The 2007–2010 U.S. financial crisis: Its origins, progressions, and solutions

Abstract

The 2007–2010 financial crisis was originated from excessive liquidity afforded by low interest rates and active securitization of mortgages and their derivatives. The excess liquidity flowed into the subprime mortgage market until interest rates increased in 2005 and an economic recession followed soon thereafter. The start of a large-scale mortgage market meltdown in 2007 coupled with the 2007–2009 Great Recession caused a severe liquidity freeze. Many financial institutions had to fail and their failures created more uncertainty about the prospect for mortgage market and economic recovery. In an attempt to provide liquidity to the credit market and thus stabilize the economy, various policies were implemented. After revisiting the origins and progressions of the crisis, this paper examines closely three major controversial policy actions: the bankruptcy of Lehman Brothers; the policy reversal from debt purchase to capital purchase under TARP; and the bailout of AIG. After a detailed review of these cases, the paper highlights a few noteworthy solutions to prevent future crises as embedded in the Dodd–Frank Act and then, introduces a few possible solutions for quicker economic recovery that the Dodd–Frank Act overlooked.