Financial Shock: A 360° Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis

12Timid Policymakers Turn Bold

Policymakers’ early response to the subprime financial shock was sometimes halting and, other times, confused. Policymakers misjudged the extent of the shock’s economic and financial damage and were hamstrung by its complexity. They also feared bailing out unde-serving homeowners, mortgage lenders, and investors; this would be unfair to people working hard to stay current on their mortgages and would embolden even more reckless risk taking in the future.

Instead of calming the financial turmoil, the tentative policy response fanned it. Investors didn’t expect to be bailed out, but they were distressed by the government’s reluctance to provide much help. The economic fallout spread, becoming an issue in the 2008 ...