Crash of 2008

This article presents preliminary accounts of the sequence of events leading to the 2007-2008, of rival explanations for the crisis, of possible contributory factors, and of proposed remedies.

A detailed account of the sequence of events is set out on the Timelines subpage, together with links to contemporary news reports. Terms shown in brackets in the text are defined on the Related Pages subpage.

Rival explanations

A widely-held explanation of the crisis treats it as a fallout from the United States subprime mortgage crisis. For example, the explanation offered in September 2008 by the United States government can be summarised as follows.

Inflows of money from abroad -- along with low interest rates -- enabled more United States consumers and businesses to borrow money. Easy credit -- combined with the faulty assumption that house prices would continue to rise -- led mortgage lenders there to approve loans without due regard to ability to pay, and borrowers took out larger loans than they could afford. Optimism about prices also led to a boom in which more houses were built than people willing to buy, so that prices fell and borrowers - with houses worth less than they expected and payments they could not afford - began to default. As a result, holders of mortgage-backed securities began to incur serious losses, and those securities became so unreliable that they could not be sold. Investment banks were consequently left with large amounts of unsaleable assets, and many failed to meet their financial obligations. Arrangements for inter-bank lending went out of use, and banks through out the world cut back upon lending .

An alternative put forward by a former member of the Bank of England's monetary policy committee, portrays the crisis as " an accident waiting to happen" that could have been triggered by any of a variety of events. His alternative explanation can be summarised is as follows.

International organisations including the International Monetary Fund, and the Bank for International Settlements, and most central banks had long been warning about a serious underpricing of risk throughout the financial system. A general belief had arisen among bankers that if their bank got into trouble, their central bank would see it as a threat to the system and act to protect them from losses. Measurement difficulties may also have resulted in mistaken risk assessments by banks and their regulators. The failure of banking regulators to take action to avert the resulting danger may have been because they lacked the necessary regulatory instruments, or it may have been due to a lack of will. Central banks would have been reluctant to take corrective action by reducing their base rates because such action might confict with action to combat inflation. .

This explanation thus attributes the crisis to a variety of possible causes, including shortcomings of the regulatory systems, management failures by investment banks, and the conduct of banking regulators. Neither explanation excludes the possibility that the severity of the eventual crisis might have been increased by factors other than those held to be directly responsible. While it is too soon to expect the emergence of a consensus concerning their relative influence, there is already general agreement concerning the identification of possible contributory factors.