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2007-09 Financial Crisis

SUMMARY:

Between 2007 and 2009 the U.S. witnessed a series of banking failures that led to a prolonged recession. The financial crisis was the worst since the Great Depression and caused a significant increase in the federal budget deficit.

DESCRIPTION:

The collapse of the American housing market in 2006 and 2007 had a profound effect on the U.S. and global banking systems. Because many large financial institutions were heavily invested in mortgages, the bursting of the housing bubble led to a steep deterioration in bank balance sheets. Questions about bank solvency shook investor confidence, particularly after the failures of Wall Street firms Bear Stearns and Lehman Brothers in 2008, and precipitated a government bailout of affected institutions that fall. However, while government intervention prevented the collapse of the banking system, it did little to restore economic growth, and the U.S. entered a deep recession in December 2007. Although the National Bureau of Economic Research has concluded that the recession ended in June 2009, recovery has been modest, with the American economy experiencing both low growth and high unemployment ever since. The slow recovery has, in turn, placed significant pressure on the federal budget: low growth has reduced tax revenues while increasing claims on the government’s resources for measures such as unemployment insurance.

Although its origins were American, the financial crisis has had worldwide effects. Economic globalization meant that many non-American investors were heavily exposed to U.S. financial markets and, as such, the deterioration of those markets negatively impacted institutions and individuals abroad. The financial crisis also led to growing fears about public debt levels, which contributed to the sovereign debt crises that erupted in Greece and Ireland in 2010.

FURTHER INFORMATION:

Federal Reserve Bank of St. Louis, "Financial Crisis Timeline," http://timeline.stlouisfed.org/index.cfm?p=timeline.

PBS Frontline, "Inside the Meltdown," http://www.pbs.org/wgbh/pages/frontline/meltdown/.

Andrew Ross Sorkin, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves (Viking, 2009).

Joseph E. Stiglitz, Freefall: America, Free Markets, and the Sinking of the World Economy (W.W. Norton, 2010)

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