Abstract
What caused the ‘meltdown’ in the US financial markets? In this transcribed version of his talk delivered at IIMA, Douglas Young explores the variety of factors that influenced the housing boom and bust and discusses how that affected the household saving behaviour and the behaviour of lenders in the mortgage market, ultimately culminating into a financial crisis. The factors which led to the crisis include public policy, financial innovation, and just plain ‘bubble mania’ – the belief that real estate prices would just keep on rising forever. The policy responses are in three stages – (a) prevention of a collapse in the financial system; (b) Economic Stimulus and Recovery Act in place to cut taxes, increase infrastructure spending, etc., and (c) regulatory reforms for the financial system. The consequences of financial crisis for the Wall Street, Main Street, and India are also discussed.