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29 Cato J. 19 (2009)
Origins of the Financial Market Crisis of 2008

handle is hein.journals/catoj29 and id is 21 raw text is: ORIGINS OF THE FINANCIAL MARKET CRISIS OF 2008 Anna J. Schwartz I begin by describing the factors that contributed to the financial market crisis of 2008. I end by proposing policies that could have prevented the baleful effects that produced the crisis. Factors Contributing to the Financial Crisis At least three factors exercised significant influences on the emer- gence of the global financial crisis. Factor One: Expansive Monetary Policy The basic groundwork to the disruption of credit flows can be traced to the asset price bubble of the housing price boom. It has become a cich6 to refer to an asset boom as a mania. The clich6, however, obscures why ordinary folk become avid buyers of whatev- er object has become the target of desire. An asset boom is propagat- ed by an expansive monetary policy that lowers interest rates and induces borrowing beyond prudent bounds to acquire the asset. The Fed was accommodative too long from 2001 on and was slow to tighten monetary policy, delaying tightening until June 2004 and then ending the monthly 25 basis point increase in August 2006. The rate cuts that began on August 10, 2007, and escalated in an unprece- dented 75 basis point reduction on January 22, 2008, was announced at an unscheduled video conference meeting a week before a sched- uled FOMC meeting. The rate increases in 2007 were too little Cato journal, Vol. 29, No. 1 (Winter 2009). Copyright @ Cato Institute. All rights reserved. Anna J. Schwartz is a Research Associate at the National Bureau of Economic Research. 19

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