U.S. Financial Crisis of 2008: Causes, Response, Consequences

Following the crippling Financial Crisis of 2008, housing prices were slashed, millions of Americans were left unemployed, and the United States government spent nearly $1.5 trillion to help pull the nation out of recession (Congressional Budget Office, 2012). Our country was faced with the difficult task of piecing back together our nation’s economy while also implementing legislation to keep a similar financial disaster from occurring again. The Financial Crisis of 2008 brought some of the worst economic conditions experienced by the United States since the Great Depression which included unemployment rates remaining above 9%, or more than 14 million Americans out of work, two years past the crisis (U.S. Bureau of Labor Statistics, 2011). In addition to the severe unemployment rates, “consumer spending experienced the most severe decline since World War II” (U.S. Bureau of Labor Statistics, 2014). A recession of this magnitude requires a perfect storm of contributing factors and in this case its origin can be traced back to the real-estate bubble, weak regulatory structure, and irresponsible lending practices throughout the United States (Ökte, 2012). The real-estate bubble caused millions of Americans to default or miss payments on their loans leading to several hundred billion dollars in write-offs by banks and other lending institutions. Though significant, these losses were miniscule compared to the $8 trillion lost by banks through their investments in the United States stock market from its peak in October 2007 to its lowest point in October 2008 (Brunnermeier, 2009). With that said, the Financial Crisis of 2008 exposed the banking industry around the world for their inability to self-regulate bringing about severe reform from national governments and global regulators. Spearheading the regulatory changes to accomplish the goal of avoiding any future financial disaster of this magnitude was the Dodd-Frank Wall Street Reform and Consumer Protection Act published by the Obama administration in 2010. While government intervention was necessary given the economic hardship resulting from the Great Recession, it has been debated whether the Dodd-Frank Act was too severe in its regulations, limiting the international competitiveness of United States financial and banking institutions or if it is not far-reaching enough, failing to accomplish its goal of avoiding future recessions. This paper explores the economic reasons and financial instruments that contributed to the recession, the legislation passed following the crisis, and the effectiveness of this legislation in deterring a future financial disaster