Overview of the 2008 Financial Crisis
The 2008 financial crisis was a severe worldwide economic downturn triggered by the collapse of the U.S. housing market and the subsequent failure of major financial institutions. It began in 2007 and peaked in 2008, leading to the Great Recession. At its core, the crisis stemmed from excessive risk-taking in lending practices, amplified by complex financial products and inadequate oversight.
Key Causes of the Crisis
Primary causes included the subprime mortgage boom, where lenders issued high-risk loans to borrowers with poor credit, often bundled into mortgage-backed securities (MBS) sold to investors. Deregulation in the 1990s and 2000s, such as the repeal of the Glass-Steagall Act, allowed banks to engage in speculative trading. Low interest rates set by the Federal Reserve encouraged borrowing, while credit rating agencies overstated the safety of these securities, creating a bubble that burst when housing prices fell in 2006-2007.
Practical Example: Lehman Brothers Collapse
A stark example is the bankruptcy of Lehman Brothers in September 2008, one of the largest in U.S. history. Lehman had heavily invested in subprime MBS, which lost value as defaults rose. Its failure froze credit markets, as banks stopped lending to each other, illustrating how interconnected financial institutions amplified the crisis globally.
Consequences and Lasting Impacts
The crisis led to massive job losses, with U.S. unemployment peaking at 10% and over 8 million jobs vanishing worldwide. Home foreclosures displaced millions, and stock markets plummeted, wiping out trillions in wealth. Governments responded with bailouts like TARP in the U.S., totaling $700 billion. Long-term, it spurred reforms like the Dodd-Frank Act to enhance regulation, but also contributed to rising inequality and populist movements, reshaping global economic policy.