Introduction:
This paper reviews macroeconomic causes of financial crisis in 2008. The economist had difficulty for seeing the systematic risk because of the unregulated new financial instruments such as credit default swap and derivatives securities. The Federal Reserve Bank was responsible for the financial crisis due to large amount of money flow in the United States. Thus, US needed to implement the monetary policy in order to overcome from the financial crisis. This paper drafted the causes of financial crisis analyzed by the macroeconomist and drafted by the American Bar Association. The Federal Reserve Bank kept the interest rates historic lows due to recession in 2000-2002. The low interest rates causes the unwanted money supply and this excess credit was invested heavily in the United States in the form of treasury securities and financial derivatives that leaded to bubble in commodities and houses prices. This paper examines the Federal Reserve monetary and fiscal policy during and prior to course of recession in 2008.
The economy had faced at least three crises since 2008, fiscal crisis, financial crisis and unemployment crisis. These crises are interrelated. The unemployment crisis during 2008 has causes the fiscal deficit at the frightening level. The economy is still facing the unemployment and fiscal crises. The unemployment rate remains high in the world and the fiscal problem in Europe has not been fully resolved.
The Fiscal Policy:
The fiscal policy played a considerable role in the financial crisis during 2008. The changes in the fiscal policy have large impact on employment and output and lead to unsustainable budget deficit in the long-run. The expansion in the budget deficit is one of the major reasons for the financial crisis during 2008. The implementing in the fiscal policy has greater impact in the short-run (David Romer). The study shows that, there was a tax change in very large and a cut of 1% in taxes resulted GDP raises output by almost 3% in 10 quarters.
Taxes Vs Spending:
The economists forecasted the taxes change in contrast of spending changes. The spending changes are larger than the tax changes both in terms of expansions and contractions. The increases in tax cause decrease in spending. Some observers stated that the countries have moved immediate fiscal austerity, have worse growth in terms of performance than other countries that have not moved immediate fiscal austerity.
The monetary policy:
The consolidation based on spending is less contradictory due to change in the monetary policy and the change in interest rates. The increase in money supply leads to inflation and increase in taxes. The monetary policy is the root of financial imbalances that associated with the capital flows. (Taylor 2007). The Federal Reserve Bank increased the money supply in the market and it is argued that demand for housing is relatively sensitive with the interest rates. The monetary policy contributed in increase in demand for houses and increase in the asset prices. Some economists argued that the increase in housing demand has low impact in a long-run and the major causes of financial crisis was the low interest rate over the period. It is noticed that, interest rates was low by historical standard and house prices increased by advance standards. The current account deficit was more than 10% due to increase in real estate prices (Rogoff 2009).
Factors lead to financial crisis and global imbalances:
 Interest Rates:

The Federal Reserve Bank prolonged low interest rate policy during 2002-04 that leaded to increase in the demand and prices of housing, because the low interest rates are always attractive for the mortgage holders. In 2005-06, Federal Reserve Bank pushed the interest rates upward that cause the monthly payment increased and the demand for housing had fallen. The interest rates during 2002-04 were lower than 2% so that, the Adjustable Rate of Mortgage (ARMs) increased to 21% from the level of 10%.

 Government-Sponsored Enterprises (GSEs):
The US financial system had low-quality and subprime mortgages prior to the financial crisis. More than 70 percent of the weak mortgages were from the government agencies such as GSE Fannie Mae and Freddie Mac. These mortgages defaulted and resulted down in the housing prices. Weakness of the major financial institutions caused the financial crisis in 2008. The congress imposed “affordable housing” requirement on the Government-Sponsored Enterprises (GSEs). The requirement was that 30 percent of the mortgage had to be made low. During 2007, The GSEs required 55 percent of the mortgages had to be made low. The Government Sponsored Enterprises (GSEs) had to reduce the underwriting standard. The GSEs purchased more than $1.2 trillion in weak and subprime mortgage. This policy created demands for the housing (Peter J.).
These government-sponsored agencies were backed by the government and mortgages were re-sold to the investment banks. The investment banks sold all over the world as risk-free securities.

 The financial services industries

The one of the major financial innovation was credit risk management through the derivatives such as CDOs (Collaterized Debt Obligations). The “buy and hold” model is replaced by the banks. The risk management policy failed and considered that these were inappropriate recognition of risk. The rating agencies such as Standard & Poor, Moody has given prime rating to the CDOs and increased the lack of transparency. The financial service industries have the lack of risk experience, thus they failed to manage the risk (Stulz, 2009).

 Tax Rebates & Stimulus:

The Congress passed the “economy stimulus bill of $168 billion that included tax rebate for the businesses and household. The tax rebate has positive effect on the economy as it increased in the consumer spending. The Congress is working for second larger stimulus bill of $850 billion that consists 2/3rd increase in spending to states, unemployment benefits, education, public works and infrastructure and 1/3rd cut in taxes.

 Aggregate demand

The aggregate demand has fallen in 2008 financial crisis, because the bank lending decreased due to shortage of funds and credit crisis. The shortage in bank lending has caused decrease in consumer spending and investment. The housing prices have fallen due to credit risk and change in interest rates. It has negative wealth effect so that, loose in consumer’s confidence and decrease in spending causes the financial crisis in 2008 (Tejvan, 2009).

 Government Debt and Deficit:

The government debt and deficit was the major reason for the financial crisis in 2008. The Federal budget deficit has been growing since 2008. The data shows that the budget deficit during 2007 was $161 billion. It rose to $459 billion in 2008 which is almost 4 times than the prior year. The budget deficit is growing readily due to higher portion of debt. In 2009, the budget deficit increased to $1,413 billion. The government is trying to decrease the budget deficit and it was decreased to $1089 billion during 2012. The government debt reached to 70 percent of the GDP. The sharply rise in government debt and lower tax revenue caused increase in unemployment in the United States. The investors loosed confidence and marked had declined sharply due to high selling pressers.

 Inflation

The inflation reached double due to higher prices of consumer spending. In 2008, the inflation hit 5.2 per cent within the six months period. The increase in consumer gas, electricity bill and increase in oil prices was the causes of inflation. In addition, increase in housing prices due to change in interest rates had created wealth affect. The home mortgage decline during August 2008, the total amount of home loan was just $6 billion in the August 2008, while it was $16.2 billion in the same month a year ago. Hence, Increase in inflation caused lower amount of spending, higher production costs to the corporations, declined in production and GDP, declined in investments, loose in investor’s confidence, higher interest rates and selling presser, and finally decline in the capital market.

 Unemployment & GDP:

The gross domestic production was declined during 2008 due to lower production and consumer’s spending, unemployment rate caused lower savings. GDP is the broadest economic indicator which is the sum of investment spending, consumer’s spending, and government spending and net export. Thus, the GDP declined due to low spending and export. Inflation causes lower amount of production due to increase in prices and decrease in demand for the goods and services. The low amount of production caused higher unemployment during 2008. The residential investment declined by 22% to 32% between the fourth quarter of 2008 and first quarter of 2009. Thus reduction in GDP played a vital role in the financial crisis during 2008 (Mishkin, 2007).

 Globalization & Foreign Investment:

Globalization has both positive and negative aspects. The positive aspects are that globalization increase foreign direct investment, increase diversity and liquidity and reduction in cost of capital. The disadvantage has been that, the banks are first to take risk and pushed the lending up to its limits, that increased credit risks. Globalization creates fiscal imbalances because the government has more possibility of increasing debt from the other countries that would have negative effect on GDP. Finally, globalization has created financial crisis, country crisis and contingency effects over various countries. During 2008, the financial crisis was also because of declined in the foreign investment due to economic condition leaded investors to lose confidence (Mishkin, 2007).

Conclusion:
The above explained reasons show that the changes fiscal policy and monetary policy were the major causes of financial crisis in 2008. Today’s economy is still facing the budget deficit but the congress has been trying to stabilizing the economy through interest rates stabilization.

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