what did pres bush do to creat the financial crisis of 2009

A trader works on the floor of the New York Stock Commutation on September 15, 2008 in New York Metropolis. In afternoon trading the Dow Jones Industrial Average brutal over 500 points every bit U.S. stocks suffered a steep loss later news of the financial business firm Lehman Brothers Holdings Inc. filing for Chapter eleven defalcation protection.

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The warning signs of an epic financial crisis were blinking steadily through 2008—for those who were paying close attention.

Ane clue? According to the ProQuest paper database, the phrase "since the Corking Depression" appeared in The New York Times near twice as often in the outset eight months of that year—about two dozen times—as it did in an entire ordinary year. As the summer stretched into September, these nervous references began to noticeably accumulate, speckling the broadsheet columns like a first, alert sprinkle of ash earlier the ruinous arrival of wildfire.

In mid-September catastrophe erupted, dramatically and in full public view. Financial news became front end-page, meridian-of-the-hour news, as hundreds of dazed-looking Lehman Brothers employees poured onto the sidewalks of Seventh Avenue in Manhattan, clutching office furnishings while struggling to explain to the swarming reporters the shocking turn of events. Why had their venerable 158-year-one-time investment cyberbanking house, a bulwark of Wall Street, gone bankrupt? And what did it mean for virtually of the planet?

The superficially composed assessments that emanated from Washington policymakers added no clarity. The secretary of the treasury, Hank Paulson, had—reporters said—"concluded that the financial arrangement could survive the collapse of Lehman." In other words, the U.S. regime decided not to engineer the business firm'southward conservancy, as information technology had for Lehman's competitor Merrill Lynch, the insurance giant American International Group (AIG) or, in the spring of 2008, the investment bank Bear Stearns.

Lehman, they thought, was not too big to fail.

Then-President George W. Bush had no explanations. He could only urge fortitude. "In the short run, adjustments in the financial markets can be painful—both for the people concerned most their investments and for the employees of the affected firms," he said, attempting to quell potential panic on Primary Street. "In the long run, I'm confident that our upper-case letter markets are flexible and resilient and tin can deal with these adjustments." Privately, he sounded less sure, saying to advisors, "Someday you guys are going to need to tell me how nosotros ended up with a system like this.… We're not doing something right if we're stuck with these miserable choices."

And because that system had become a globally interdependent one, the U.S. financial crisis precipitated a worldwide economic collapse. So…what happened?

The American Dream was sold on too-easy credit

The 2008 financial crunch had its origins in the housing market, for generations the symbolic cornerstone of American prosperity. Federal policy conspicuously supported the American dream of homeownership since at least the 1930s, when the U.Southward. government began to back the mortgage market. Information technology went farther after WWII, offering veterans inexpensive home loans through the Thousand.I. Bill. Policymakers reasoned they could avoid a return to prewar slump conditions so long as the undeveloped lands around cities could fill up up with new houses, and the new houses with new appliances, and the new driveways with new cars. All this new buying meant new jobs, and security for generations to come up.

Fast forward a half-century or so, to when the mortgage market was blowing up. According to the Final Study of the National Committee on the Causes of the Financial and Economical Crisis of the United States, betwixt 2001 and 2007, mortgage debt rose nearly every bit much as it had in the whole balance of the nation's history. At about the aforementioned time, dwelling house prices doubled. Around the country, armies of mortgage salesmen hustled to get Americans to infringe more money for houses—or fifty-fifty just prospective houses. Many salesmen didn't enquire borrowers for proof of income, job or assets. So the salesmen were gone, leaving behind a new debtor belongings new keys and mayhap a faint suspicion that the deal was too skillful to exist true.

Mortgages were transformed into always-riskier investments

The salesmen could brand these deals without investigating a borrower's fitness or a property's value because the lenders they represented had no intention of keeping the loans. Lenders would sell these mortgages onward; bankers would package them into securities and peddle them to institutional investors eager for the returns the American housing market had yielded so consistently since the 1930s. The ultimate mortgage owners would oftentimes be thousands of miles away and unaware of what they had bought. They knew only that the rating agencies said information technology was as safe equally houses always had been, at least since the Depression.

The fresh 21-century involvement in transforming mortgages into securities owed to several factors. After the Federal Reserve System imposed low interest rates to avoid a recession afterward the September xi, 2001 terrorist attacks, ordinary investments weren't yielding much. So savers sought superior yields.

To meet this need for higher returns, the U.S. financial sector adult securities backed by mortgage payments. Ratings agencies, similar Moody'due south or Standard and Poor's, gave high marks to the processed mortgage products, grading them AAA, or as proficient equally U.Southward. Treasury bonds. And financiers regarded them equally reliable, pointing to data and trends dating back decades. Americans almost always fabricated their mortgage payments. The only trouble with relying on those data and trends was that American laws and regulations had recently changed. The fiscal environment of the early on 21st century looked more than like the U.s.a. before the Depression than after: a state on the brink of a crash.

An employee of Lehman Brothers Holdings Inc. carrying a box out of the company's headquarters after it filed for bankruptcy.

Chris Hondros/Getty Images

Postal service-Depression bank regulations were slowly chipped abroad

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To forbid the Dandy Depression from always happening again, the U.South. government subjected banks to stringent regulation. Franklin Roosevelt had campaigned on this issue as part of his New Deal in 1932, telling voters his administration would closely regulate securities trading: "Investment banking is a legitimate concern. Commercial banking is another wholly separate and distinct business organisation. Their consolidation and mingling is contrary to public policy. I propose their separation."

He and his party kept this promise. Starting time, they insured commercial banks and the savers they served through the Federal Deposit Insurance Corporation (FDIC). Then, with the Cyberbanking Human action of 1933 (a.k.a. the Glass-Steagall Deed), they separated these newly secure institutions from the investment banks that engaged in riskier financial endeavors. For decades afterward, such restrictive regulation ensured, as the adage went, that bankers had just to follow rule 363: pay depositors 3 percent, charge borrowers 6 percent, and hit the golf game form by 3 p.m.

This steady state persisted until the latter 1970s, when politicians hoping to jolt a stagnant economy pushed deregulation. Over several decades, policymakers eroded Glass-Steagall separations. Most of what remained was repealed in 1999 by act of Congress, assuasive big commercial banks, affluent with the deposits of savers, to lumber into parts of the fiscal business that had, since the New Deal, been the province of the smaller, more specialized investment banks.

Investment banks jumped cervix-deep into risk

These nimbler firms, crowded by bigger brethren out of deals they might once take made, now had to seek riskier and more complicated ways to brand money. Congress gave them 1 mode to do so in 2000, with the Commodity Futures Modernization Act, deregulating over-the-counter derivatives—securities that were essentially bets that two parties could privately brand on the hereafter cost of an asset.

Like, for example, bundled mortgages.

stage was now set for investment banks to reap immense nearly-term profits by betting on the continuing rise of existent-estate values—and also for such banks to fail once the billions on their balanced sheets proved illusory because ultimately, overextended American borrowers— who had been sold more debt than they could afford, secured on imperceptible assets—began to default. In an ever-speeding spiral, the bundled mortgage securities lost their AAA credit ratings, and banks vicious headlong into bankruptcy.

Erstwhile employees of financial giant Lehman Brothers leaving the New York City headquarters.

(Susan Watts/NY Daily News Archive/Getty Images

The Bush administration, criticized for before bailouts, cutting Lehman loose

In March 2008, the investment bank Conduct Stearns began to go under, and so the U.Southward. treasury and the Federal Reserve organisation brokered, and partly financed, a deal for its conquering by JPMorgan Chase. In September, the treasury announced it would rescue the regime-supervised mortgage underwriters about universally known as Fannie Mae and Freddie Mac.

President George W. Bush was a conservative Republican who, forth with nearly of his appointees, believed in the virtue of deregulation. But with a crisis upon them, Bush and his lieutenants, particularly Treasury Secretary Paulson and Federal Reserve Chair Ben Bernanke, decided not to bet on leaving the markets unfettered. Although not required past law to bail out Conduct, Fannie or Freddie, they did so to avoid disaster—only to be castigated by fellow Republican believers in deregulation. Senator Jim Bunning of Kentucky called the bailouts "a cataclysm for our free-market system" and, substantially, "socialism"—albeit the sort of socialism that favored Wall Street, rather than workers.

Earlier in the year, Paulson had identified Lehman as a potential problem and spoke privately to its chief executive, Richard Fuld. Months passed every bit Fuld failed to observe a buyer for his firm. Exasperated with Fuld and stung by criticism from his fellow Republicans, Paulson told Treasury staff to comment—anonymously only on the tape—that the government would not rescue Lehman.

By the weekend of September 13-xiv, 2008, Lehman was clearly finished, with perhaps tens of billions of dollars in overvalued assets on its rest sheets. Anyone who yet held Lehman securities on the supposition that the government would bail them out had bet wrong.

One such institution was the Reserve Management Corporation, which in September re-valued its Lehman securities at zero and then had to announce it could no longer afford to redeem shares in its money-market place fund at par value. Shares in RMC'due south money-market place fund were now worth less than a dollar apiece—in the language of finance, RMC had "broken the cadet," something no money-market fund had washed to private investors before. The coin marketplace, some $3.5 trillion in size, provided vital brusque-term financing to U.S. corporations—but now information technology joined banks, mortgage lenders, and insurance firms among the faithless giants of the financial system that had suddenly proven spectacularly unworthy of confidence.

A series of bankruptcies and mergers followed equally skittish investors, seeking prophylactic harbor, pulled their money out of supposedly loftier-return vehicles. Their preferred shelter: the U.S. treasury, into whose bonds and bills the terrified financiers of the world poured what liquid wealth they had left. After decades of trying to button the U.South. government out of banking, it turned out that in the cease, the U.S. authorities was the only establishment the bankers trusted. Starved of capital and credit, the economy faltered, and a long slump began.

Eric Rauchway is the writer of several books on US history includingWinter War andThe Money Makers. He teaches at the Academy of California, Davis, and yous tin can find him on Twitter @rauchway.

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Source: https://www.history.com/news/2008-financial-crisis-causes

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