Underlying Causes of the Financial Crisis of 2008–2009
Underlying Causes of the Financial Crisis of 2008–2009
This chapter explores the underlying causes that brought about the financial crisis of 2008 down a path that does not involve bankers and home buyers. Although they both committed mistakes in the process that may have contributed to the collapse, the chapter positions them at the sidelines, stating that they are not the main drivers of the collapse. First, it considers two theories as to why interest rates fell and consequently rose in the early 2000s, one being the “global savings glut,” and whether the rise and fall in housing prices was really a bubble phenomenon. The chapter also talks about how the Federal Reserve can influence interest rates other than just the federal funds rate, and how this in turn influences economic activity. In conclusion, the chapter attributes the financial crisis to the root failure of monetary policy.
Keywords: financial crisis of 2008, global savings glut, bubble phenomenon, federal funds rate, failure of monetary policy, monetary policy, fall in housing prices
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