How The Great Recession started?

Mahalakshmi P - Infobite  Aug 8, 2020

How The Great Recession started?

Read First: Who were behind the Great Recession (2008)?

The severe crisis started after the rise of U.S financial sectors. The industry was making huge money in the damages caused by the crisis.

- The Financial Industry in U.S was tightly regulated after The Great Depression (1929-1939). E.g., The banks weren't allowed to invest customers' deposits (prohibited from using the deposits to make risky investments).

- In 1982, The President of U.S announced financial deregulation that allowed savings and loan companies to take risky investments with the depositor's money.

- Hundreds of savings and loan companies failed resulted in crisis that led to $124 Billion loss of tax payers money in 1985, but the deregulation continued.

- The people who had high involvement in the crisis were given top Financial positions in the U.S government by Presidents Reagan, Clinton, and Bush.

- The financial sector influenced and captured the political system with economic lobbyists.

- In 1998 Citicorp merged with Travelers Group, violating the "Glass-Steagall Act" - A law passed after The Great Depression which prevents the banks from using depositor's money in risky investments.

- The Federal Reserve gave Citicorp an exemption for a year. Within a year, "Gramm-Leach-Bliley Act" was passed which overturns the "Glass-Steagall Act".

- In 2001, there was a massive crisis in Internet stocks which costs around $5 Trillion loss.

- Many analysts investigated and echoed that the investment banks were promoting internet companies knowing they are unreliable. E.g., "Infospace" an internet company highly rated by Merrill Lynch was referred as "a piece of crap" by analysts.

- In 2002, Ten Investment Banks paid $1.4 billion to settle Financial fraud cases and promised to change their ways of operation.

- The world's biggest financial firms were caught for criminal-activities like

  1. Laundering money

  2. Funneling drug money

  3. Tax evasion for wealthy people.

They walked free paying Billions as fine (No criminal investigation).


- In the early 1990's, deregulation and technological advancements combined to form derivatives.

- Derivatives are like math created by physicists and mathematicians by colluding with financial industry.

- Using derivatives, bankers can virtually gamble or predict on anything like Weather, Oil, Rise or Fall of any share.

- By late 1990s derivatives were $50 Trillion unregulated market.

- Officials who proposed to regulate "Derivatives" market were threatened and forced to back-off.

- Investment banks and economic lobbyists in the government claimed derivatives as a growth and confirmed regulation of derivatives as unnecessary by passing a Bill.

By the time George W. Bush took office in 2001, the U.S financial sector was exploded with more money and power than ever before.

Read Next: What was the reason for the Economic Collapse (The Great Recession 2008)?