The Great Recession of 2007 to 2009 in the United States


The Great Recession of 2007 to 2009 in the United States




Often compared to the Great Depression of 1929, the Great Recession or Great Financial Crisis (GFC) of 2007 to 2009 permeated global financial markets. The subprime mortgage market in the USA is viewed as the catalyst, resulting in widespread credit defaults and unemployment. The banking sector, including mortgage purchasers and hedge funds, were only able to remain afloat due to unprecedented government largesse (World Bank 2012). The symptoms may be diagnosed; however, the foundation of this profligate moment remain extensively debated. Economic consensus may be biased towards a policy approach which benefits the conformer.


1. The Financial Crisis 10 years later: Fannie and Freddie Fueled the Subprime Mortgage Bubble


Daniel Press, policy analyst at the Competitive Enterprise Institute, makes a compelling argument that federal government intervention caused the GFC. The institutions put in place to create this grossly misunderstood distortion date to the 1930’s (Fannie Mae) and 1970 (Freddie Mac). The toxic combination of private ownership and government backing permitted a gradual wrecking ball to manifest. Purchasers of mortgages with mandated outcomes, government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac drove both banking and shadow banking to dangerously low standards. Bipartisan support, via utopian aims of addressing inequality and increasing home ownership, propelled the home loan market to a ruinous nadir (Press 2018).

Figure 1: Peter Wallison, “What Really Caused the World’s Worst Financial Crisis—and Why It Could Happen Again


Unintended consequences of this policy induced speculation in price gains. When the cracks in the system were not obvious, it became a simple game to hold multiple mortgages and flip houses. Or to expect easy refinancing after a price rise. In 2000, 1% of subprime mortgages were for second homes. By 2006, it was 31%. Commencing in 1992, GSEs were directed to continually increase a series of poorly considered metrics which were dubbed affordable housing goals. Lofty aims, namely assisting low-income and minority borrowers, disguised the noxious haze. Down payments, credit worthiness and even documentation fell by the wayside. GSEs, being quasi-governmental entities, were able to dominate the mortgage buying sector. Lenders found themselves able to package up swill as prime beef on a whim, with little reason for accountability (Press 2018).

Press delves into advanced reasons behind the onset of the GFC. Much of his material may be unheard of for the average observer. In highlighting direct government intervention as the major cause, he leaves other areas unexplained. It is perhaps not his purview to wade into the immediate explanations for the GFC. By focusing on the damaging execution of GSEs, his judgement may be hidden away for political purposes. It may be threatening to a paradigm which assesses government to always represent progress. Press has clearly and concisely demonstrated the backward, reckless effects of meddling via GSEs.


2. Structural causes of the global financial crisis: a critical assessment of the ‘new financial architecture’


James Crotty, economics professor at University of Massachusetts, argues that relaxed government regulation, commencing in the 1980s, created New Financial Architecture (NFA) - the fuel that led to the GFC fire. Comprising loose regulation of commercial banks and little to no parameters for shadow banks - hedge funds and investment banks. Banks, investment firms and hedge funds overleveraged and undertook massive risk. Granted permission to feast upon AAA rated collateralized debt obligations (CDOs) while offloading mortgage-backed securities (MBSs) to the shadow banking system. The rating agencies, in thrall to the banks who remunerate them, haphazardly certified many of these products as perfectly benign. Opaque and complex, even to the financial markets themselves, these products were difficult to price. Fast paced innovation allowed CDOs and MBSs to become widespread. Derivative use for hedging plummeted and speculation ran rampant (Crotty 2009).

Frequent government bailouts in the leadup to the GFC created an environment where failure was not punished. Leading to further appetite for risk. Crotty argues that aggressive laws are needed in combination with nationalization of financial institutions. Political will to transform policy and law was in absence. Politicians, acting with a belief in efficient markets and campaign contributions from big donors were impotent. The pricing of markets was inefficient and requires a return to the “golden age” of “more realistic theories associated with Keynes and Minsky” (Crotty 2009).

Crotty’s thesis is representative of the general academic reaction to the GFC. His insistence that the government response, in the mid-1930s, to the Great Depression is the model for healing the sick patient in 2009 is inept. Over-reliance on housing stock is precisely the outcome of a risk-averse banking sector. It is true that financial instruments used to supposedly offset the danger of meltdown were opaque and not easily understood. However, to expect regulators to have a greater knowledge is a furphy. A case can be made that relevant financial products performed exactly as they should (Stringham 2014). Essentially, a prohibition on various derivatives is the end solution. This is indeed a popular idea, but very misguided. Derivative usage encompasses hedging, and an end to speculation will hobble hedging.

Crotty’s criticism of the crony, financial advisors appointed to oversee policy redecoration is highly valid. He firmly states the flaws will remain with ex-bankers left in charge of ruling. Regulatory capture is a very real phenomenon, particularly when the material is complex. Crotty’s framework is a suitable platform for understanding the proximate causes of the GFC. His remedies less so.


3. The Subprime Crisis


Ravier and Lewin, professors of economics in Guatemala and Texas respectively, assert that the Federal Reserve Bank was the instigator of the GFC. Specifically, the GFC was but one of many boom-bust cycles exacerbated by Fed intervention since 1980. A succession of preceding episodes camouflaged by incessant band-aid prescriptions finally arrived at a consequence beyond Fed influence. Most noticeable is the unrelenting kicking-of-the-can from the tech boom of 2000. The longer the period of easy money, the greater the necessary correction shall be (Ravier & Lewin, 2014).

Figure 2: Federal Reserve Bank of Chicago 

As evinced in figure 2, real federal fund (FF) rates were negative in 2002, for over two years. Prior to this, a hike in ‘99/00 then a massive cut during the tech boom. A dithering response in 2005, jacking up interest rates in response to a sizzling housing market. More bumbling prior to 2008 by slashing rates. It is clear the adults were not in charge.

Financial regulation was too high, shepherding money into real estate. In accounting terms, housing is a perpetual Goldilocks. A bank may at minimum repossess, which it may not necessarily do so with business lending. Contrary to popular intuition, more investment law and oversight produce adverse outcomes. Political expedience also led to the flavour of the day - decrees which distort market operations towards housing (Ravier & Lewin, 2014).

Ravier and Lewin present a comprehensive rundown of the ham-fisted methodology of the the Fed. Criticism may be given in that the focus is almost solely upon the Fed. It is to be expected with an Austrian economic interpretation. The actions of the Fed from 1980 onwards merely entrenched a larger bust-up later. A single chapter rundown of the operation of GSEs accords with Press’s view.




The twin operations of the Federal Reserve Bank and federally backed mortgage buyers shoulder the lion’s share of blame for the GFC. The Fed performed its regular gymnastic routine of attempting to soften impacts of boom/bust cycles, only to push it forth into the future. Compelling an impending blow up down the road.

The actions of GSEs are of particular interest. By their sheer creation, the sway of policies related to GSEs powered inequitable treatment and inflation. Taxpayer dollars directed to mortgage buying can only benefit some, at the expense of upsurges in house values for those next in line.

The bipartisan support for GSEs is curious, but understandable once restated into layman’s terms. For the left, a blind attempt to address inequality, while simultaneously dumping fuel onto the housing market fire. For the right, a push to instill home ownership and a corresponding sense of community. A reasoned approach in isolation, but with government intervention – pushing the next generation into an awkward consciousness that the ship for them has sailed. Chasing the immediate vote takes precedence. Second order effects be damned.

From Clinton to G W Bush, the frenzied dance of mortgage acquisition only ramped up. It never slowed, much to the chagrin of those caught in the GFC dumpster fire. While the music was raging, huge windfalls were possible for those lucky or wise enough to exit the conga line in time. Others, or even those not invited, suffered the largest consequences.

We’ve learnt nothing (Tucker 2018).




Lin, J & Treichel, V 2012, ‘The unexpected global financial crisis: Reaching its root cause’, World Bank Policy Research Working Paper 5937.

Press, D 2018, ‘The Financial Crisis 10 years later: Fannie and Freddie Fueled the Subprime Mortgage Bubble’, Competitive Enterprise Institute, viewed 25 April 2021,

Crotty, J 2009, ‘Structural causes of the global financial crisis: a critical assessment of the new financial architecture’, Cambridge Journal of Economics, vol. 33, pp. 563-580.

Stringham, E 2014, ‘It's Not Me, It's You: The Functioning of Wall Street During the 2008 Economic Downturn’, Public Choice, Forthcoming, viewed 2 May 2021, 

Federal Reserve Bank of Chicago 2020, The Federal Funds Rate, viewed 28 April 2021,

Ravier, A & Lewin, P 2014, ‘The Subprime Crisis’,, viewed 29 April 2021,

Tucker, J 2018, ‘The Financial Crisis, Ten Years On’, American Institute for Economic Research, viewed 2 May 2021,

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