"Here is an embiggened version of the infamous jobs chart prepared by Obama administration economists Jared Bernstein and Christina Romer back in January 2009 (and now updated again by me with data from the August jobs report)."
2007-2009 Recession: Boom, Bust, and Beyond
The 2008 financial crisis and subsequent recession involved a complex interplay among a wide cast of characters. On the private side were prospective homeowners, mortgage brokers, credit rating agencies, banks and investment institutions. On the public sector side were government housing entities such as Fannie Mae and Freddie Mac, the Federal Housing Finance Agency, the Department of Housing and Urban Development, the Federal Reserve Bank, the Securities and Exchange Commission, the Treasury, and, of course, Congress.
Despite the complexity, there is some level of agreement on just how the crisis was caused. In short, a push to raise levels of home ownership led to a bubble in the housing market, and when that bubble popped, those who had banked on the continual rise of home prices were left in a troublesome spot.
The agreement seems to end there, however. There is still much disagreement on just how much the government is to blame for the crisis. Was there a lack of regulation or too much regulatory capture? How much did the implicit guarantee by the federal government to back the assets held by Fannie Mae and Freddie Mac affect the decision-making by those firms and their counter-parties? What role did financial innovations such as mortgage-backed securities, credit default swaps and the credit rating agencies assessing the risk of these innovations play? What about financial institutions growing so big as to become a "systemic risk" and hence "too big to fail"?
Perhaps the biggest point of contention is what the government’s role should be in the recovery. Broadly speaking, there are two camps. On one side, Keynesians believe that government intervention is necessary to restrain market forces and direct the economy in order to create stability. Their philosophy underlies government responses to the crisis: TARP and the Capital Purchase Program were supposed to prop up banks to encourage lending; stimulus programs such as the American Recovery and Reinvestment Act of 2009 were to “create jobs”; and new regulations such as Dodd-Frank Wall Street Reform and Consumer Protection Act and the Consumer Financial Protection Agency Act are aimed at preventing future crises.
On the other side, free-market thinkers see government as having only a small part to play in a recovery. They believe that the government’s manipulation of risk taking and investment incentives was a major reason for the crisis obstructing market signals and corrections. Further intervention to mitigate or cushion the effects of the crisis, they fear, will obstruct a much-needed market correction at greater future costs, including massively increasing the national debt.
This topic page provides an overview on the 2008 recession. It covers many different aspects: purported causes of the crisis; suggested ways to combat the crisis; evaluations of government responses to the crisis; and comparisons of this crisis to past and lessons for future ones.
More About This Topic...
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- Dissenting Statement of Commissioner Keith Hennessey, Commissioner Douglas Holtz-Eakin, and Vice Chairman Bill Thomas
- Podcast: Kling on Freddie and Fannie and the Recent History of the U.S. Housing Market
- Selected Financial Market & Economic Data
- Video: 2008 Financial Crisis and Fannie Mae, Day 3
- Testimony by Henry M. Paulson, Jr. Before the Financial Crisis Inquiry Commission
- Non-traditional mortgage holdings by agency in 2008
- Dissent from the Majority Report of the Financial Crisis Inquiry Commission
- Recent Developments In U.S. Financial Markets And Regulatory Responses To Them
- Delinquency rates on nontraditional mortgages
- Quotes on Fannie Mae & Freddie Mac