2008 Financial Crisis Analysis

Government action and inaction in determining whether the 2008 financial crisis was avoidable

The global financial crisis of 2008 is one of the largest crises ever experienced. The scale and gravity of it can only be compared to the great depression of 1929 (Almunia et al., 2010). While it has been recorded that economies have gone through financial crises at least since the 1880s, the frequency and severity of financial crises has more or less doubled in the 28 years between 1972 and 2000 compared to the period of time of 91 years between 1880 and 1971(Bordo et al., 2001). Therefore financial crises are getting more and more recurrent as economic systems develop further. This shows how important it is to identify whether or not financial

It caused major losses in the financial sector globally. Firstly, the loss in aggregate market capitalization of global equity exchanges is one way to judge the global impact of the crisis. After some fluctuation the erosion of equity value stood between ten and twelve trillion dollars from 2007 to 2010 (Adelson, 2013). Secondly, the financial crisis roughly caused a 5.25% drop in global gross domestic product in 2009. To put this into perspective, the biggest percentage drop ever recorded before the crisis was 0.96% in 1982 (Adelson, 2013). It can be said with moderate certainty that the financial crisis did in fact cause large losses to effected

One very direct way the government caused the crisis is its economic policy and various public acts that were approved, the community reinvestment act that passed during the Clinton era being a key culprit. The Community Reinvestment Act allows low-income individuals to have access to homeownership by regulating banks and saving institutions in a way that steers them towards making investments that are less safe in the name of antidiscrimination by allowing more lax lending standards (White, 2008). While the objective of the act is noble, the long-term negative effects were not considered or predicted. Ultimately the act led to banks being pressured into issuing subprime mortgages that homeowners could not pay off thus leading to the housing bubble that caused the market to crash (White, 2008). There were other key acts that complimented the Community Reinvestment Act such as the Depository Institutions Deregulatory and Monetary Control Act, the Fair Housing Act and the Commodity Futures Modernization Act (Friedman, 2011) in pressuring banks and creating the financial climate that led to the