The Deep Roots of the Great Recession

The Deep Roots of the Great Recession

10/10/14

Christopher Whalen

Economics, United States

"The low-interest-rate environment that arguably helped cause the 2008 financial crisis remains in place today. What has changed is that government policy has shifted dramatically and now is arguably stifling job creation."

It has now been six years since the start of the subprime financial crisis, an event that many people mentally connect with the September 2008 collapse of Lehman Brothers. But in reality, the financial crisis that erupted in the financial markets that year actually began several years before. Just as the Great Crash of 1929 started with the unraveling of the Florida real-estate bubble and other events in the mid-1920s, the financial bust of 2008 was visible years before, as real-estate investors and lenders began to evidence mounting signs of stress.

Most observers connect the crisis with events in the financial markets: securities fraud by Wall Street investment houses, bad mortgages extended by lenders, and even worse, policy from Washington that encouraged an artificial increase in homeownership. But the roots of the crisis actually go far deeper than any single decision, action or policy originating in the 2000s. Thus, when people consider the financial meltdown of 2008 and ask whether the right policy tools were used to combat the crisis, the first question we need to ask is: what is the question?

Did we overreact to the crisis of 2008? Or did we underreact? Was the fiscal and monetary stimulus applied since 2008 the best way to address the crisis? What lessons can we learn from the financial meltdown? All of these questions suppose that we actually understand why the crisis occurred, and in particular, whether it was due to a set of narrow problems originating in the financial markets around the time of the event or instead part of a broader set of economic and political factors that go back decades.

Read full articlehttp://nationalinterest.org/feature/the-deep-roots-the-great-recession-11443