wage and productivity growth explains deficit and debt dynamics important to stock market developments.{{cite news| last=Batra| first=Ravi| author-link=Ravi Batra | url=https://truthout.org/articles/weapons-of-mass-exploitation/ |title=Weapons of Mass Exploitation? |work=Truthout |date=May 8, 2011}}

John Bellamy Foster, a political economy analyst and editor of the Monthly Review, believed that the decrease in GDP growth rates since the early 1970s is due to increasing market saturation.{{cite news |url=https://monthlyreview.org/2008/04/01/the-financialization-of-capital-and-the-crisis |title=The Financialization of Capital and the Crisis | first=John Bellamy | last=Foster | work=Monthly Review | date=April 1, 2008}}

Marxian economics followers Andrew Kliman, Michael Roberts, and Guglielmo Carchedi, in contradistinction to the Monthly Review school represented by Foster, pointed to capitalism's long-term tendency of the rate of profit to fall as the underlying cause of crises generally. From this point of view, the problem was the inability of capital to grow or accumulate at sufficient rates through productive investment alone. Low rates of profit in productive sectors led to speculative investment in riskier assets, where there was potential for greater return on investment. The speculative frenzy of the late 1990s and 2000s was, in this view, a consequence of a rising organic composition of capital, expressed through the fall in the rate of profit. According to Michael Roberts, the fall in the rate of profit "eventually triggered the credit crunch of 2007 when credit could no longer support profits".{{cite web |last=Roberts | first=Michael |url=https://thenextrecession.wordpress.com/2011/07/03/carchedi-foster-and-the-causes-of-crisis/ |title=Carchedi, Foster and the causes of crisis| date=July 3, 2011}}

In 2005 book, The Battle for the Soul of Capitalism, John C. Bogle wrote that "Corporate America went astray largely because the power of managers went virtually unchecked by our gatekeepers for far too long". Echoing the central thesis of James Burnham's 1941 seminal book, The Managerial Revolution, Bogle cites issues, including:{{cite book| last=Bogle| first=John |year=2005| title=The Battle for the Soul of Capitalism| url=https://archive.org/details/battleforsoulo00bogl| url-access=registration |publisher=Yale University Press | isbn=978-0-300-11971-8}}

• that "manager's capitalism" replaced "owner's capitalism", meaning management runs the firm for its benefit rather than for the shareholders, a variation on the principal–agent problem;
• the burgeoning executive compensation;
• the management of earnings, mainly a focus on share price rather than the creation of genuine value; and
• the failure of gatekeepers, including auditors, boards of directors, Wall Street analysts, and career politicians.

In his book The Big Mo, Mark Roeder, a former executive at the Swiss-based UBS Bank, suggested that large-scale momentum, or The Big Mo, "played a pivotal role" in the financial crisis. Roeder suggested that "recent technological advances, such as computer-driven trading programs, together with the increasingly interconnected nature of markets, has magnified the momentum effect. This has made the financial sector inherently unstable."{{Cite book | url=https://books.google.com/books?id=jrnFCB2lNAEC | title=The Big Mo: Why Momentum Now Rules Our World | first=Mark | last=Roeder | author-link=Mark Roeder | publisher=Virgin Books | year=2011 | isbn=978-0-7535-3937-8}}

Robert Reich attributed the economic downturn to the stagnation of wages in the United States, particularly those of the hourly workers who comprise 80% of the workforce. This stagnation forced the population to borrow to meet the cost of living.{{cite magazine |url=https://www.guernicamag.com/the_heart_of_the_economic_mess/ |last=Reich | first=Robert | author-link=Robert Reich |title=The Heart of the Economic Mess | magazine=Guernica |date=July 25, 2008}}

Economists Ailsa McKay and Margunn Bjørnholt argued that the financial crisis and the response to it revealed a crisis of ideas in mainstream economics and within the economics profession, and call for a reshaping of both the economy, economic theory and the economics profession.{{cite book| last1=Bjørnholt |first1=Margunn |author1-link=Margunn Bjørnholt |last2=McKay |first2=Ailsa |author2-link=Ailsa McKay |editor1-last=Bjørnholt |editor1-first=Margunn |editor1-link=Margunn Bjørnholt |editor2-last=McKay |editor2-first=Ailsa |editor2-link=Ailsa McKay| title=Counting on Marilyn Waring: New Advances in Feminist Economics|chapter-url=http://www.margunnbjornholt.no/wp-content/uploads/2014/05/Advances-in-Feminist-Economics-in-Times-of-Economic-Crisis.pdf |year=2014| publisher=Demeter Press |pages=7–20| chapter=Advances in Feminist Economics in Times of Economic Crisis |isbn=978-1-927335-27-7}}

A report by the International Labour Organization concluded that cooperative banking institutions were less likely to fail than their competitors during the crisis. The cooperative banking sector had 20% market share of the European banking sector, but accounted for only 7% of all the write-downs and losses between the third quarter of 2007 and first quarter of 2011.{{cite web |url=https://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/---coop/documents/publication/wcms_207768.pdf |title=Resilience in a downturn |publisher=International Labour Organisation }} In 2008, in the U.S., the rate of commercial bank failures was almost triple that of credit unions, and almost five times the credit union rate in 2010.{{cite news| url=https://www.fool.com/investing/general/2011/11/22/in-pictures-banks-vs-credit-unions-in-the-financia.aspx |title=In Pictures: Banks vs. Credit Unions in the Financial Crisis |first=Matt |last=Cropp| date=November 22, 2011 |website=The Motley Fool}} Credit unions increased their lending to small- and medium-sized businesses while overall lending to those businesses decreased.{{cite web | url=https://www.sba.gov/advocacy/how-did-bank-lending-small-business-united-states-fare-after-financial-crisis | title=How Did Bank Lending to Small Business in the United States Fare After the Financial Crisis? | publisher=Small Business Administration | access-date=November 29, 2018 | archive-date=August 28, 2019 | archive-url=https://web.archive.org/web/20190828223019/https://www.sba.gov/advocacy/how-did-bank-lending-small-business-united-states-fare-after-financial-crisis | url-status=dead }}

Economists, particularly followers of mainstream economics, mostly failed to predict the crisis.{{cite news | url=https://www.bloomberg.com/news/articles/2009-04-15/what-good-are-economists-anyway | title=What Good Are Economists Anyway? | first=Peter | last=Coy | work=Bloomberg Businessweek | date=April 16, 2009 | url-access=subscription}} The Wharton School of the University of Pennsylvania's online business journal examined why economists failed to predict a major global financial crisis and concluded that economists used mathematical models that failed to account for the critical roles that banks and other financial institutions, as opposed to producers and consumers of goods and services, play in the economy.{{cite web| url=https://knowledge.wharton.upenn.edu/article/why-economists-failed-to-predict-the-financial-crisis/ |title=Why Economists Failed to Predict the Financial Crisis |publisher=Wharton School of the University of Pennsylvania | date=May 13, 2009}}

Several followers of heterodox economics predicted the crisis, with varying arguments. Dirk Bezemer{{cite web| url=https://mpra.ub.uni-muenchen.de/15892/ |title="No One Saw This Coming": Understanding Financial Crisis Through Accounting Models |last=Bezemer |first=Dirk J |publisher=Munich Personal RePEc Archive |date=June 2009}} credits 12 economists with predicting the crisis: Dean Baker (US), Wynne Godley (UK), Fred Harrison (UK), Michael Hudson (US), Eric Janszen (US), Steve Keen (Australia), Jakob Broechner Madsen & Jens Kjaer Sørensen (Denmark), Med Jones (US){{cite book |url=https://books.google.com/books?id=0DvEDQAAQBAJ&q=rational+investing+med+jones&pg=PA61 |title=Columbia University Press, Rational Investing Book, Page 61-62 What Can Be Forecasted| isbn=9780231543781|last1=Langlois |first1=Hugues| last2=Lussier |first2=Jacques |date=March 7, 2017|publisher=Columbia University Press }} Kurt Richebächer (US), Nouriel Roubini (US), Peter Schiff (US), and Robert Shiller (US).

Shiller, a founder of the Case–Shiller index that measures home prices, wrote an article a year before the collapse of Lehman Brothers in which he predicted that a slowing U.S. housing market would cause the housing bubble to burst, leading to financial collapse.{{cite news | url=https://www.project-syndicate.org/commentary/bubble-trouble | title=Bubble Trouble | first=Robert J. | last=Shiller | author-link=Robert J. Shiller | work=Project Syndicate | date=September 17, 2007 | url-access=subscription}} Peter Schiff regularly appeared on television in the years before the crisis and warned of the impending real estate collapse.{{cite news | url=https://money.cnn.com/2009/01/20/magazines/fortune/okeefe_schiff.fortune/index.htm | title=Peter Schiff: Oh, he saw it coming | first=Brian | last=O'Keefe | work=CNN | date= January 23, 2009}}

The Austrian School regarded the crisis as a vindication and classic example of a predictable credit-fueled bubble caused by laxity in monetary supply.{{cite web | url=https://mises.org/library/austrian-business-cycle-theory-and-global-financial-crisis-confessions-mainstream-economist | title=Austrian Business Cycle Theory and the Global Financial Crisis: Confessions of a Mainstream Economist | first=Jerry | last=Tempelman | work=Mises Institute | date=July 30, 2014}}

There were other economists that did warn of a pending crisis.{{Cite news | url=https://www.economist.com/leaders/2007/11/15/americas-vulnerable-economy | title=Recession in America | newspaper=The Economist | date=November 15, 2007}}

The former Governor of the Reserve Bank of India, Raghuram Rajan, had predicted the crisis in 2005 when he became chief economist at the International Monetary Fund. In 2005, at a celebration honoring Alan Greenspan, who was about to retire as chairman of the US Federal Reserve, Rajan delivered a controversial paper that was critical of the financial sector.{{cite journal |first=Raghuram |last=Rajan |title=Has Financial Development Made the World Riskier? |journal=NBER Working Paper No. 11728 |date=November 2005 |doi=10.3386/w11728 |doi-access=free}} In that paper, Rajan "argued that disaster might loom".{{cite news | first=Justin | last=Lahart | url=https://www.wsj.com/articles/SB123086154114948151 | title=Mr Rajan Was Unpopular (But Prescient) at Greenspan Party | work=The Wall Street Journal | date=January 2, 2009 | url-access=subscription}} Rajan argued that financial sector managers were encouraged to "take risks that generate severe adverse consequences with small probability but, in return, offer generous compensation the rest of the time. These risks are known as tail risks. But perhaps the most important concern is whether banks will be able to provide liquidity to financial markets so that if the tail risk does materialize, financial positions can be unwound and losses allocated so that the consequences to the real economy are minimized."

Stock trader and financial risk engineer Nassim Nicholas Taleb, author of the 2007 book The Black Swan, spent years warning against the breakdown of the banking system in particular and the economy in general owing to their use of and reliance on bad risk models and reliance on forecasting, and framed the problem as part of "robustness and fragility".{{cite news |url=https://www.huffpost.com/entry/why-nassim-taleb-is-the-t_b_263194 |title=Why Nassim Taleb is the True Predictor of this Crisis | first=Pablo | last=Triana | work=HuffPost| date=August 19, 2009}}{{cite web |url=https://www.fooledbyrandomness.com/imbeciles.htm |title=The Black Swan: Quotes & Warnings that the Imbeciles Chose to Ignore |publisher=fooledbyrandomness.com |date=April 2007}} He also took action against the establishment view by making a big financial bet on banking stocks and making a fortune from the crisis ("They didn't listen, so I took their money").{{cite news | url=https://www.nytimes.com/2009/01/04/magazine/04risk-t.html |work=The New York Times| first=Joe| last=Nocera | author-link=Joe Nocera | title=Risk Mismanagement | date=January 4, 2009 | url-access=subscription}} According to David Brooks from The New York Times, "Taleb not only has an explanation for what's happening, he saw it coming."{{cite news| url=https://www.nytimes.com/2008/10/28/opinion/28brooks.html| work=The New York Times| first=David| last=Brooks| author-link=David Brooks (commentator) | title=The Behavioral Revolution | date=October 28, 2008 | url-access=subscription}}

Popular articles published in the mass media have led the general public to believe that the majority of economists have failed in their obligation to predict the financial crisis. For example, an article in The New York Times noted that economist Nouriel Roubini warned of such crisis as early as September 2006, and stated that the profession of economics is bad at predicting recessions.{{cite news | url=https://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html | title=Dr. Doom | first=Stephen | last=Mihm | date=August 15, 2008 | work=New York Times Magazine | url-access=subscription}} According to The Guardian, Roubini was ridiculed for predicting a collapse of the housing market and worldwide recession, while The New York Times labelled him "Dr. Doom".{{cite news| url=https://www.theguardian.com/business/2009/jan/24/nouriel-roubini-credit-crunch| first=Emma |last=Brockes | title=He Told Us So| work=The Guardian |date=January 24, 2009 |location=London}}

In a 2012 article in the journal Japan and the World Economy, Andrew K. Rose and Mark M. Spiegel used a Multiple Indicator Multiple Cause (MIMIC) model on a cross-section of 107 countries to evaluate potential causes of the 2008 crisis. The authors examined various economic indicators, ignoring contagion effects across countries. The authors concluded: "We include over sixty potential causes of the crisis, covering such categories as: financial system policies and conditions; asset price appreciation in real estate and equity markets; international imbalances and foreign reserve adequacy; macroeconomic policies; and institutional and geographic features. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to link most of the commonly cited causes of the crisis to its incidence across countries. This negative finding in the cross-section makes us skeptical of the accuracy of 'early warning' systems of potential crises, which must also predict their timing."{{cite journal|author=Andrew K. Rose and Mark M. Spiegel|url=https://www.sciencedirect.com/science/article/abs/pii/S0922142511000417|title=Cross-country causes and consequences of the 2008 crisis: Early warning|journal=Japan and the World Economy|volume=24|issue=1|date=January 2012|pages=1–16|doi=10.1016/j.japwor.2011.11.001}}

The first visible institution to run into trouble in the United States was the Southern California–based IndyMac, a spin-off of Countrywide Financial. Before its failure, IndyMac Bank was the largest savings and loan association in the Los Angeles market and the seventh largest mortgage loan originator in the United States.{{cite press release |url=https://www.businesswire.com/news/home/20080408005471/en/IndyMac-Bancorp-Announces-Earnings-Webcast-Teleconference-Call |title=IndyMac Bancorp Announces Earnings Webcast & Teleconference Call for First Quarter 2008 Financial Results | publisher=Business Wire | date=August 8, 2008}} The failure of IndyMac Bank on July 11, 2008, was the fourth largest bank failure in United States history up until the crisis precipitated even larger failures,{{cite news | first=Andrea| last=Shalal-Esa |title=FACTBOX: Top ten U.S. bank failures |url=https://www.reuters.com/article/us-washingtonmutual-jpmorgan-failures-fa/factbox-top-ten-u-s-bank-failures-idUSTRE48P0YC20080926 |work=Reuters | date=September 25, 2008}} and the second largest failure of a regulated thrift.{{cite news |url=https://www.foxnews.com/printer_friendly_wires/2008Jul11/0,4675,IndyMac,00.html |title=Government shuts down mortgage lender IndyMac |first=Alex |last=Veiga | agency=Associated Press | publisher=Fox News |date=July 12, 2008}} IndyMac Bank's parent corporation was IndyMac Bancorp until the FDIC seized IndyMac Bank.{{cite web| url=https://www.thestreet.com/investing/stocks/indymac-bancorp-to-liquidate-10431578 |title=IndyMac Bancorp to Liquidate |last=LaCapra| first=Lauren Tara |work=TheStreet.com |date=August 1, 2008}} IndyMac Bancorp filed for Chapter 7 bankruptcy in July 2008.

IndyMac Bank was founded as Countrywide Mortgage Investment in 1985 by David S. Loeb and Angelo Mozilo{{cite press release | url=https://www.businesswire.com/news/home/20030702005243/en/David-S.-Loeb-Chairman-IndyMac-Bancorp-Passes | title=David S. Loeb, Former Chairman of IndyMac Bancorp, Inc., Passes Away | publisher=Business Wire | date=July 2, 2003}}{{cite news | url=https://www.latimes.com/archives/la-xpm-2003-jul-03-me-loeb3-story.html | title=David Loeb, 79; Founded Mortgage Banking Firms | first=Roger | last=Vincent | work=Los Angeles Times | date=July 3, 2003 | url-access=subscription}} as a means of collateralizing Countrywide Financial loans too big to be sold to Freddie Mac and Fannie Mae. In 1997, Countrywide spun off IndyMac as an independent company run by Mike Perry, who remained its CEO until the downfall of the bank in July 2008.{{cite news | url=https://www.wsj.com/articles/SB121581435073947103 |title=Crisis Deepens as Big Bank Fails: IndyMac Seized In Largest Bust In Two Decades |first1=Damian |last1=Paletta | last2=Enrich | first2=David | work=The Wall Street Journal |date=July 12, 2008 | url-access=subscription}}

The primary causes of its failure were largely associated with its business strategy of originating and securitizing Alt-A loans on a large scale. This strategy resulted in rapid growth and a high concentration of risky assets. From its inception as a savings association in 2000, IndyMac grew to the seventh largest savings and loan and ninth largest originator of mortgage loans in the United States. During 2006, IndyMac originated over $90 billion (~${{Format price|{{Inflation|index=US-GDP|value=90000000000|start_year=2006}}}} in {{Inflation/year|US-GDP}}) of mortgages.

IndyMac's aggressive growth strategy, use of Alt-A and other nontraditional loan products, insufficient underwriting, credit concentrations in residential real estate in the California and Florida markets—states, alongside Nevada and Arizona, where the housing bubble was most pronounced—and heavy reliance on costly funds borrowed from a Federal Home Loan Bank (FHLB) and from brokered deposits, led to its demise when the mortgage market declined in 2007.

IndyMac often made loans without verification of the borrower's income or assets, and to borrowers with poor credit histories. Appraisals obtained by IndyMac on underlying collateral were often questionable as well. As an Alt-A lender, IndyMac's business model was to offer loan products to fit the borrower's needs, using an extensive array of risky option-adjustable-rate mortgages (option ARMs), subprime loans, 80/20 loans, and other nontraditional products. Ultimately, loans were made to many borrowers who simply could not afford to make their payments. The thrift remained profitable only as long as it was able to sell those loans in the secondary mortgage market. IndyMac resisted efforts to regulate its involvement in those loans or tighten their issuing criteria: see the comment by Ruthann Melbourne, Chief Risk Officer, to the regulating agencies.{{cite web| url=https://www.treasury.gov/about/organizational-structure/ig/Documents/oig09032.pdf |title=Audit Report – SAFETY AND SOUNDNESS: Material Loss Review of IndyMac Bank, FSB | publisher=United States Department of the Treasury | date=February 26, 2009}}{{cite press release |url=https://www.fdic.gov/news/news/press/2009/pr09001.html |title=FDIC Board Approves Letter of Intent to Sell IndyMac Federal | publisher=Federal Deposit Insurance Corporation | date=January 2, 2009}}{{cite web| url=http://files.ots.treas.gov/comments/20478116-56b7-4810-938b-60b7688f9652.pdf |title=Letter from IndyMac | access-date=February 24, 2014 |url-status=dead | archive-url=https://web.archive.org/web/20120216201626/http://files.ots.treas.gov/comments/20478116-56b7-4810-938b-60b7688f9652.pdf | archive-date=February 16, 2012 }}

On May 12, 2008, in the "Capital" section of its last 10-Q, IndyMac revealed that it may not be well capitalized in the future.{{cite web | url=http://www.secinfo.com/dVut2.t668.htm#msef | title=Indymac Bancorp Inc – '10-Q' for 3/31/08 | publisher=U.S. Securities and Exchange Commission}}

IndyMac reported that during April 2008, Moody's and Standard & Poor's downgraded the ratings on a significant number of Mortgage-backed security (MBS) bonds—including $160 million (~${{Format price|{{Inflation|index=US-GDP|value=160000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}) issued by IndyMac that the bank retained in its MBS portfolio. IndyMac concluded that these downgrades would have harmed its risk-based capital ratio as of June 30, 2008. Had these lowered ratings been in effect on March 31, 2008, IndyMac concluded that the bank's capital ratio would have been 9.27% total risk-based. IndyMac warned that if its regulators found its capital position to have fallen below "well capitalized" (minimum 10% risk-based capital ratio) to "adequately capitalized" (8–10% risk-based capital ratio) the bank might no longer be able to use brokered deposits as a source of funds.

Senator Charles Schumer (D-NY) later pointed out that brokered deposits made up more than 37% of IndyMac's total deposits, and asked the Federal Deposit Insurance Corporation (FDIC) whether it had considered ordering IndyMac to reduce its reliance on these deposits.{{cite news | url=https://www.nytimes.com/2008/12/23/business/23thrift.html | title=Irregularity Is Uncovered at IndyMac Bank | first=Edmund L. | last=Andrews | author-link=Edmund L. Andrews | work=The New York Times | date=December 22, 2008 | url-access=subscription}} With $18.9 billion in total deposits reported on March 31, Senator Schumer would have been referring to a little over $7 billion in brokered deposits. While the breakout of maturities of these deposits is not known exactly, a simple averaging would have put the threat of brokered deposits loss to IndyMac at $500 million a month, had the regulator disallowed IndyMac from acquiring new brokered deposits on June 30.

IndyMac was taking new measures to preserve capital, such as deferring interest payments on some preferred securities. Dividends on common shares had already been suspended for the first quarter of 2008, after being cut in half the previous quarter. The company still had not secured a significant capital infusion nor found a ready buyer.{{cite news | url=https://www.thestreet.com/markets/rates-and-bonds/indymac-seeks-to-preserve-capital-10416473 | title=Indymac Seeks to Preserve Capital | first=PHILIP | last=VAN DOORN | work=TheStreet.com | date=May 13, 2008}}

IndyMac reported that the bank's risk-based capital was only $47 million above the minimum required for this 10% mark. But it did not reveal some of that $47 million (~${{Format price|{{Inflation|index=US-GDP|value=47000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}) capital it claimed it had, as of March 31, 2008, was fabricated.{{cite web | url=http://securities.stanford.edu/filings-documents/1040/IMB_01/201099_r01c_08CV03812.pdf | title=Robert C. Daniels, et al. v. IndyMac Bancorp, Inc., et al.}}

{{Wikinews|Category:July_15,_2008#IndyMac_Bank_placed_into_conservatorship_by_US_Government|d1=IndyMac Bank placed into conservatorship by US Government}}

When home prices declined in the latter half of 2007 and the secondary mortgage market collapsed, IndyMac was forced to hold $10.7 billion (~${{Format price|{{Inflation|index=US-GDP|value=10700000000|start_year=2007}}}} in {{Inflation/year|US-GDP}}) of loans it could not sell in the secondary market. Its reduced liquidity was further exacerbated in late June 2008 when account holders withdrew $1.55 billion (~${{Format price|{{Inflation|index=US-GDP|value=1550000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}) or about 7.5% of IndyMac's deposits. This bank run on the thrift followed the public release of a letter from Senator Charles Schumer to the FDIC and OTS. The letter outlined the Senator's concerns with IndyMac. While the run was a contributing factor in the timing of IndyMac's demise, the underlying cause of the failure was the unsafe and unsound way it was operated.

On June 26, 2008, Senator Charles Schumer (D-NY), a member of the Senate Banking Committee, chairman of Congress' Joint Economic Committee and the third-ranking Democrat in the Senate, released several letters he had sent to regulators, in which he was"concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers." Some worried depositors began to withdraw money.{{cite news | url=https://money.cnn.com/2008/07/13/news/companies/schumer_indymac/index.htm | title=Schumer: Don't blame me for IndyMac failure | work=CNN | date=July 13, 2008}}{{cite news | url=https://www.wsj.com/articles/SB121607771017452513 | title=The $4 Billion Senator | work=The Wall Street Journal | date=July 15, 2008 | url-access=subscription}}

On July 7, 2008, IndyMac announced on the company blog that it:

• Had failed to raise capital since its May 12, 2008, quarterly earnings report;
• Had been notified by bank and thrift regulators that IndyMac Bank was no longer deemed "well-capitalized";

IndyMac announced the closure of both its retail lending and wholesale divisions, halted new loan submissions, and cut 3,800 jobs.{{cite news | last=Veiga | first=Alex | title=IndyMac stops new mortgage loans, to cut workforce by half | url=https://www.mercurynews.com/2008/07/07/indymac-stops-new-mortgage-loans-to-cut-workforce-by-half/ | publisher=Mercury News |agency=Associated Press | date=July 7, 2008 | url-access=subscription}}

On July 11, 2008, citing liquidity concerns, the FDIC put IndyMac Bank into conservatorship. A bridge bank, IndyMac Federal Bank, FSB, was established to assume control of IndyMac Bank's assets, its secured liabilities, and its insured deposit accounts. The FDIC announced plans to open IndyMac Federal Bank, FSB on July 14, 2008. Until then, depositors would have access to their insured deposits through ATMs, their existing checks, and their existing debit cards. Telephone and Internet account access was restored when the bank reopened.{{cite news| url=https://www.reuters.com/article/indymac-idUSWAO00014120080711 |title=IndyMac Taken Over By Regulators| first1=John | last1=Poirier | first2=Karey | last2=Wutkowski | first3=Rachelle | last3=Younglai | work=Reuters | date=July 11, 2008}}{{cite web| url=https://ml-implode.com/info/indy-fdic.pdf |publisher=IndyMac Bank| title=FDIC Notification to All Employees| first=Evan |last=Wagner |date=July 11, 2008}}{{cite news| url=https://www.foxnews.com/story/federal-regulators-close-california-mortgage-lender | publisher=Fox News | agency=Associated Press |title=Federal Regulators Close California Mortgage Lender | date=July 11, 2008}} The FDIC guarantees the funds of all insured accounts up to US$100,000, and declared a special advance dividend to the roughly 10,000 depositors with funds in excess of the insured amount, guaranteeing 50% of any amounts in excess of $100,000. Yet, even with the pending sale of Indymac to IMB Management Holdings, an estimated 10,000 uninsured depositors of Indymac are still at a loss of over $270 million.{{cite web | url=https://www.latimes.com/archives/la-xpm-2009-feb-28-fi-indymac28-story.html | title=IndyMac's shuffle ran over depositors | first=William | last=Heisel | work=Los Angeles Times | date=February 28, 2009 | url-access=subscription}}{{cite web |url=https://www.fdic.gov/bank/individual/failed/IndyMac.html |title=FDIC: Failed Bank Information – Bank Closing Information for IndyMac Bank, F.S.B., Pasadena, CA | publisher=Federal Deposit Insurance Corporation}}

With $32 billion in assets, IndyMac Bank was one of the largest bank failures in American history.{{cite news | url=https://www.nytimes.com/2008/07/13/business/worldbusiness/13iht-indy.4.14456887.html | title=IndyMac one of the largest bank failures in U.S. history | first=Louise | last=Story | work=The New York Times | date=July 13, 2008 | url-access=subscription}}

IndyMac Bancorp filed for Chapter 7 bankruptcy on July 31, 2008.

Initially the companies affected were those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial, as they could no longer obtain financing through the credit markets. Over 100 mortgage lenders went bankrupt during 2007 and 2008. Concerns that investment bank Bear Stearns would collapse in March 2008 resulted in its fire-sale to JP Morgan Chase. The financial institution crisis hit its peak in September and October 2008. Several major institutions either failed, were acquired under duress, or were subject to government takeover. These included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, Citigroup, and AIG. On October 6, 2008, three weeks after Lehman Brothers filed the largest bankruptcy in U.S. history, Lehman's former CEO Richard S. Fuld Jr. found himself before Representative Henry A. Waxman, the California Democrat who chaired the House Committee on Oversight and Government Reform. Fuld said he was a victim of the collapse, blaming a "crisis of confidence" in the markets for dooming his firm.{{cite news| first=James | last=Sterngold | url=https://www.bloomberg.com/news/articles/2010-04-29/how-much-did-lehman-ceo-dick-fuld-really-make | title=How Much Did Lehman CEO Dick Fuld Really Make? | work=Bloomberg Businessweek | date=April 29, 2010 | url-access=subscription}}

• In 2006, Peter Schiff authored a book titled Crash Proof: How to Profit From the Coming Economic Collapse, which was published in February 2007 by Wiley. The book describes various features of the economy and housing market that led to the United States housing bubble, and warns of the impending decline. After many of the predictions came to pass, a second edition titled Crash Proof 2.0 was published in 2009, which included a "2009 update" addendum at the end of each chapter. It was featured on The New York Times Best Seller list.
• Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and the Government Bailout Will Make Things Worse, by Tom Woods, was published in February 2009 by Regnery Publishing. It was featured on The New York Times Best Seller list for 10 weeks.
• The US documentary program Frontline produced several episodes investigating various aspects of the crisis:
• "[https://www.pbs.org/wgbh/frontline/film/meltdown/ Inside the Meltdown]" (Season 2009: Episode 8)
• "[https://www.pbs.org/wgbh/frontline/film/tentrillion/ Ten Trillion and Counting]" (Season 2009: Episode 9)
• "[https://www.pbs.org/wgbh/frontline/film/breakingthebank/ Breaking the Bank]" (Season 2009: Episode 15)
• "[https://www.pbs.org/wgbh/frontline/film/warning/ The Warning]" (Season 2009: Episode 2)
• A 2010 documentary film, Overdose: A Film about the Next Financial Crisis, describes how the financial crisis came about and how the solutions that have been applied by many governments are setting the stage for the next crisis. The film is based on the book Financial Fiasco by Johan Norberg and features Alan Greenspan, with funding from the libertarian think tank Cato Institute.{{cite web |url=https://www.cato.org/events/overdose-film-about-next-financial-crisis |title=Overdose: A Film about the Next Financial Crisis| publisher=Cato Institute |date=May 17, 2010}}
• In October 2010, a documentary film about the crisis, Inside Job directed by Charles Ferguson, was released by Sony Pictures Classics. In 2011, it won the Academy Award for Best Documentary Feature at the 83rd Academy Awards.{{cite news |title=Oscars 2011: Inside Job banks best documentary award |url=https://www.theguardian.com/film/2011/feb/28/inside-job-best-documentary-oscar |work=The Guardian |date=February 28, 2011}}
• Set on the night before the crisis broke, the 2011 film Margin Call is a movie that follows traders through a sleepless 24 hours as they try to contain the damage after an analyst discovers information that is likely to ruin their firm, and possibly the whole economy.{{Cite news | url=https://www.vox.com/culture/2018/9/14/17856048/movies-financial-crisis-streaming-lehman-brothers-versailles-big-short-inside-job | title=5 movies that explain what caused the financial crisis, and what happened after | first=Alissa | last=Wilkinson | work=Vox Media | date=September 15, 2018}}
• The 2011 film Too Big to Fail is based on Andrew Ross Sorkin's 2009 non-fiction book Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System – and Themselves.
• Michael Lewis authored a best-selling non-fiction book about the crisis, entitled The Big Short. In 2015, it was adapted into a film of the same name, which won the Academy Award for Best Adapted Screenplay. One point raised is to what extent those outside of the markets themselves (i.e., not working for a mainstream investment bank) could forecast the events and be generally less myopic.
• Simon Reid-Henry's 2019 book Empire of Democracy describes how liberal norms{{which?|date=January 2025}} in the West were replaced by populism as a consequence of the 2007–08 financial crisis, as well as neoliberal policies{{which?|date=January 2025}} that had emerged in previous decades which hollowed out government and changed voter expectations.

{{div col|colwidth=20em}}

• Banking (Special Provisions) Act 2008 (United Kingdom)
• 2008–2009 Keynesian resurgence
• 2010 United States foreclosure crisis
• 2012 May Day protests
• 2000s commodities boom
• Crisis theory
• Kondratiev wave
• List of acronyms associated with the eurozone crisis
• List of bank failures in the United States (2008–present)
• List of banks acquired or bankrupted during the Great Recession
• List of banks acquired or bankrupted in the United States during the 2008 financial crisis
• List of economic crises
• List of entities involved in 2007–2008 financial crises
• List of largest bank failures in the United States
• Stock market crashes in India
• Low-Income Countries Under Stress
• Mark-to-market accounting
• Neoliberalism
• Occupy movement
• Pessimism porn
• PIGS (economics)
• Private equity in the 2000s
• Subprime crisis impact timeline
• Chicago plan

{{div col end}}

{{Reflist}}

The initial articles and some subsequent material were adapted from the Wikinfo article [https://web.archive.org/web/20120111145026/http://www.wikinfo.org/index.php?title=Financial_crisis_of_2007-2008 Financial crisis of 2007–2008] released under the GNU Free Documentation License Version 1.2

• David M. Kotz (2015), The Rise and Fall of Neoliberal Capitalism. Harvard University Press. {{ISBN|9780674725652}}.David M. Kotz is Professor of Economics at the University of Massachusetts, Amherst, and Distinguished Professor, School of Economics, Shanghai University of Finance and Economics ([https://www.hup.harvard.edu/books/9780674980013 source])jstor.org: [https://www.jstor.org/stable/j.ctt21pxkf9 TOC]
• John Lanchester, The Invention of Money: How the heresies of two bankers became the basis of our modern economy, The New Yorker, August 5 & 12, 2019, pp. 28–31
• Julien Mercille & Enda Murphy, 2015, Deepening neoliberalism, austerity, and crisis: Europe's treasure Ireland, Palgrave Macmillan, Basingstoke.
• Nomi Prins: Collusion: How Central Bankers Rigged the World, Nation Books 2018, {{ISBN|978-1568585628}}.
• Laura A. Patterson & Cynthia A. Koller (2011). Diffusion of Fraud Through Subprime Lending: The Perfect Storm. In Mathieu Deflem (ed.) Economic Crisis and Crime (Sociology of Crime Law and Deviance, Volume 16), Emerald Group Publishing, pp. 25–45. {{ISBN|9780857248022}}.
• Charles Read (2022). Calming the storms : the carry trade, the banking school and British financial crises since 1825. Cham, Switzerland, pp. 295–305.
• {{cite book | last=Tooze |first=Adam |author-link=Adam Tooze |title=Crashed: How a Decade of Financial Crises Changed the World |location=New York |publisher=Viking Press |year=2018 |isbn=9780670024933 | url=https://books.google.com/books?id=om2mDwAAQBAJ }}
• Peter Wallison, Bad History, Worse Policy (Washington, D.C.: American Enterprise Institute, 2013) {{ISBN|978-0-8447-7238-7}}.
• Palais-Royal Initiative18 high-ranking former ministers, Central Bank governors and/or officials in national or international institutions:

Sergey Aleksashenko Former Deputy Governor, Central Bank of Russia.

Hamad Al Sayari Former Governor, Saudi Arabian Monetary Agency.

Jack T. Boorman Former Department Director and Special Advisor to the Managing Director, IMF.

Michel Camdessus Former Managing Director, IMF.

Andrew Crockett Former General Manager, BIS.

Guillermo De la Dehesa Former State Secretary of Economy and Finance, Spain.

Arminio Fraga Former Governor, Central Bank of Brazil.

Toyoo Gyohten Former Vice Minister of Finance, Japan.

Xiaolian Hu Vice President of China Society of Finance and Banking.

André Icard Former Deputy General Manager, BIS.

Horst Koehler Former Managing Director, IMF.

Alexandre Lamfalussy Former General Manager, BIS.

Guillermo Ortiz Former Governor, Banco de México.

Tommaso Padoa-Schioppa (†) Former Minister of Finance, Italy.

Maria Ramos Former Director General, National Treasury, South Africa.

Y. Venugopal Reddy Former Governor, Reserve Bank of India.

Edwin M. Truman Former Assistant Secretary for International Affairs of the U.S. Treasury.

Paul A. Volcker Former Chairman, Federal Reserve Board.

Joined by Isabelle Mateos y Lago Advisor, IMF.

Pietro Catte Director, International Research Department, Banca d’Italia.

Corrinne Ho Senior Economist, BIS.

Irena Asmundson Economist, IMF. (8 February 2011): [https://www.emergingmarketsforum.org/wp-content/uploads/2020/01/Palais-Royal-report.pdf Reform of the International Monetary System: A Cooperative Approach for the 21st Century] (pdf, 20 p)

Reports on causes

• [https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf Final Report] of the Financial Crisis Inquiry Commission
• [http://fcic.law.stanford.edu/ Archived website] of the Financial Crisis Inquiry Commission (maintained by the Stanford University and the Stanford Law School)
• [http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf Wall Street and the Financial Crisis: Anatomy of a Financial Collapse] {{Webarchive|url=https://web.archive.org/web/20110418203336/http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf |date=April 18, 2011 }}, Majority and Minority Staff Report, United States Senate Homeland Security Permanent Subcommittee on Investigations, April 13, 2011
• [https://www.stlouisfed.org/financial-crisis/articles-and-papers/what-caused-the-crisis What Caused the Crisis]: A collection of papers at the Federal Reserve Bank of St. Louis

Journalism and interviews

• [https://www.pbs.org/wgbh/pages/frontline/meltdown/ Inside the Meltdown] – PBS Frontline documentation including additional background article and in-depth interviews
• [https://www.pbs.org/wgbh/frontline/film/money-power-wall-street/ "Money, Power & Wall Street"] – PBS Frontline documentation including additional background article and in-depth interviews
• Stewart, James B., [https://www.newyorker.com/reporting/2009/09/21/090921fa_fact_stewart Eight Days: the battle to save the American financial system], The New Yorker magazine, September 21, 2009. pp. 58–81. Summarizing September 15–23, 2008, with interviews of Paulson, Bernanke, and Geithner by James Stewart
• [https://features.marketplace.org/bernanke-paulson-geithner/ Panic, Fear, and Regret] – audio interviews with Timothy Geithner, Ben Bernanke and Henry Paulson from Marketplace

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