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What Caused The 2008 Financial Crisis

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The financial crisis of 2008 shocked many people and had a huge effect on many people’s lives. This essay aims to examine why the crisis happen, why the nation is still taking so long to recover from it, and what are possible solutions other economists have mentioned to try and solve the issue.
Causes
One of the most commonly agreed upon causes for the 2008 financial crisis is the bursting of the housing bubble right before 2008. Asset price inflation occurred in the housing market and the prices of the assets rose higher than their “real value” (Colander 2013, 385). This means that society believed it was wealthier than it actually was, asset price inflation occurred, and people spent more (Colander 2013, 385). While asset price inflation …show more content…

The extreme rich flood the financial markets with credit which creates new credit instruments, greater indebtedness, and speculation (Wiseman 2014, 921). Consumption externalities are generated which makes it harder for households to maintain statuses and welfare which results in plummeting household savings, ever greater indebtedness, and longer working hours (Wiseman 2014, 921). The rich take larger shares of income and wealth which means they gained more political and ideological power resulting in tax cuts for the rich, reduced welfare for the poor, and deregulation (Wiseman 2014, …show more content…

The Structural Stagnation Theory states that the recent problems of the U.S. economy are directly related to the structural problems caused by globalization (Colander 2013, 232). Structural stagnation also assumes that after a downturn, there will be a long period of time before the economic adjustment will get back to long-run growth rates (Colander 2013, 234). As stated before, globalization causes problems of unemployment and large trade deficits. To mask these problems the government decided to put in expansionary macro policy to combat unemployment instead of letting natural structural adjustments induced by higher unemployment guide the economy back into an international equilibrium without a trade deficit (Colander 2013, 242). The reason why actual structural changes didn’t happen to change the globalization problems is that politicians didn’t want to deal with the difficult policy issues of fairness and income redistribution because they want to be reelected (Colander 2013,

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