The Global Financial Crisis of the 2000's

The global financial crisis is the biggest financial disaster since the depression and it has had a huge impact on a lot of people. By and large it has been the middle class that has suffered the most. There are a lot reasons why the crisis occurred and any solution is going to be very complex. What is clear is that it is going to take some serious effort to get us out of the crisis.

The reasons for the global financial crisis are quite complex but primarily they come down to some pretty questionable practices on the part of the banks and other financial institutions and some pretty questionable monetary policies on the part of the Federal Reserve. The crisis started when the housing bubble burst and the value of homes declined rapidly. Many people found themselves unable to pay their mortgages. The reason that this situation occurred in the first place was that the banks had given mortgages to people who really couldn't afford them.

If it had just been a matter of people being unable to pay their mortgages the problem would have been contained. Unfortunately the banks that had issued those mortgages took them and bundled them together with high quality mortgages and sold them off to unsuspecting investors. The result was that a lot of financial institutions and other investors got stuck with the bad debt. This left them at risk of going bankrupt. Even this wouldn't have been a disaster for the economy except that nobody knew who was holding the bad debt. That meant that anybody could go bankrupt at any time and nobody knew who was at risk. As a result everybody stopped lending money; this is what really caused the economy to slow down.

The Federal Reserve has to take some of the blame for the crisis as well, for many years they kept interest rates at a lower level than they should have been at. This is really what caused the housing boom, it was so cheap to borrow money you would have been crazy to continue renting. Unfortunately the same policy also caused the value of the dollar to soar which hurt business. In order to help these businesses out the Fed had to raise interest rates, this is what led to housing bubble bursting.

While it is important to understand what caused the financial crisis the bigger concern is what do we do about it. One thing that has become very clear is that it is going to take some strong action on the part of the government to fix the problem. Unfortunately the government has shown little interest in actually addressing the problem. The politicians would rather argue with each other than deal with the crisis. In addition a lot of the things that have to be done are going to be very unpopular, which tends to discourage the politicians from taking action.