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America's Financial Crisis: The End of an Era

Author

Listed:
  • Bosworth, Barry

    (Asian Development Bank Institute)

  • Flaaen, Aaron

    (Asian Development Bank Institute)

Abstract
This paper reviews research on the origins of the financial crisis of 2008–2009, highlights the key events that triggered a financial panic in September 2008, and summarizes the extraordinary policy actions the United States (US) has taken to ameliorate the crisis. We discuss the proximate causes of the crisis, including the characteristics and growth of the subprime mortgage market, and the distorted incentives and flawed regulatory structure surrounding the secondary market for mortgage-backed securities. We also assess the role of more fundamental macroeconomic determinants of the bubble in US asset prices, most notably low global interest rates attributed to either loose monetary policy or excess global saving. We find that while low global interest rates may have contributed to the boom in housing markets and speculative excesses, the poorly understood innovations and microeconomic distortions of the financial system played a more fundamental role. Finally, the otherwise extraordinary policy response of the US government has been limited by the lack of an effective restructuring of the financial system, and a recovery marked by higher private saving, weak domestic investment, and a large public deficit appears to be unsustainable. Ultimately, the US economy will need to shift about 3% of GDP from domestic consumption to the export sector. This will pose some serious challenges to countries that have come to rely on exports to the US market.

Suggested Citation

  • Bosworth, Barry & Flaaen, Aaron, 2009. "America's Financial Crisis: The End of an Era," ADBI Working Papers 142, Asian Development Bank Institute.
    • Handle: RePEc:ris:adbiwp:0142
    as

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    References listed on IDEAS

    as
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    Cited by:

    1. Charles Wyplosz, 2010. "The Eurozone in the Current Crisis," Finance Working Papers 22825, East Asian Bureau of Economic Research.
    2. Menzie D. Chinn & Barry Eichengreen & Hiro Ito, 2014. "A forensic analysis of global imbalances," Oxford Economic Papers, Oxford University Press, vol. 66(2), pages 465-490.
    3. De, Prabir & Neogi, Chiranjib, 2011. "Global Financial and Economic Crisis: Implications for Trade and Industrial Restructuring in South Asia," ADBI Working Papers 294, Asian Development Bank Institute.
    4. James Crotty, 2009. "The Bonus-Driven “Rainmaker” Financial Firm: How These Firms Enrich Top Employees, Destroy Shareholder Value and Create Systemic Financial Instability," UMASS Amherst Economics Working Papers 2009-13, University of Massachusetts Amherst, Department of Economics.
    5. Bian, Junsong & Zhang, Guoqing & Zhou, Guanghui, 2020. "Manufacturer vs. Consumer Subsidy with Green Technology Investment and Environmental Concern," European Journal of Operational Research, Elsevier, vol. 287(3), pages 832-843.

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    More about this item

    Keywords

    global financial crisis; financial panic; american policy actions;
    All these keywords.

    JEL classification:

    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • E69 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Other
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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