Causes Of The 2008 Financial Crisis

In March 2008, the housing bubble burst (Economic Recession). The prices of homes nose-dived because people could no longer pay their monthly payments on time because the introductory rate of the mortgage increased. Some people were even leaving their homes because the loan was worth more than the actual house. Because more homes were being foreclosed, fewer people were buying things, which caused companies to lay off workers which lead to fewer consumers able to afford the things companies manufactured. This caused Wall Street to panic and sell stocks, causing investors and companies to lose millions of dollars. Some of the foundations of the 2008 Financial Crisis are as follows: deregulation of the banks, the debt burden of the American public.

All in all, the Euro Crisis is an impediment to America’s recovery because Europe is the second largest importer of American products and both economies have over 2 trillion dollars invested in each other. One of the main causes of the 2008 financial crisis was the deregulation of Wall Street, which started in the 1990s and continued in the 2000s. In 1999, the Glass-Steagal Act was repealed and replaced with the Gramm-Leach-Blily Act, which eliminated many of Glass-Steagal’s restrictions. In 2000, the Commodity Futures Modernization Act, sponsored by Gramm allowed investors to make bets on commodities and unleashed the derivatives market. In 2004, Goldman Sachs lobbied the government to permit banks to severely over-leverage themselves, meaning they can pile on as much debt on the books as possible (Economic Rescue Plan). Before there was any regulation on financial activities, the American economy went through frequent boom and bust cycles. Runs on the banks occurred every decade and was a part of everyday life. In 1929, after the Crash, Senator Glass and Senator Steagal proposed the Glass-Steagal Act to regulate Wall Street and the banks. It also created the FDIC and separated commercial and investment banking. According to Daniel Taurula, the era of banking Glass-Steagal ushered in was quiet and brought nothing new to the forefront. In the 1980s people started to use long term investments for their retirement. Because of this shift towards investment banking, traditional banks began to lose business (Financial Regulation). In conclusion, deregulation of the financial sector is one of the main causes of the crisis because it allowed traditional banks to put money in risky investments, it allowed them to give mortgages to people with low credit, and it allowed banks to create mortgage backed securities.Another cause of the 2008 financial crisis was the artificially low interest rates the Federal Reserve put in