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Financial crisis of 2007–2008

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Causes: ce
[[File:NYUGDPFinancialShare.jpg|thumb|350px|Share in GDP of US financial sector since 1860<ref>Confer Thomas Philippon: "The future of the financial industry", Finance Department of the [[New York University Stern School of Business]] at [[New York University]], link to blog []</ref>]]
While the housing and credit bubbles were building, a series of factors caused the financial system to both expand and become increasingly fragile, a process called [[financialization]]. US Governmentgovernment policy from the 1970s onward has emphasized [[deregulation]] to encourage business, which resulted in less oversight of activities and less disclosure of information about new activities undertaken by banks and other evolving financial institutions. Thus, policymakers did not immediately recognize the increasingly important role played by financial institutions such as investment banks and [[hedge funds]], also known as the [[shadow banking system]]. Some experts believe these institutions had become as important as commercial (depository) banks in providing credit to the US economy, but they were not subject to the same regulations.<ref name="">{{cite web|url=|title=Geithner-Speech Reducing Systemic Risk in a Dynamic Financial System||date=June 9, 2008|accessdate=May 1, 2010}}</ref>
These institutions, as well as certain regulated banks, had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses.<ref>{{cite web|url=|title=Greenspan-We Need a Better Cushion Against Risk|work=Financial Times|date=March 26, 2009|accessdate=May 1, 2010}}</ref> These losses affected the ability of financial institutions to lend, slowing economic activity. Concerns regarding the stability of key financial institutions drove central banks to provide funds to encourage lending and restore faith in the [[commercial paper]] markets, which are integral to funding business operations. Governments also [[bailout|bailed out]] key financial institutions and implemented economic stimulus programs, assuming significant additional financial commitments.
As well as easy credit conditions, there is evidence that competitive pressures contributed to an increase in the amount of subprime lending during the years preceding the crisis. Major US investment banks and GSEs such as [[Fannie Mae]] played an important role in the expansion of lending, with GSEs eventually relaxing their standards to try to catch up with the private banks.<ref>{{cite news|last=Labaton|first=Stephen|url=|title=NY Times-The Reckoning-Agency 04 Rule Lets Banks Pile on Debt|work=The New York Times|date=October 2, 2008|accessdate=April 22, 2011}}</ref><ref>{{cite news|last=Duhigg|first=Charles|url=|title=NYT-The Reckoning-Pressured to Take More Risk, Fannie Reached Tipping Point|work=The New York Times|date=October 4, 2008|accessdate=April 22, 2011}}</ref>
A contrarian view is that Fannie Mae and [[Freddie Mac]] led the way to relaxed underwriting standards, starting in 1995, by advocating the use of easy-to-qualify automated underwriting and appraisal systems, by designing the no-downpaymentdown-payment products issued by lenders, by the promotion of thousands of small mortgage brokers, and by their close relationship to subprime loan aggregators such as [[Bank of America Home Loans|Countrywide]].<ref>Joseph Fried, Who Really Drove the Economy into the Ditch? (New York, NY: Algora Publishing, 2012), 16–42, 67–119.</ref><ref name="Graham Fisher">{{cite web|title=Housing in the New Millennium: A Home without Equity Is Just a Rental with debt||author=Graham Fisher|date=June 29, 2001|ssrn=1162456|accessdate=November 20, 2012}}</ref>
Depending on how “subprime” mortgages are defined, they remained below 10% of all mortgage originations until 2004, when they rose to nearly 20% and remained there through the 2005–2006 peak of the United States housing bubble.<ref>{{cite web|url=|title=Harvard Report-State of the Nation's Housing 2008 Report|format=PDF|accessdate=May 1, 2010|deadurl=yes|archiveurl=|archivedate=June 30, 2010|df=mdy}}</ref>