2008 Financial Crisis Case Study

The 2008 financial crisis has been described as the worst financial crisis since the Great Depression. Most economists agree that the crisis began in 2006, when housing prices began to decline, leading to the collapse of the subprime mortgage market in 2008. The subprime mortgage market had been in place since the 1990s, and lacked regulation. The lack of regulation due to corruption among mortgage securitization companies in the 1990s ultimately led the collapse of the economy 2 decades later. The financial crisis resulted in the US government engaging in a series of policies with the purpose of getting the economy back on track. In addition to adopting such policies, the government engaged in large-scale bailouts. The biggest bailouts included the government-sponsored enterprises Fannie Mae and Freddie Mac, as well as the insurance giant AIG. Many economists questioned why the government bailed out certain firms while letting others (like Lehman Brothers Holdings) crumble. This paper uses Bourdieu’s theory of fields and Fligstein’s theory of market stabilization to examine the history of mortgage securitization market leading up to the 2008 crisis as well as the government’s policy responses. About 30 years prior to the financial …show more content…
They were both labeled as government-sponsored enterprises, meaning that Congress created them in order to provide financial services. Being that they were sponsored by the government, they were able to engage in riskier practices than most mortgage companies because they would be bailed-out if they ever failed. For example, whereas large banks had to put aside enough capital to cover 8% of their portfolio’s, Fannie Mae and Freddie Mac only put aside a fraction of that. As a result, they were able to hold more debt than their competitors and became the dominant actor in the mortgage securitization market throughout the