The Financial Crisis Five Years Later RESPONSE, REFORM, AND PROGRESS

U.S. Department of the Treasury
SEPTEMBER 2013

Introduction
In the fall of 2008, our economy faced challenges on a scale not seen since the Great Depression. The crisis was caused by many factors. Among them were an unsustainable housing boom fueled in part by the easy availability of mortgages, financial institutions taking on too much risk, and the rapid growth of the nation’s financial system with regulations that were designed for a different era. Forces built up over many years until the crisis reached its apex in September of 2008. In the span of a few weeks, many of our nation's largest financial institutions failed or were forced to merge to avoid insolvency. Capital markets—essential for helping families and businesses meet their everyday financing needs—were freezing up, dramatically reducing the availability of credit, such as student, auto, and small business loans. Market participants, consumers, and investors were rapidly losing trust in the stability of America’s financial system. Faced with this reality, the federal government moved with overwhelming speed and force to stem the panic. The first series of actions, including broad-based guarantees of bank accounts, money market funds and liquidity by the Federal Reserve, were not enough. Realizing that additional tools were needed to address a rapidly deteriorating situation, the Bush Administration proposed the law creating the Troubled Asset Relief Program (TARP). That measure, which was passed by Congress with bipartisan support, was signed into law by President Bush on October 3, 2008. Some of the programs under TARP were implemented by the Bush Administration. The Obama Administration continued these and added others, utilizing its authority under TARP to keep credit flowing to consumers and businesses, help struggling homeowners avoid foreclosure, and prevent the collapse of the American automotive industry, which alone is estimated to have saved one million jobs. But putting out the fires of the crisis was not enough. To address the underlying causes of the crisis, we had to modernize our regulatory framework and put powerful consumer financial protections in place. That is why President Obama took up the mantle of financial reform by championing and enacting the Dodd-Frank Wall Street Reform and Consumer Protection Act. Americans now have a dedicated consumer financial protection watchdog, financial markets are more transparent, and the government has more tools to monitor risk, and resolve firms whose failure could threaten the entire financial system. As we approach the five-year anniversary of the height of the crisis, the financial system is safer, stronger, and more resilient than it was beforehand. We are still living with the broader economic consequences, and we still have more work to do to repair the damage. But without the government’s forceful response, that damage would have been far worse and the ultimate cost to repair the damage would have been far higher. The financial crisis reminds us that we must remain vigilant to emerging risks in the system. The financial system is dynamic and firms are innovative. And as sources of risk change, regulation and oversight must keep pace.