The Financial Crisis 2008- Mistakes by the Government

Updated: Mar 26, 2021

Since the Great Depression of the 1930s, the worst financial crisis, “The Financial Crisis of 2007-2008” also known as the the ’global financial crisis’ and the ’2008 financial crisis’, began with a crisis in the US subprime mortgage market, which, combined with an unknown risk as well as a lack of transparency quickly transformed into full-fledged international banking crisis and recession.

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But why did it begin? Was the government responsible for this?

The intervention by the government in the free market and the regulations done by it caused the financial crisis of 2008 and The Great Recession.

Former Federal Reserve Chairman Ben Bernanke(from 2006 until 2014) acknowledged that policy makers made two critical errors fighting the financial crisis a decade ago: They failed to see it coming with such force then underestimated how much economic damage it would cause later.

Bernanke, singled out the panic that engulfed the financial system with the 2008 collapse of Lehman Brothers Holdings Inc. as the key reason for the depth of the recession back then.

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The real cause of this financial crisis was the government policies. Though policymakers wanted us to believe the crisis had nothing to do with the government’s affordable housing goals yet the financial crisis was, in truth, firmly rooted in a set of ill-conceived government policies that allowed too many people to take out home mortgages. Moreover, the Federal Reserve’s disruptive manipulations of interest rates, plus massive subsidies and regulations in housing, banking, and mortgages were some of the issues related to the financial crisis of 2008.

And apart from the above reasons, President Clinton, President Bush and Republicans and Democrats in Congress had departed from every one of the four planks of Reaganomics that produced the 25-year economic boom.  Bush’s Fed had trashed Reagan’s monetary policy.  Clinton’s overregulation produced the subprime mortgage fiasco.  Moreover, during Bush’s presidency Congress lost control of spending, with federal spending rising by one seventh as a percent of GDP, reversing the gains that had been made under the Gingrich Republican majorities in the 1990s.

Or we can say that the Americans have been over confident in their beliefs about what regulators can achieve which caused a lot of difficulties which economy had to face during 2008 like the loose monetary policy caused financial distortion. Moreover, the subprime lending and some international regulation also played the part.

To go even back in history, the Dotcom bubble, also referred to as Internet Bubble is to be blamed. In the period between 1995-2000, attributing to the low interest rates, helped increase the start-up capital amounts and encouraged venture-capitalists to aggressively invest in this highly speculative market. However, dotcom bubble started to collapse in 1999 – 2000 when the American Federal Reserve increased them nearly six times in early 2000 after lowering their interest rates. Thus investment started receding. Most dot companies spent too much of amount on advertising and promotions and also led to bankruptcy. To tackle this bubble, the interest rates were again lowered, under the administration of the then Fed Chairman Alan Greenspan. Further, the Fed had assured the banks of bailout and backed them with all power.

The mistakes committed by the government not only affected the American economy rather it had an impact on the global economy. By the end of 2008, Germany, Japan, and China were locked in recession, as were many smaller countries. And, the U.S. and Europe cut deep into demand for their products. Less-developed countries likewise lost markets abroad, and their foreign investment, on which they had depended for growth capital, withered. With none of the biggest economies prospering, there was no obvious engine to pull the world out of its recession.

WRITTEN AND COMPILED BY:

Gaurav Taneja

Economics(H)

First year

EDITED BY:

Prathiba. P

B.Com(H)

Second Year


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