The U.S. Financial Crisis: A Summary of Causes & Consequences

44 Pages Posted: 22 Aug 2012

See all articles by Brian J. Bolton

Brian J. Bolton

IMD Business School, Global Board Center

Date Written: October 21, 2009

Abstract

The near-collapse of the financial system in the United States was the most substantial economic crisis in the U.S. since the Great Depression of the 1920s and 1930s. Since the crisis began in late-2007, more than 6 million Americans have lost their jobs, large and important financial institutions have failed, and trillions of dollars in savings and retirement accounts have been lost. It is generally accepted that problems in the United States housing market are at the root of the current United States and global financial crisis. However, even in mid-2009, twelve months after the financial crisis fully erupted in the United States, it is still too early to determine all of the precise causes and consequences of the crisis. Many different entities share the responsibility for creating or enabling the crisis: mortgage lenders, borrowers, regulators, investors, rating agencies, and probably many others. At its broadest level, this crisis was caused by a failure of governance: of political governance by regulators and legislators, of corporate governance by firms and executives, and of personal governance by individuals.

Just as it is too early to determine all of the precise causes of the U.S. and global financial crisis, it is too early to determine the best way to address the crisis. The U.S. government has implemented a plethora of facilities to try to fix the problems – from increased liquidity to mortgage modification programs. Financial institutions have also changed their ways: many are working hard to reduce their exposure to risky assets and extreme amounts of leverage. It seems apparent now that the U.S. will get through this crisis and the U.S. financial system will emerge in reasonably good shape. Whether or not this will be due to all of the efforts of the U.S. government is unclear. It is likely that much of what the government did was essential to saving the system during the peak of the crisis during September and October of 2008. It is also likely that legislators will react to this crisis by instituting legislation that will be misguided and unnecessary. It is important to thoroughly study the causes and consequences of the U.S. financial crisis and its implications for financial markets around the globe in order to better understand how the entities responsible for governing economies and firms might work to prevent a similar crisis from occurring in the future. This chapter attempts to do just that.

Keywords: corporate governance, firm performance, banks, financial and risk management, financial crisis

Suggested Citation

Bolton, Brian J., The U.S. Financial Crisis: A Summary of Causes & Consequences (October 21, 2009). Available at SSRN: https://ssrn.com/abstract=2133576 or http://dx.doi.org/10.2139/ssrn.2133576

Brian J. Bolton (Contact Author)

IMD Business School, Global Board Center ( email )

Ch. de Bellerive 23
P.O. Box 915
CH-1001 Lausanne
Switzerland
+41216180225 (Phone)

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