What began as an American financial crisis in September quickly spread into a global panic that sent stock markets from Reykjavik to Moscow tumbling by anywhere from forty to sixty-five percent, declines unmatched since the Great Depression of the 1930s. The proximate cause of the crisis was the collapse of several large investment banks, but the real cause was the risky get-rich-quick schemes cooked up by the banks and backed by poor investments and the Federal Reserve’s low interest rates.

Investment banks like Bear Sterns and Lehman Brothers collapsed because they could not cover their commitments when the securities they held declined in value as a result of the collapse of the U.S. housing market. The decline in home prices made cleverly-packaged securities that rested on mortgages worth less and less, stripping wealth from the system and forcing banks to cut lending. The result froze the flow of credit, bringing the economy to a halt.

None of this could have been possible, however, without decades of low interest rates by central banks like the Federal Reserve. Central banks came to believe that the correct response to financial difficulties was to cut the interest rates they charge to investment banks. These historically low rates meant that banks could pump money into the economy, but at times there was so much money that they began making ever-riskier investments to keep pace with the flow of cash from the central banks. The result was the great housing bubble of 2001-2006, and the subsequent problems caused by its end.

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