IDEAS home Printed from
   My bibliography  Save this article

Political economy of the US financial crisis 2007-2009


  • Vuk Vukovic

    (Student at Master of Science program at London School of Economics and Political Science, London)


The emphasis of this paper is on the political economy of the subprime mortgage crisis in the United States and how the policy makers contributed to it through their legislation and regulations, made under the rising influence of interest groups and the lobbying activities of the finance industry. The “Great Recession” of 2007-2009 began as a bubble-burst in the mortgage market in the United States that spilled over to the entire financial market of the US, and afterwards to the integrated world financial market. The crisis sprang up over the US real sector and, due to the decline in US aggregate demand, spread consequently to the real economy of the rest of the World. No sound evidence has been given for the publicly proclaimed idea that the causes of the crisis lie within the self-regulating free market. The causes of the crisis lie primarily in the activities of political power, i.e. in the extensive government regulation which has, under the strong influence of interest groups and the lobbying power of financial corporations, led to favouritism in macroeconomic policies and inefficient resource allocation. Regulation was enforced by stimulating affordable housing through government sponsored enterprises, oligopoly of the rating agencies, banking regulation and an increasing connection between government and the finance industry.

Suggested Citation

  • Vuk Vukovic, 2011. "Political economy of the US financial crisis 2007-2009," Financial Theory and Practice, Institute of Public Finance, vol. 35(1), pages 91-128.
  • Handle: RePEc:ipf:finteo:v:35:y:2011:i:1:p:91-128

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo Group Munich.
    2. Christopher Bajada & Friedrich Schneider, 2005. "The Shadow Economies Of The Asia-Pacific," Pacific Economic Review, Wiley Blackwell, vol. 10(3), pages 379-401, October.
    3. Edgar L. Feige, 2004. "How Big IS the Irregular Economy?," Macroeconomics 0404005, EconWPA.
    4. Feige, Edgar L., 1990. "Defining and estimating underground and informal economies: The new institutional economics approach," World Development, Elsevier, vol. 18(7), pages 989-1002, July.
    5. Otto Driel, 1978. "On various causes of improper solutions in maximum likelihood factor analysis," Psychometrika, Springer;The Psychometric Society, vol. 43(2), pages 225-243, June.
    6. Roberto Dell’Anno & Friedrich G. Schneider, 2006. "Estimating the underground economy by using MIMIC models: A response to T. Breusch´s critique," Economics working papers 2006-07, Department of Economics, Johannes Kepler University Linz, Austria.
    7. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    8. Trevor Breusch, 2005. "Estimating the Underground Economy using MIMIC Models," Econometrics 0507003, EconWPA, revised 15 Dec 2005.
    9. Stanisław Cichocki, 2008. "Shadow economy and its relations with tax system and state budget in Poland 1995 - 2007," Working Papers 2008-05, Faculty of Economic Sciences, University of Warsaw.
    Full references (including those not matched with items on IDEAS)


    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. Crony capitalism and the financial crisis
      by Vuk Vukovic in Don't worry, I'm an economist on 2012-01-11 23:57:00
    2. Inequality and the crisis: problems of reversed causality
      by Vuk Vukovic in Don't worry, I'm an economist on 2012-07-03 23:59:00
    3. CPS: "Credit downgrade - misinterpreting the signals"
      by Vuk Vukovic in Don't worry, I'm an economist on 2013-02-27 01:37:00


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ipf:finteo:v:35:y:2011:i:1:p:91-128. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martina Fabris). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.