Question

which of the following was a contributing factor to the economic crisis of 2008? A. balanced budget and decreased federal deficits. B. lower taxes and more disposable income for families. C. indiscriminate and risky banking practices. D. increased federal funding tied to stuent academic success.

Answer 1

I'd say C... Things like the Lehman Brothers failure, coupled with the sub-prime mortgage issue that was years in the making caused the collapse.

Answer 2

Well, the only plausible answer is C, since A and D were not true, and B was at best modestly true.

But I would question the idea that the banking practices in question were indiscriminate or risky. I mean, why would banks all of a sudden, in 2000-2007, become crazy and sloppy with their money, when they'd spent the previous 100 years being cautious and careful? That's nuts. It's one thing to take note that one or two banks, or a few banking executives, got greedy or stupid and drove their business into the ground. That happens all the time. But it really strains credulity to imagine that ALL of them (or even most of them) suddenly got greedy and stupid. I don't believe it.

So then we have to ask, what ELSE might have changd in 2000-2007 that would explain why banking practices changed in a dangerous way? And here we have an answer: the monetary policy of the Federal government. The chairman of the Federal Reserve system (first Alan Greenspan, then Ben Bernanke) had attempted to keep economic growth high following the dot-com recession of the late 90s and the slowdown following 9/11 by making money unreasonably easy to borrow. ("Unreasonably" meaning the Federal Reserve pushed the "cost" of borrowing money, the interest rate, below where normal market forces would put it.)

By making money unreasonably easy to borrow, this directly caused unreasonably risky banking practices. The problem is this: when interest rates are abnormally low, people who must earn their money investing, such as retirees on pensions, can't earn enough money by investing their money in traditionally safe ways. They are forced to seek out higher rates of return by making riskier investments. Hence abnormally low interests rates force investors -- and the banks that handle their money -- to make abnormally risky investments.

This is a much more plausible cause of the financial crisis of 2008, because it relies on only two or three people having a crazy and stupid idea, namely the chairmen of the Federal Reserve system and the President. It's much more likely that two or three people had crazy and stupid ideas than that thousands did.