Financial Crisis of 2008
This is a special topic focusing on ideas, theories, and evidence surrounding the Financial Crisis of 2008 and the previous business recessions. Please see Business Cycles for basic definitions and vocabulary, background, and more material on business cycles, recessions, recoveries, booms, busts, bubbles, depressions, fluctuations, economic shocks, financial crises, and trade crises.
Every idea or theory put forth as a cause for this most recent 2008 recession, or any other business recession, contains an implicit recommendation for a cure. The hard part for someone who puts forth an idea, theory, or recommendation is to show that that idea is important enough to matter or to resolve the problem–either for the recent 2008 crisis or more generally other economic crises or recessions.
Economists have worked on the causes and cures for business cycles, recessions, and financial crises since the mid-1800s. As you listen to these podcasts, interviewing dozens of renowned economists, your questions should be: Does this convince me? If it convinces or sways you, then you should take that to heart and ask about it again should it come up the next time there is a recession. Specifically: does your favored theory bear out?
You will not be alone if your favored ideas or theories don’t pan out in the next recession. No economist for the last 200 years has yet figured out what causes or cures recessions. It’s easy to ex-post quarterback. Plenty of theories abound. Economists don’t like to admit that no one has figured out the causes or the cures. If we can’t completely figure out or resolve the repercussions of business cycles, could we make the economy more resilient in the face of these recurring unknowns? Sit back and listen to all the ideas before you throw your own ideas into the ring.
Definitions and Basics
For definitions and basics, please see Business Cycles.
In the News and Examples
- Was the cause of the recent recession and financial crisis or other business cycles a housing bubble? The earliest ideas were that it was a collapse of a housing bubble.
- Shiller on Housing and Bubbles. EconTalk podcast.
- John Taylor on the Financial Crisis. EconTalk podcast. Did the Federal Reserve’s loose monetary policy fuel the housing crisis?
- Kling on Freddie and Fannie and the Recent History of the U.S. Housing Market. EconTalk podcast.
- Was the recent recession and financial crisis a result of the government having a policy deeming some banks “Too Big to Fail”? of not bailing out Lehman Brothers? Bailing out other banks? Are banks too large and should they be forced to break up?
- Roberts on the Crisis. EconTalk podcast. Bailouts systematically bail out the creditors.
- Gary Stern on Too Big to Fail. EconTalk podcast.
- Ritholtz on Bailouts, the Fed, and the Crisis. EconTalk podcast.
- Vincent Reinhart on Bear Stearns, Lehman Brothers, and the Financial Crisis. EconTalk podcast.
- Calomiris on the Financial Crisis. EconTalk podcast. Historical bank crises and discussion of Too Big to Fail policies.
- Simon Johnson on the Financial Crisis. EconTalk podcast. Regulatory capture and regulating the size of banks.
- Admati on Financial Regulation. EconTalk podcast. Raising capital requirements for banks; Basel III.
- Calomiris on Capital Requirements, Leverage, and Financial Regulation. EconTalk podcast. Banks’ corporate debt decisions and bailouts.
- Cochrane on the Financial Crisis. EconTalk podcast. Incentives created by bank bailouts, TARP program; mark-to-market accounting.
- Quiggin on Zombie Economics. EconTalk podcast. What was the Great Moderation? Discussion of bank regulation, the Greenspan put.
- Was the cause of the financial crisis or recent recession the existence of unusual financial instruments, contracts, financial derivatives or other unusual bank contracts initiated by banking institutions protected by Wall Street or the Federal Reserve? The greed of bankers or speculators? An early claim was that financial derivatives, driven by speculators, Wall Street cronyism, insider deals, or moral hazard, were behind the economic and financial collapse in 2008.
- Kling on Credit Default Swaps, Counterparty Risk, and the Political Economy of Financial Regulation. EconTalk podcast.
- Kling on the Unseen World of Banking, Mortgages, and Government. EconTalk podcast.
- Cohan on the Life and Death of Bear Stearns. EconTalk podcast.
- Acemoglu on the Financial Crisis. EconTalk podcast. Did credit rating agencies contribute to the crisis?
- William Black on Financial Fraud. EconTalk podcast.
- Rebonato on Risk Management and the Crisis. EconTalk podcast.
- Nocera on the Crisis and All the Devils Are Here. EconTalk podcast.
- Cathy O’Neil on Wall St and Occupy Wall Street. EconTalk podcast.
- Was the cause of the financial crisis or other business cycles a reduction of aggregate demand, spending reduction, paradox of thrift, animal spirits, income inequality? What is the multiplier? Is fiscal stimulus the cure for recessions? What was the TARP program; and was too big, too small, effective, ineffective?
- Fazzari on Keynesian Economics. EconTalk podcast.
- Reis on Keynes, Macroeconomics, and Monetary Policy. EconTalk podcast.
- Barofsky on Bailouts. EconTalk podcast. TARP and bailing out banks.
- Ramey on Stimulus and Multipliers. EconTalk podcast.
- Wapshott on Keynes and Hayek. EconTalk podcast. Discussion and definition of the multiplier.
- Garett Jones on Stimulus. EconTalk podcast.
- Higgs on the Great Depression. EconTalk podcast. What cured the Great Depression? Discussion of the New Deal and effects of WWII.
- Dean Baker on the Crisis. EconTalk podcast. Income inequality and unionization.
- Was the cause of the financial crisis or other business cycles a fragile banking system that was bound to implode eventually, or alternatively an occasional probability of major events?
- Taleb on the Financial Crisis. EconTalk podcast.
- Was the cause of the financial crisis triggered by monetary policy by the Federal Reserve? Was a recovery impeded by restrictive monetary policy? What does or should the Federal Reserve target?
- Sumner on Monetary Policy. EconTalk podcast. Aggressive monetary policy coupled with interest on reserves.
- Sumner on Money and the Fed. EconTalk podcast.
- Milton Friedman on Money. EconTalk podcast.
- Hanke on Hyperinflation, Monetary Policy, and Debt. EconTalk podcast. Is Fed policy too loose or too tight? Interest on bank reserves and Basel III.
- Meltzer on Inflation. EconTalk podcast. The Greenspan put.
- John Taylor on Monetary Policy. EconTalk podcast. The Taylor Rule explained.
- Taylor on the Financial Crisis. EconTalk podcast. Did the Federal Reserve’s loose monetary policy fuel the housing crisis?
- Taylor on the State of the Economy. EconTalk podcast. Status report, July 2010.
- Taylor on Fiscal and Monetary Policy. EconTalk podcast. Status report, July 2011. Were the fiscal stimulus and quantitative easing effective?
- Taylor on Rules, Discretion, and First Principles. EconTalk podcast. Avoiding recessions.
- Was the cause of the financial crisis triggered by a buildup of excessive debt that, in the face of a shock, led to fire-sale liquidations of assets and a concomitant contraction in the money supply? Where there fewer, or perhaps different repercussions, during business cycles when there were fixed exchange rate systems in place, such as a gold standard? Could free banking, a gold standard, or disallowing fractional reserves reduce the magnitude, severity, or frequency of business cycle fluctuations?
- Garett Jones on Fisher, Debt, and Deflation. EconTalk podcast.
- Irwin on the Great Depression and the Gold Standard. EconTalk podcast.
- Larry White on Hayek and Money. EconTalk podcast. Central bank’s cheapening money below the market rate of interest as a cause of business cycles; private money and free banking.
- Selgin on Free Banking. EconTalk podcast. Effects of the creation of the Federal Reserve; branch banking; roles of a central bank.
- Gene Epstein on Gold, the Fed, and Money. EconTalk podcast.
- Was the cause of the financial crisis or other business cycles what is posited by the Austrian theory of business cycles: a coordination problem across time, and capital-investment-monetary interactions?
- Don Boudreaux on Macroeconomics and Austrian Business Cycle Theory. EconTalk podcast.
- Boettke on the Austrian Perspective on Business Cycles and Monetary Policy. EconTalk podcast.
- Was the cause of the financial crisis or other business cycles monetary instability, real shocks (non-monetary, supply-side shocks), expectations led astray?
- Lucas on Growth, Poverty and Business Cycles. EconTalk podcast.
- Phelps on Unemployment and the State of Macroeconomics. EconTalk podcast.
- Was the cause of the financial crisis or other recessions a trade war? International capital flows or international debt?
A Little History: Primary Sources and References
- Two rap videos contrasting the theories of Keynes and Hayek (John Papola and Russ Roberts):
- Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay.
- John Maynard Keynes, biography from the Concise Encyclopedia of Economics
- Friedrich A. Hayek, biography from the Concise Encyclopedia of Economics