The financial crisis: what caused it and when and why it ended

Daniel Thornton

Applied Economics, 2021, vol. 53, issue 33, 3854-3870

Abstract: The financial crisis was the second worst in U.S. history. There are a variety of explanations for what caused it, but no consensus. Moreover, there is little agreement about when or why it ended. This paper investigates when and why the financial crisis began and when and why it ended. The analysis shows that the financial crisis was caused by a large reduction in mortgage lending standards which was primarily due to Congresses’ mandate to increase homeownership. The paper provides evidence that the financial crisis was abating by January 2009 and ended when the recession ended in June 2009. The paper argues that neither deliberate monetary nor fiscal policy actions ended it. Rather, it was brought to an end by the unprecedented increase in the monetary base caused by the Fed’s lending to banks and other financial institutions immediately following Lehman Bros. bankruptcy announcement on 15 September 2008. The increase was not a deliberate policy action but an unintended consequence of the fact that the Fed was no longer able to sterilize its lending after Lehman’s bankruptcy announcement. The financial crisis ended because the Fed inadvertently followed Walter Bagehot’s recommendation that during a crisis the central bank should lend freely. The Fed followed Bagehot’s advice in spite of Bernanke’s effort to sterilize the Fed’s lending.

Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/00036846.2021.1887806 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:applec:v:53:y:2021:i:33:p:3854-3870

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/00036846.2021.1887806

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().