The 2008 financial crisis was one of the worst economic downturns in recent history.
The housing market crash, combined with high consumer debt and other factors, caused a recession that would change the world forever. This blog post discusses the signs, causes and effects of this global crisis.
What Caused The Financial Crisis?
The 2008 financial crisis was caused by a number of factors,
including the housing market crash.
The main cause though was not just one thing it was a combination of things together that led up to what happened in 2007-2008. These included:
Low Interest Rates:
which encouraged people into buying houses they couldn’t afford with loans they could never repay back as house prices rose rapidly during 2001-2006 period due to lax lending standards on bank’s part combined with easy credit conditions but also subprime borrowing increased from $85 billion annual rate in 2000s decade prior peak of $600 billion in 2006.
Bank Crisis In Europe:
made it difficult for American banks especially investment banks like Bear Stearns, Merrill Lynch & Lehman Brothers who invested heavily on subprime mortgage backed securities (MBS) using borrowed funds from overnight lenders such as ‘repo’ markets where they used these toxic assets collateralized by stocks or bonds of companies like Enron to borrow money.
Failures Of Corporate Governance:
when CEO’s had perverse incentives due to pay structure that encouraged them into taking excessive risks in housing market which led up to the crisis, while some companies like Bear Stearns was more exposed than other investment banks because it didn’t have enough cash on hand during financial panic when they were unable meet their obligations so creditors lost faith in them leading up to collapse & fire sale for pennies on dollar bankruptcy.
Housing Bubble Burst:
which became unsustainable after 2006-2007 period with record low interest rates combined with risky loan products caused a massive surge in home prices by 150% between 2001 and 2006 where average American family could easily afford $200k homes but once this speculative
How The 2008 Financial Crisis Changed The World?
First, it affected banks that were having trouble because of their exposure to US subprime mortgages and other toxic assets which led up to bank failures due to liquidity issues so they had to be bailed out by government
who used taxpayer money & printed more currency leading up hyperinflation fears even though this was not yet the case back than but still affect currencies today like Euro with European Central Bank (ECB) printing €60 billion per month starting 2015 until September 2016 while inflation is at highest levels since June 2013.
Second, it created ‘too big too fail’ problem after Lehman Brothers collapsed during September 15th 2008 causing a domino effect on where AIG almost went bankrupt as well but due to AIG being a huge insurance company insuring assets of 90% of big
well but due to AIG being a huge insurance company insuring assets of 90% of big banks around the world, there was too much at risk that American government had no choice but to bailout them as well & print more money.
Thirdly it led up with US national debt skyrocketed from $19 trillion in 2008 now increased by over $500 billion every year throughout Obama presidency taking total public debt currently at 19.91T or 106 percent of GDP which is usually sustainable between 85-90%.
Fourth, this caused deregulation on Wall Street as nothing has changed since then where financial institutions were allowed to take even bigger risks today than they did before because they know if anything goes wrong their taxpayer will bail out for them again
Who Did The Crisis Affect?
The crisis affected millions of people worldwide.
First, it caused a huge wave in unemployment rate where jobless claims surged from 401k to over 650k during October 2007- April 2009 period when the US economy lost nearly $14 trillion in wealth or around $50k per American household which is still affecting growth today with slow recovery and high debt levels throughout Obama administration since 2009 leading up to now 2017.
Second, this created great divide between top 20% earners who actually gained more assets than they did before while bottom 80% lost significant amount of net worth because housing prices went down after bubble burst by 30%, mass layoffs started & many Americans defaulted on their mortgages resulting into foreclosures/evictions across America
Conclusion
The 2008 financial crisis was a major turning point in world history that changed everything we knew as America’s economy is still recovering from it.
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