The financial and economic crisis of 2007 started without warning and before long it had spread to many countries around the globe. Many have tried to blame one or another factor for the crisis. The fact of the matter is that such a crisis could not possibly have had a single cause. A combination of elements conspired to create it. It was first felt in the housing market. From there it spread to the credit market and ultimately affected the real part of the economy. In order to understand it we need to start from the beginning and we need to understand a few concepts in finance.
The record is unmistakable: If you seek economic growth, if you seek opportunity, if you seek social justice and human dignity, the free market system is the way to go. And it would be a terrible mistake to allow a few months of crisis to undermine 60 years of success.
President George W. Bush, speech in Federal Hall National Memorial, New York City, hosted by Manhattan Institute, November 13, 2008
Capitalism is that form of private property economy in which innovations are carried out by means of borrowed money, which in general, though not by logical necessity, implies credit creation.
Joseph Schumpeter, Business Cycles, 1939, p. 223.
The salary of the chief executive of the large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.
John Kenneth Galbraith, Annals of an Abiding Liberal
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- 1.
Harry Markowitz (1952), pp. 77–91.
- 2.
We have assumed that the two assets are completely independent of each other and, therefore, their returns are not correlated. If the returns of the assets are correlated with correlation coefficient ρ, then we will have \(S = \sqrt {a^2 s_1^2 + (1 - a)^2 s_2^2+2a(1-a)s_1s_2 \rho}\)
- 3.
The mutual fund was invented by Massachusetts Financial Services Company (now MFS Investment Management) in 1924.
- 4.
Credit default swaps were invented at JP Morgan Chase in 1997 and found legal status in the Commodity Futures Modernization Act of 2000.
- 5.
After Charles Ponzi, an Italian immigrant who at the beginning of the last century set up shop in Boston and defrauded his victims. He spent some years in prison after which he was deported to Italy where he died in poverty.
- 6.
These are annual rates. Thus, −6.2% growth rate for the GDP in 2008-IV means that if the same rate of decline as in the fourth quarter had continued for a whole year, the GDP would have decreased by 6.2%. The decline in fourth quarter compared to the third had been 1.59%.
- 7.
The Wall Street Journal, December 15, 2008.
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Dadkhah, K. (2009). The Financial and Economic Crisis of 2007–2009. In: The Evolution of Macroeconomic Theory and Policy. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-77008-4_13
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