What Caused the 2008 Recession?

Source: The Balance.com

How Did this Epidemic Start?

"A picture speaks a thousand words" - Anonymous. I am going to add to this picture not with another one but with context.

Initially, the recession began in 2006 after the subprime mortgage crisis erupted when the Bush Administration and the Federal Reserve took no heed of the warning issued to them. With the home permits being down 28% compared to the previous year you would like to think that those in power were more than capable of comprehending what was happening or could possibly happen. Obviously not.

Ignoring the decline in the inverted yield curve... (which I'm sure you can guess is not a good thing). If you were in charge of USA, do you think a strong money supply and low-interest rates would solve all the problems they've brought upon themselves? Somebody did anyway.

What factors influenced the Crisis?

To sit here and say that all of the problems were entirely caused by one factor would be unfair to say the least, there are multiple factors which contributed to the recession. One man who believes there was a "catastrophe" avoided similar to that of the 1930s, is David Drezner who published his book "The System Worked: How the World Stopped Another Great Depression" explaining how we did not completely avoid the crisis altogether but it could have been worse if it wasn't for quantitative easing (meaning the federal reserve bought bonds preventing the economy from imploding; Source: https://www.newyorker.com/magazine/2018/09/17/the-real-cost-of-the-2008-financial-crisis) which is hard to imagine.

Chaikovska (2019) has stated that "The recent financial crisis has exposed to weaknesses the area of banking regulations and supervision", for example, the liquidation of $24 billion by the federal reserve into the banking system which is regulated and only under certain circumstances can this be done. Printing money can be dangerous and requires intense supervision because history tells us that without regulation and supervision hyperinflation can occur as demonstrated by the Weimar Republic of Germany when the printed money 1921-23. Relaxed lending standards which I am sure were never meant to be so sloppy which impacted on household debt and bursting that real-estate bubble all of which could have been helped with more stringent bank regulations and supervisions but here we are 13 years later.

From 2000-07, the global pool of fixed-income securities increased to $80 trillion from $36 trillion. This kitty continued to increase as savings from high-growth developing nations entered the global capital markets, prompting investors began to search for higher yields than those in the USA. The greed, or temptation whichever way you want to describe it, became overwhelming as policies and regulatory control mechanisms were completely disregarded as lenders and borrowers put their savings to use causing bubbles to burst and banks to collapse. The moral of the story is, do not lend people money who you deem to have questionable integrity.

Would you lend a person money who had a poor credit history and was liable to default on their payments all for a quick profit? No, me neither.