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Financial Crisis American Style

Author

Listed:
  • Barry Bosworth

    (The Brookings Institution, 1775 Massachusetts Ave., Washington DC 20036 USA.)

  • Aaron Flaaen

    (The Brookings Institution, 1775 Massachusetts Ave., Washington DC 20036 USA.)

Abstract

This paper reviews some of the research on the causes of the financial crisis of 2008-09, highlights the key events that triggered a financial panic in September 2008, and summarizes the key policy actions that the United States has taken to ameliorate the crisis. We document the characteristics and growth of the sub-prime mortgage market, and the distorted incentives and flawed regulatory structure surrounding the secondary market for mortgage-backed securities. We also assess the role for macroeconomic determinants of the crisis that serve to explain the bubble in U.S. asset prices, most notably low global interest rates attributed to either loose monetary policy or excess global saving. Although low global interest rates may have contributed to the boom in housing markets and speculative excesses, we believe that the financial innovations and microeconomic distortions played a more fundamental role. Finally, a recovery marked by higher private saving, weak domestic investment, and a large public deficit appears to be unsustainable. Ultimately, the U.S. economy will need to shift about 3 percent of GDP from domestic consumption to the export sector. This will pose some serious challenges to Asian economies that have come to rely on exports to the U.S. market. (c) 2009 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

Suggested Citation

  • Barry Bosworth & Aaron Flaaen, 2009. "Financial Crisis American Style," Asian Economic Papers, MIT Press, vol. 8(3), pages 146-170, Fall.
  • Handle: RePEc:tpr:asiaec:v:8:y:2009:i:3:p:146-170
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    References listed on IDEAS

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    1. Peter G. Warr, 1999. "What Happened to Thailand?," The World Economy, Wiley Blackwell, vol. 22(5), pages 631-650, July.
    2. Jorgenson, Dale W, 1988. "Productivity and Postwar U.S. Economic Growth," Journal of Economic Perspectives, American Economic Association, pages 23-41.
    3. David Vines & Peter Warr, 2003. "Thailand's investment-driven boom and crisis," Oxford Economic Papers, Oxford University Press, vol. 55(3), pages 440-466, July.
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