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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
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    References listed on IDEAS

    as
    1. Nicholas S. Souleles & Jonathan A. Parker & David S. Johnson, 2006. "Household Expenditure and the Income Tax Rebates of 2001," American Economic Review, American Economic Association, vol. 96(5), pages 1589-1610, December.
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    3. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
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    5. Jan Hatzius, 2008. "Beyond Leveraged Losses: The Balance Sheet Effects of the Home Price Downturn," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 195-227.
    6. Barry P. Bosworth & Susan M. Collins, 2003. "The Empirics of Growth: An Update," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 113-206.
    7. Gary Gorton, 2009. "The Subprime Panic," European Financial Management, European Financial Management Association, vol. 15(1), pages 10-46.
    8. Todd E. Clark & Taisuke Nakata, 2008. "Has the behavior of inflation and long-term inflation expectations changed?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 17-50.
    9. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    global financial crisis; financial panic; american policy actions;

    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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