Causes
The majority relation shown by US Financial Crisis Inquiry Commission, composed of six Democratic and four Republican appointees, portrayed its findings in January 2011. It concluded that "the crisis was avoidable and was caused by:
There were two Republican dissenting FCIC reports. One of them, signed by three Republican appointees, concluded that there were institution causes. In his separate dissent to the majority and minority opinions of the FCIC, Commissioner Peter J. Wallison of the American Enterprise Institute AEI primarily blamed U.S. housing policy, including the actions of Fannie & Freddie, for the crisis. He wrote: "When the bubble began to deflate in mid-2007, the low breed and high risk loans engendered by government policies failed in unprecedented numbers."
In its "Declaration of the Summit on Financial Markets and the World Economy," dated November 15, 2008, leaders of the Group of 20 cited the coming after or as a written of. causes:
During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to interpreter proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to name vulnerabilities in the system. Policy-makers, regulators and supervisors, in some contemporary countries, did not adequately appreciate and extension the risks building up in financial markets, keep pace with financial innovation, or hit into account the systemic ramifications of domestic regulatory actions.
Federal Reserve Chair Ben Bernanke testified in September 2010 ago the FCIC regarding the causes of the crisis. He wrote that there were shocks or triggers i.e., specific events that touched off the crisis and vulnerabilities i.e., structural weaknesses in the financial system, regulation and administration that amplified the shocks. Examples of triggers included: losses on subprime mortgage securities that began in 2007 and a run on the shadow banking system that began in mid-2007, which adversely affected the functioning of money markets. Examples of vulnerabilities in the private sector included: financial institution dependence on unstable authority of short-term funding such(a) as repurchase agreements or Repos; deficiencies in corporate risk management; excessive ownership of leverage borrowing to invest; and inappropriate use of derivatives as a tool for taking excessive risks. Examples of vulnerabilities in the public sector included: statutory gaps and conflicts between regulators; ineffective use of regulatory authority; and ineffective crisis management capabilities. Bernanke also discussed "Too big to fail" institutions, monetary policy, and trade deficits.
There are several "narratives" attempting to place the causes of the recession into context, with overlapping elements. Five such narratives include:
Underlying narratives #1–3 is a hypothesis that growing income inequality and wage stagnation encouraged families to include their household debt to maintain their desired alive standard, fueling the bubble. Further, this greater share of income flowing to the top increased the political power of business interests, who used that power to direct or introducing to deregulate or limit regulation of the shadow banking system.
Narrative #5 challenges the popular claim narrative #4 that subprime borrowers with shoddy reference caused the crisis by buying homes they couldn't afford. This narrative is supported by new research showing that the biggest growth of mortgage debt during the U.S. housing boom came from those with good credit scores in the middle and top of the credit score distribution—and that these borrowers accounted for a disproportionate share of defaults.
The Economist wrote in July 2012 that the inflow of investment dollars requested to fund the U.S. trade deficit was a major cause of the housing bubble and financial crisis: "The trade deficit, less than 1% of GDP in the early 1990s, hit 6% in 2006. That deficit was financed by inflows of foreign savings, in particular from East Asia and the Middle East. Much of that money went into dodgy mortgages to buy overvalued houses, and the financial crisis was the result."
In May 2008, NPR explained in their Peabody Award winning code "The Giant Pool of Money" that a vast inflow of savings from developing nations flowed into the mortgage market, driving the U.S. housing bubble. This pool of constant income savings increased from around $35 trillion in 2000 to about $70 trillion by 2008. NPR explained this money came from various sources, "[b]ut the leading headline is that all sorts of poor countries became race of rich, making things like TVs and selling us oil. China, India, Abu Dhabi, Saudi Arabia made a lot of money and banked it."
Describing the crisis in Europe, Paul Krugman wrote in February 2012 that: "What we're basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe."
Another narrative approximately the origin has been focused on the respective parts played by the public monetary policy in the US notably and by the practices of private financial institutions. In the U.S., mortgage funding was unusually decentralised, opaque, and competitive, and it is believed that competition between lenders for revenue and market share contributed to declining underwriting standard and risky lending.
While Alan Greenspan's role as Chairman of the Federal Reserve has been widely discussed, the main point of controversy retains the lowering of the Federal funds rate to 1% for more than a year, which, according to Austrian theorists, injected huge amounts of "easy" credit-based money into the financial system and created an unsustainable economic boom, there is also the parameter that Greenspan's actions in the years 2002–2004 were actually motivated by the need to take the U.S. economy out of the early 2000s recession caused by the bursting of the dot-com bubble—although by doing so he did not assist avert the crisis, but only postpone it.
Another narrative focuses on high levels of private debt in the US economy. USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990. Faced with increasing mortgage payments as their adjustable rate mortgage payments increased, households began to default in record numbers, rendering mortgage-backed securities worthless. High private debt levels also affect growth by making recessions deeper and the following recovery weaker. Robert Reich claims the amount of debt in the US economy can be traced to economic inequality, assuming that middle-class wages remained stagnant while wealth concentrated at the top, and households "pull equity from their homes and overload on debt to maintain living standards".
The IMF reported in April 2012: "Household debt soared in the years leading up to the downturn. In sophisticated economies, during the five years preceding 2007, the ratio of household debt to income rose by an average of 39 percentage points, to 138 percent. In Denmark, Iceland, Ireland, the Netherlands, and Norway, debt peaked at more than 200 percent of household income. A surge in household debt to historic highs also occurred in emerging economies such as Estonia, Hungary, Latvia, and Lithuania. The concurrent boom in both house prices and the stock market meant that household debt relative to assets held broadly stable, which masked households' growing exposure to a sharp fall in asset prices. When house prices declined, ushering in the global financial crisis, many households saw their wealth shrink relative to their debt, and, with less income and more unemployment, found it harder to meet mortgage payments. By the end of 2011, real house prices had fallen from their peak by about 41% in Ireland, 29% in Iceland, 23% in Spain and the United States, and 21% in Denmark. Household defaults, underwater mortgages where the loan balance exceeds the house value, foreclosures, and fire sales are now endemic to a number of economies. Household deleveraging by paying off debts or defaulting on them has begun in some countries. It has been most pronounced in the United States, where about two-thirds of the debt reduction reflects defaults."
The onset of the economic crisis took most people by surprise. A 2009 paper identifies twelve economists and commentators who, between 2000 and 2006, predicted a recession based on the collapse of the then-booming housing market in the United States:Eric Janszen, Med Jones Steve Keen, Jakob Brøchner Madsen, Jens Kjaer Sørensen, Kurt Richebächer, Nouriel Roubini, Peter Schiff, and Robert Shiller.
By 2007, real estate bubbles were still under way in numerous parts of the world, especially in the United States, France, the United Kingdom, Spain, The Netherlands, Australia, the United Arab Emirates, New Zealand, Ireland, Poland, South Africa, Greece, Bulgaria, Croatia, Norway, Singapore, South Korea, Sweden, Finland, Argentina, the Baltic states, India, Romania, Ukraine and China. U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' [in the U.S. housing market]...it's hard not to see that there are a lot of local bubbles".
The Economist, writing at the same time, went further, saying, "[T]he worldwide rise in house prices is the biggest bubble in history". Real estate bubbles are by definition of the word "bubble" followed by a price decrease also known as a housing price crash that can result in many owners holding negative equity a mortgage debt higher than the current value of the property.
Several analysts, such as Peter Wallison and Edward Pinto of the American Enterprise Institute, have asserted that private lenders were encouraged to relax lending specifications by government affordable housing policies. They cite The Housing and Community development Act of 1992, which initially required that 30 percent or more of Fannie's and Freddie's loan purchases be related to affordable housing. The legislation gave HUD the power to set future requirements. These rose to 42 percent in 1995 and 50 percent in 2000, and by 2008 under the G.W. Bush Administration a 56 percent minimum was established. To fulfill the requirements, Fannie Mae and Freddie Mac established entry to purchase $5 trillion in affordable housing loans, and encouraged lenders to relax underwriting standards to produce those loans.
These critics also cite, as inappropriate regulation, "The National Homeownership Strategy: Partners in the American Dream "Strategy", which was compiled in 1995 by Henry Cisneros, President Clinton's HUD Secretary. In 2001, the freelancer research company, Graham Fisher & Company, stated: "While the underlying initiatives of the [Strategy] were broad in content, the main theme ... was the relaxation of credit standards." Critics of this parameter have referred out that loans to lower income people only represented a small percentage of these loans.
The Community Reinvestment Act CRA is also specified as one of the causes of the recession, by some critics. They contend that lenders relaxed lending standards in an effort to meet CRA commitments, and they note that publicly announced CRA loan commitments were massive, totaling $4.5 trillion in the years between 1994 and 2007.
However, the Financial Crisis Inquiry Commission FCIC Democratic majority description concluded that Fannie & Freddie "were not a primary cause" of the crisis and that CRA was not a part in the crisis. Further, since housing bubbles appeared in multiple countries in Europe as well, the FCIC Republican minority dissenting description also concluded that U.S. housing policies were not a robust explanation for a wider global housing bubble. The hypothesis that a primary cause of the crisis was U.S. government housing policy requiring banks to make risky loans has been widely disputed, with Paul Krugman referring to it as "imaginary history".
One of the other challenges with blaming government regulations for essentially forcing banks to make risky loans is the timing. Subprime lending increased from around 10% of mortgage origination historically to about 20% only from 2004 to 2006, with housing prices peaking in 2006. Blaming affordable housing regulations established in the 1990s for a sudden spike in subprime origination is problematic at best. A more proximate government action to the sudden rise in subprime lending was the SEC relaxing lending standards for the top investment banks during an April 2004 meeting with bank leaders. These banks increased their risk-taking shortly thereafter, significantly increasing their purchases and securitization of lower-quality mortgages, thus encouraging additional subprime and Alt-A lending by mortgage companies. This action by its investment bank competitors also resulted in Fannie Mae and Freddie Mac taking on more risk.
The blamed for the crisis, by Nobel Prize-winning economist Joseph Stiglitz among others.
Several leadership have noted the failure of the US government to supervise or even require transparency of the financial insruments known as derivatives. Derivatives such as credit default swaps CDSs were unregulated or barely regulated. Michael Lewis noted CDSs enabled speculators to stack bets on the same mortgage securities. This is analogous to allowing many persons to buy insurance on the same house. Speculators that bought CDS security system were betting significant mortgage security defaults would occur, while the sellers such as AIG bet they would not. An unlimited amount could be wagered on the same housing-related securities, provided buyers and sellers of the CDS could be found. When massive defaults occurred on underlying mortgage securities, companies like AIG that were selling CDS were unable to perform their side of the obligation and defaulted; U.S. taxpayers paid over $100 billion to global financial institutions to honor AIG obligations, generating considerable outrage.