*Causes of the Crisis*
1. *Subprime Mortgage Crisis*: Banks and other financial institutions had extended large amounts of credit to homeowners who were not able to afford the mortgages. These subprime mortgages had low introductory interest rates that reset to much higher rates after a few years, making monthly payments unaffordable for many homeowners.
2. *Securitization of Mortgages*: Many of these subprime mortgages were packaged into securities and sold to investors around the world. When the housing market began to decline, the value of these securities plummeted, causing huge losses for banks and other financial institutions.
3. *Deregulation*: The Gramm-Leach-Bliley Act of 1999 repealed parts of the Glass-Steagall Act of 1933, allowing commercial banks to engage in investment activities, which increased their exposure to risk.
4. *Excessive Leverage*: Many financial institutions had taken on excessive debt, which made them vulnerable to collapse when the housing market began to decline.
*Key Events of the Crisis*
1. *Bear Stearns Collapse*: In March 2008, Bear Stearns, a Wall Street investment bank, was sold to JPMorgan Chase after it was unable to recover from the collapse of the subprime mortgage market.
2. *Lehman Brothers Bankruptcy*: On September 15, 2008, Lehman Brothers, another Wall Street investment bank, filed for bankruptcy, causing widespread panic in financial markets.
3. *AIG Bailout*: On September 16, 2008, the US government provided an $85 billion bailout to AIG, an insurance company that had invested heavily in subprime mortgage-backed securities.
4. *TARP Program*: On October 3, 2008, the US government passed the Troubled Asset Relief Program (TARP), which provided $700 billion to purchase or insure troubled assets.
*Consequences of the Crisis*
1. *Global Recession*: The crisis led to a global recession, with many countries experiencing significant declines in economic output.
2. *Unemployment*: Unemployment rates soared, with the US unemployment rate peaking at 10% in October 2009.
3. *Home Foreclosures*: Millions of homeowners lost their homes to foreclosure, leading to a significant decline in housing prices.
4. *Bank Failures*: Hundreds of banks failed, including several major institutions.
*Response to the Crisis*
1. *Monetary Policy*: Central banks around the world implemented expansionary monetary policies, including quantitative easing and interest rate cuts.
2. *Fiscal Policy*: Governments implemented fiscal stimulus packages to boost economic growth.
3. *Regulatory Reforms*: The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 to regulate the financial industry and prevent similar crises.
*Legacy of the Crisis*
1. *Increased Regulation*: The crisis led to increased regulation of the financial industry, including the implementation of stricter capital requirements and risk management practices.
2. *Improved Financial Stability*: The crisis led to improvements in financial stability, including the establishment of the Financial Stability Board and the implementation of macroprudential policies.
3. *Increased Inequality*: The crisis exacerbated income inequality, as those who were already wealthy were less affected by the crisis, while those who were less wealthy were more severely impacted.