The Story Behind the 2008 Crisis: Is it coming back?
On the morning of September 15th, 2008, Wall Street experienced its worst day in history, on par with the 1987 “Black Monday” financial crisis. The 2008 crisis had a complex storyline, involving several reactants and catalysts that ultimately led to a global economic downturn.
The stock market crash of 2008 was the end result of a chain reaction that had been building up since the new millennium began. This eight-year period was marked by a series of events that eventually led to the downfall of the economy.
The chain reaction is a good reference point because it destroyed people’s dreams, interests, and finances away, such like the way a chain reaction unfolds. The greed of many individuals played a significant role in the collapse of the US economy.
Story of 2008 Financial Crisis:
The Global Financial Crisis of 2007-2008, also known as “The Great Recession,” was not a sudden event, but rather a peak of several factors that had been building up for some time. The impact of this crisis is still being felt today.
Here is a brief outline of what led up to the Global Financial Crisis of 2007-2008.
The period of economic downturn that occurred in 2008-2009 is commonly known as “The Great Recession.”
This economic crisis was triggered by the housing market bubble, which resulted from a large number of high-risk loans that were bundled together as mortgage-backed securities.
Many financial institutions failed as a result of careless lending and the subsequent increase in loan defaults. The government had to arbitrate by providing financial assistance to these institutions. In an effort to revive the economy, the American Recovering and Reinvestment Act of 2009 were enacted.
The Housing Market Bubble
- The global financial crisis was primarily caused by the housing market bubble that started to form in 2007. Lending institutions and banks were offering homeowners with low interest rates on mortgages, persuading them to take out loans that were beyond their financial means.
- To handle the inflow of mortgages, lenders introduced a new financial product called mortgage-backed securities (MBS).
- These were essentially a bundle of mortgages that could be sold as securities with minimal risk, since they were backed by credit default swaps (CDS). Lenders could then easily pass on the mortgages along with all the risk to others.
- Due to outdated regulations that were not strictly enforced, lenders became negligent in their underwriting process. As a result, the actual value of the securities could not be accurately determined or guaranteed.
The Bubble Bursts
- Banks started lending haphazardly to families and individuals who did not have the financial means to repay the mortgages they were granted.
- These high-risk loans, also known as subprime loans, were bundled together and passed down the line.
- As the number of subprime mortgage bundles grew exponentially, with a significant portion of them defaulting, lending institutions started facing severe financial challenges.
- This resulted in a gloomy financial situation around the world during the 2008-2009 periods, which persisted for years to come.
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What happened after the Global Financial Crisis of 2008-2009?
- Individuals who had taken out subprime mortgages eventually defaulted, which had a substantial impact on financial institutions.
- When borrowers could not repay their loans, lending institutions suffered major losses. However, the government intervened by providing financial assistance to the affected banks, also known as a bailout.
- The housing market was profoundly affected by the crisis, with evictions and foreclosures occurring within months. In response, the stock market started to decline, and major businesses worldwide began to fail, resulting in losses of millions of dollars.
- As the results, the crisis caused widespread layoffs and extends periods of unemployment globally. Declining credit availability and a loss of confidence in financial stability led to reduced investment and cautious spending, resulting in international trade slowing down to a crawl.
- To address the crisis, the United States responded by passing the American Recovery and Reinvestment Act of 2009. The act aimed to stimulate economic growth by implementing an expansionary monetary policy, facilitating bank bailouts and mergers, and promoting infrastructure projects.
Is The Global Financial Crisis Repeat itself?
It is difficult to predict if the 2008 financial crisis will repeat itself. Since the crisis, there have been various regulatory reforms and changes in the financial system aimed at preventing a similar situation from occurring.
However, economic cycles are inevitable, and there is always a risk of another crisis occurring. It is crucial to remain vigilant and implement sound policies to minimize the possibility of such an event happening again. We hope that you like our blog “The Story Behind the 2008 Crisis”.
