The Causes and Implications of the 2008 Financial Crisis

The financial crisis of 2008 shocked markets and led to a global recession. Failure of the financial markets caused economies to shrink resulting in hardship and loss around the world. In our modern connected world, few nations escaped the consequences of the crisis. This huge financial crisis diminished the economic strength of our nation, with significant implications for our national defense. This paper will address competing views of the causes of the crisis, and will discuss some of its potential impacts, including its impact on U.S. national security. Post mortems of the 2008 financial crisis have pointed to many causes for it. The Financial Crisis Inquiry Commission issued three separate reports split along partisan ideological lines detailing the causes of the financial crisis. The majority report identifies the housing bubble fueled by low interest rates, easy credit, and lax government regulation as the proximate cause of the crisis.1 The report maintains that the crisis could have been avoided with better government regulation, improved corporate risk management, and more transparency to provide better measures of risk. A better government response to the growing asset bubble, and better ethical enforcement would have minimized or prevented the crisis. According to the report, irresponsible lending practices, questionable mortgage securitization and an unregulated over-the-counter derivatives market contributed significantly to the crisis.