What were the root causes of the financial crisis of 2008? How was President Obama's financial relief plan different from President George W. Bush's plan?

Question

What will be an ideal response?

Answer 1

The ideal answer should include:
- Global context: the global economy was declining sharply by late 2007 and went into deep recession by the end of 2008; the bankruptcies of Bear Stearns and Lehman Brothers and the near-collapse of AIG after the real estate bubble burst negatively impacted international financial markets
- The housing bubble: the immediate cause of the recession in the United States was the burst of the real estate bubble that had artificially inflated the values of houses; approximately 80 percent of recent mortgages had been contracted by risky borrowers who had been encouraged by the banks to buy with little or no money down and to take subprime or adjustable-rate mortgages; when housing prices declined and interest rates rose, many homeowners either defaulted on their mortgage payments or realized that the money they still owed on their mortgages exceeded the value of their homes, leading to home foreclosures
- Deregulation of the financial industry: the collapse of the real estate market led to the largest financial industries being left with mortgage-backed stocks and bonds that were nearly worthless, resulting in leading banks, investment houses, and insurance companies facing insolvency
- Bush's financial plan: to stabilize the financial system, the Bush administration pushed an unprecedented bailout package that infused funds to banks and other large financial institutions; banks continued to collapse, and businesses responded by cutting payrolls, resulting in rising unemployment as the recession deepened
- Obama's financial plan: pushed through the largest stimulus package in U.S. history in early 2009-the American Recovery and Reinvestment Act, which targeted ordinary Americans instead of large financial institutions; the act combined tax breaks with spending on infrastructure projects, extensions of welfare and unemployment benefits, and education; the hope to jump-start recovery proved hard to measure as home foreclosures, the wipeout of retirement savings, higher tuition rates at many colleges and universities, and industries such as auto making were on the verge of collapse