The Ultimate Quiz on the 2008 Financial Crisis

Worldwide Economic Crisis: Key Facts and Figures

• The 2007-2008 financial crisis was the most serious financial crisis since the Great Depression (1929).

• The crisis was caused by predatory lending targeting low-income homebuyers, excessive risk-taking by global financial institutions, and the bursting of the United States housing bubble.

• Mortgage-backed securities (MBS) tied to American real estate, as well as a vast web of derivatives linked to those MBS, collapsed in value.

• Governments deployed massive bail-outs of financial institutions and other palliative monetary and fiscal policies to prevent a collapse of the global financial system.

• The crisis sparked the Great Recession which resulted in increases in unemployment and suicide and decreases in institutional trust and fertility, among other metrics.

• In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the US as a response to the crisis to "promote the financial stability of the United States".

• The Basel III capital and liquidity standards were adopted by countries around the world.

• At least two major reports on the causes of the crisis were produced by the U.S. Congress.

• In total, 47 bankers served jail time as a result of the crisis, over half of which were from Iceland.

• Only one banker in the United States served jail time as a result of the crisis.

• Goldman Sachs paid $550 million to settle fraud charges after allegedly anticipating the crisis and selling toxic investments to its clients.

• The crisis led to a loss of more than $2 trillion from the global economy.Causes of the 2008 Financial Crisis

• $467 billion of mortgage lending was made by Community Reinvestment Act (CRA)-covered lenders into low and mid-level income (LMI) borrowers and neighborhoods, representing 10% of all US mortgage lending during the period from 1993 to 1998.

• Most sub-prime loans were not made to the LMI borrowers targeted by the CRA, especially in the years 2005-2006 leading up to the crisis.

• The relaxation of underwriting standards in 1995 and the ultra-low interest rates initiated by the Federal Reserve after the terrorist attack on September 11, 2001, were two connected causes of the crisis.

• The delay between CRA rule changes in 1995 and the explosion of subprime lending is not surprising and does not exonerate the CRA.

• Publicly announced CRA loan commitments were massive, totaling $4.5 trillion in the years between 1994 and 2007.

• Investment banks and hedge funds used financial innovation to enable large wagers to be made, far beyond the actual value of the underlying mortgage loans, using derivatives called credit default swaps, collateralized debt obligations, and synthetic CDOs.

• By March 2011, the FDIC had paid out $9 billion to cover losses on bad loans at 165 failed financial institutions.

• The simultaneous growth of the residential and commercial real estate pricing bubbles and the global nature of the crisis undermines the case made by those who argue that Fannie Mae, Freddie Mac, CRA, or predatory lending were primary causes of the crisis.

• Subprime lending standards declined in the US, making subprime lending a riskier business.

• Predatory lending refers to the practice of unscrupulous lenders, enticing borrowers to enter into "unsafe" or "unsound" secured loans for inappropriate purposes.

• The roots of the financial crisis lay in the deregulation of financial markets.

• Bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced the financial crisis.

• Laws were changed, or enforcement weakened in parts of the financial system.Causes of the 2008 Financial Crisis

• Canada had a single, powerful, overarching regulator, while the United States had a weak, crisis-prone, and fragmented banking system with multiple competing regulatory bodies.

• Financial institutions became highly leveraged, increasing their appetite for risky investments and reducing their resilience in case of losses.

• U.S. households and financial institutions became increasingly indebted or overleveraged during the years preceding the crisis.

• Financial innovation refers to the ongoing development of financial products designed to achieve particular client objectives, such as offsetting a particular risk exposure.

• Mortgage risks were underestimated by almost all institutions in the chain from originator to investor.

• There is strong evidence that the riskiest, worst-performing mortgages were funded through the "shadow banking system."

• The run on the shadow banking system was the core of what caused the crisis.

• The financial crisis was attributable to "global asset scarcity, which led to large capital flows toward the United States and to the creation of asset bubbles that eventually burst."

• Long-only commodity index funds became popular, which raised concern as to whether these index funds caused the commodity bubble.

• The collapse of Lehman Brothers in 2008 was a key moment in the financial crisis.

• The crisis led to significant job losses, a decrease in consumer wealth, and a global economic recession.

• The crisis led to increased government regulation and oversight of the financial sector.Theories and Predictions of the 2008 Financial Crisis

• Financial crises are systemic crises of capitalism itself, according to John McMurtry.

• Growing inequality of financial capitalism produces speculative bubbles that burst and result in depression, according to Ravi Batra.

• The decrease in GDP growth rates since the early 1970s is due to increasing market saturation, according to John Bellamy Foster.

• Capitalism's long-term tendency of the rate of profit to fall is the underlying cause of crises, according to Andrew Kliman, Michael Roberts, and Guglielmo Carchedi.

• Corporate America went astray because the power of managers went unchecked by gatekeepers for too long, according to John C. Bogle.

• Large-scale momentum played a pivotal role in the financial crisis, according to Mark Roeder.

• The stagnation of wages in the United States, particularly those of hourly workers, forced the population to borrow to meet the cost of living, according to Robert Reich.

• The financial crisis and its response revealed a crisis of ideas in mainstream economics and within the economics profession, according to Ailsa McKay and Margunn Bjørnholt.

• Cooperative banking institutions were less likely to fail than their competitors during the crisis, according to a report by the International Labour Organization.

• Economists, particularly followers of mainstream economics, mostly failed to predict the crisis, according to the Wharton School of the University of Pennsylvania's online business journal.

• The Austrian School regarded the crisis as a predictable credit-fueled bubble caused by laxity in monetary supply.

• IndyMac Bank was the first visible institution to run into trouble in the United States and its failure was largely associated with its business strategy of originating and securitizing Alt-A loans on a large scale.