What was the 2008 financial crisis?
Answer
A recession caused by bank failures
Explanation
The 2008 financial crisis was the deepest economic downturn since the Great Depression, triggered by the collapse of the United States housing market and the failure or near-failure of major financial institutions, and producing what is now called the Great Recession. The roots of the crisis lay in a long housing boom from roughly 2000 through 2006, during which lenders issued large numbers of subprime mortgages to borrowers with poor credit, often with adjustable rates that reset higher after a few years. Banks bundled these mortgages into mortgage-backed securities and complex derivatives such as collateralized debt obligations, which credit rating agencies often rated AAA despite their underlying risk. Investment banks borrowed heavily to buy these securities, with leverage ratios sometimes exceeding 30 to 1.
Housing prices rose nationwide by more than 70 percent between 2000 and the peak in 2006. When prices began to fall and adjustable-rate mortgages reset, default rates climbed sharply. Bear Stearns, the fifth largest American investment bank, collapsed in March 2008 and was sold to JPMorgan Chase with Federal Reserve support. The federal government took over mortgage giants Fannie Mae and Freddie Mac on September 7, 2008. Lehman Brothers, the fourth-largest investment bank, filed for bankruptcy on September 15, 2008, the largest bankruptcy in American history. The same day, Bank of America rescued Merrill Lynch.
The next day, the federal government rescued insurance giant AIG with an 85 billion dollar bailout. Financial markets seized up. Banks stopped lending to each other. The Dow Jones Industrial Average fell 777 points on September 29, 2008, then the largest single-day point drop in history. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke proposed the Troubled Asset Relief Program, or TARP, which Congress eventually approved on October 3, 2008, authorizing 700 billion dollars to stabilize the banking system.
President Barack Obama, who took office on January 20, 2009, signed the American Recovery and Reinvestment Act on February 17, 2009, providing 787 billion dollars in stimulus. Unemployment peaked at 10 percent in October 2009. About 9 million American jobs were lost. The Dodd-Frank Wall Street Reform and Consumer Protection Act of July 21, 2010 imposed new financial regulations and created the Consumer Financial Protection Bureau.
Why this matters for your test
USCIS asks about the 2008 financial crisis because it shaped American economic policy, financial regulation, and political polarization for years afterward. Understanding the crisis helps applicants connect modern debates over banking, housing, and inequality to a specific moment of failure and federal response.
Source: USCIS 128 Civics Questions (2025)
