In 2007, the US entered a financial crisis, consequences of which are still suffered by the entire country. Until the crisis began and unraveled in 2008, most economists were optimistic. The US economy was growing, markets were considered to be liquid and employment levels were high. However, within one year, everything changed. According to Reavis, “the collapse of the U.S. housing market triggered the financial crisis” (3). Weak financial regulatory structure, lack of understanding the innovations in the financial sector, over borrowing and securitization of mortgages are seen as main causes of the crisis.
Though already in 2006 the Treasury recognized the need for a stronger financial regulatory structure, the crisis was unexpected. Short run potential financial market challenges together with the long run challenges were discussed by the Treasury staff (Swagel 6). The result was March 2008 Treasury Blue print for a Modernized Financial Regulatory Structure in case of policy changes in the long run (Swagel 6). Possible near term scenarios were considered, with some of them being:
market driven events such as the failure of a major financial institution, a large sovereign default, or huge losses at hedge funds; as well as slower-moving macroeconomic developments such as … a prolonged economic downturn (Swagel 6).