CRISIS & RESPONSE HOME FRBSF RESEARCH ON THE CRISIS

THE ECONOMY:

CRISIS & RESPONSE

FINANCIAL CRISIS FED'S RESPONSE ECONOMIC RECOVERY REGULATORY REFORM

Financial Crisis

A rapid reversal of U.S. house prices set off a chain of events that eventually led to the global financial and economic crisis.

Essential Questions
  • What ignited the financial crisis?

    A rapid reversal of U.S. house prices set off a chain of events that eventually led to the global financial crisis.

    • Housing boom
      Between 2000 and 2006, U.S. house prices rose dramatically, fueling a home construction boom.
    • Easy credit
      Lenders made home loans on ever-easier terms, even to risky borrowers, knowing they could sell those loans to investors. For their part, investors underestimated the riskiness of the loans.
    • Housing bust and mortgage meltdown
      As house prices started to fall, the housing boom quickly turned into a bust, bringing home construction to a halt and creating a vicious cycle that fed higher and higher levels of mortgage delinquencies.

    » Learn more

  • Why did the mortgage meltdown threaten the financial system?

    Banks and other financial institutions faced enormous losses on mortgages and related investments, leading to a worldwide pullback in credit to households and businesses.

    • Mortgage-related losses skyrocketed
      The mortgage meltdown drove down the value of residential mortgage-related loans and investments held by banks and other financial institutions in the United States and abroad.
    • Confidence erodes
      As losses spread worldwide, financial institutions started to worry about the viability of other financial firms, which made them hesitant to provide the short-term funding those firms needed to operate.
    • Financial markets panic
      Following the failure of investment banking giant Lehman Brothers, markets for short-term funding broke down altogether, igniting global financial panic.

    » Learn more

  • How did the financial crisis threaten Main Street?

    Massive losses caused banks to tighten lending and the stock market to crash, sending the economy into a tailspin.

    • Credit crunch
      Credit became more expensive and harder to come by.
    • Plummeting wealth
      The housing and stock market crashes wiped out over 25% of U.S. household net worth.
    • Global recession
      The combination of the credit crunch and plummeting wealth sent the global economy into one of the worst recessions since the 1930s.

    » Learn more

Policymakers' Perspectives

THE FEDERAL RESERVE BANK OF SAN FRANCISCO