2008 Financial Crisis
The 2008 Financial Crisis was a severe worldwide economic crisis that was triggered by the collapse of the housing market in the United States. It led to a widespread banking crisis, stock market crash, and a significant downturn in global economic activity. The crisis resulted in massive government interventions and had long-lasting effects on the global economy.
7 Key excerpts on "2008 Financial Crisis"
eBook - ePubFoundations of Real-World Economics
What Every Economics Student Needs to Know
- John Komlos(Author)
- 2019(Publication Date)
- Routledge(Publisher)
...14 The Financial Crisis of 2008 At the turn of the twenty-first century, the economy was about to experience the worst economic crisis since the Great Depression. The Meltdown of 2008 became a crisis that shook the very foundations of liberal democracy. The 2008 collapse of the house of cards built on mistaken dogmas and excessive amounts of hubris will become a watershed moment on a par with 1929. This was caused by the confluence of the Dot-Com bubble, the tsunami of globalization, and the subprime mortgage crisis. Adding to these problems was terrorism and the subsequent senseless invasions of Iraq and Afghanistan which drained tremendous amounts of money from the U.S. economy. “These are times that try men’s souls.” 1 Unfortunately, our souls were not prepared for these challenges and we lacked leaders with FDR’s vision to lead us to safer shores. Speaking of 1929, John M. Keynes’ words ring true for our own time: [t]o-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time. 2 What a poetic way to describe an economic slump! We, too, got ourselves into a “colossal muddle” and we, too, blundered in our economic policies, and we still do not understand or care to recognize the workings of the new economy. And yes, we have been wasting much of our productivity and will continue to do so for a long time. We would need a Keynes for our times, but one is not in sight. One serious problem was that by the twenty-first century the memory of the Great Depression had faded and consequently the accumulation of “irrational exuberance” was not taken seriously. That experience was no longer considered relevant. Even the Chairman of the Federal Reserve since 1987 and among the elders of finance, Alan Greenspan (who coined the above phrase), was barely a toddler in 1929...
eBook - ePubInequality, Boom, and Bust
From Billionaire Capitalism to Equality and Full Employment
- Howard J. Sherman, Paul D. Sherman(Authors)
- 2018(Publication Date)
- Routledge(Publisher)
...p.159 14 FINANCIAL CRISIS AND INEQUALITY What were the main factors causing the financial crisis of 2008 to 2009? The previous chapter has recounted in detail all of the factors that led to the Great Recession. Those same factors set the stage for the financial crisis. In both the Great Depression and the Great Recession, the real economy turned downwards at least a year before the financial crisis became acute. This point is spelled out in great detail by Stiglitz (2015b). As to the Great Recession, the recession began in the fourth quarter of 2007 (see Table 5.1). There was a time lag of about a year from the downturn in the real economy until the collapse of credit and the threatened bankruptcy of the largest banks. The financial crisis became acute and was the main point of all economic discussion by the fourth quarter of 2008. The previous chapter supported the view that the rapid increase of income and wealth inequality during the Bush expansion from 2001 until 2007 was the most important factor causing the Great Recession. Since inequality was a major factor leading to the downturn in the real economy in the fourth quarter of 2007, and that downturn was a major factor leading to the financial crisis, it follows that inequality was one of the major factors leading to the financial crisis of 2008 to 2009. The rise of inequality contributed to the financial crisis both through the reduction of aggregate demand and through the increased political power of the bankers. There were many factors contributing to the financial crisis. One was the financial deregulation pushed by the bankers. The second was the encouragement of risky home loans by the Bush Administration. The third was the housing crisis. The fourth was the worldwide downturn in trade...
eBook - ePubThe Contemporary Global Economy
A History since 1980
- Alfred E. Eckes(Author)
- 2011(Publication Date)
- Wiley-Blackwell(Publisher)
...And credit markets locked up, as financial institutions refused to lend money to one another. As Dominique Strauss-Kahn, the IMF’s managing director, observed later: “With the collapse of Lehman Brothers, uncertainty turned to outright panic, and economic activity started to collapse. People raised the specter of another Great Depression, and these fears were not unfounded.” 42 In an era of open capital markets, many investors had borrowed in cheap markets, such as the US, and invested “hot money” in world markets with high growth rates seeking higher returns. Increasingly interconnected financial markets – with rapid communications and instantaneous money transfers – accelerated the spread of bad news and uncertainty. In the turmoil, hedge funds whose mathematicians asserted they could make money in rising or falling markets lost vast sums. Fear that seemingly secure companies might go bankrupt prompted credit markets to freeze, and interbank lending stalled. Nonetheless, some were surprised that a downturn in the housing market, affecting some $250 billion in mortgages, could cause cumulative output losses estimated at 20 times greater ($4,700 billion). David Smick, a financial analyst, explained the housing crisis was a “mere trigger for a collapse in trust of paper, followed by a deleveraging of the entire bloated-with-credit global financial system.” 43 Central and Eastern Europe In 2007 and 2008 people far and wide – from the Arctic to Australia – experienced the pain as the financial system broke down. The global crisis hit emerging markets in Central and Eastern Europe severely. In the preceding two decades this region reoriented trade, integrated into the world economy, and became heavily dependent on foreign capital. Latvia, Estonia, and Lithuania borrowed heavily from global markets to achieve high growth rates. Others – Hungary, Ukraine, Bulgaria, Kazakhstan, and Kyrgyzstan – also had high levels of foreign debt and dependence on foreign investments...
eBook - ePubUnderstanding Central Banking
The New Era of Activism
- David M Jones(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...It is estimated that this unprecedented surge in global growth, spurred by the free market and a growing openness to global trade and finance, has brought a billion people out of poverty into the middle class. The success of free-market capitalism depends on a stable, efficient, and fairly sophisticated financial system. Over the past two decades, globalization, deregulation, and rapid financial innovation, while generally increasing efficiency in allocating capital to its most productive uses, have also led to periodic instability, as reflected in asset price bubbles and recurring financial crises, some more severe than others. This chapter will analyze one of those major, unforeseen, and extremely difficult-to-manage financial crises, namely the Great Credit Crisis of 2007–2009, one that has cost many trillions of dollars to fight in the form of government guarantees, fiscal stimulus packages, and new money created out of thin air by the monetary authorities. The seeds of the Great Credit Crisis of 2007–2009 were sowed in the huge credit bubble supporting the U.S. housing boom of 2002–2006. Moreover, contrary to custom, the housing credit bubble saw its largest expansion off bank balance sheets in a sort of “shadow” banking system. Interestingly, in the United States, approximately 80 percent of the funds intermediated from savers/lenders to borrowers/spenders are channeled through nonbank “shadow” financial intermediaries and the capital markets, while, in contrast, in the eurozone, 80 percent of intermediated funds are channeled through banks (Draghi 2013). S HADOW B ANKING S YSTEM The “shadow” banking system, operates outside the traditional banking system...
eBook - ePubGlobal Housing Markets
Crises, Policies, and Institutions
- Ashok Bardhan, Robert H. Edelstein, Cynthia A. Kroll, Ashok Bardhan, Robert H. Edelstein, Cynthia A. Kroll(Authors)
- 2011(Publication Date)
- Wiley(Publisher)
...CHAPTER 1 The Financial Crisis and Housing Markets Worldwide Similarities, Differences, and Comparisons ASHOK BARDHAN Fisher Center for Real Estate and Urban Economics, University of California–Berkeley ROBERT H. EDELSTEIN Haas School of Business, University of California–Berkeley CYNTHIA A KROLL Fisher Center for Real Estate and Urban Economics, University of California–Berkeley INTRODUCTION The subprime crisis that began in the United States in 2007 sent the world into a financial crisis of unprecedented proportions. In the United States, this was manifested in a boom-bust cycle in residential real estate markets, the near shutdown of the country's financial sector in 2008, and a prolonged Great Recession of a magnitude not seen in the country in any cycle since the 1930s. The contagion in financial markets became clear very quickly, affecting countries around the world, including Singapore, New Zealand, Iceland, the United Kingdom, Germany, France, and Ireland, to name a few, as well as a some fast-growing emerging economies to a lesser extent. Both residential and commercial real estate markets as well as stock, bond and asset markets appeared vulnerable worldwide. As the dust settles, it has become clear that some countries were more vulnerable than others. In particular, impacts on residential real estate ranged from unnoticeable in countries as far apart as Australia, Germany, and Israel to sharp downturns in Ireland, Spain, and the United Kingdom; the latter group at a level that at a cursory glance appears to closely mirror the U.S. experience. This book was conceived for the purpose of examining if and how the contagion spread to housing markets throughout the world, what were the paths and transmission mechanisms by which it spread (through financial markets, directly through global real estate markets), and what was the institutional and regulatory context in which policy measures were adopted in response to the spreading financial crisis...
eBook - ePub- Colin Crouch(Author)
- 2020(Publication Date)
- Polity(Publisher)
...The reduction in public spending implied a general reduction in demand, and therefore increases in business failures, unemployment and poverty. Especially in the US, the homes of many low-income families with unsecured mortgages were repossessed by their lenders, rendering them homeless and reduced to living in caravans. Among members of the single European currency with high public debt, a further crisis broke in 2010 as they were placed under exceptional stress to repay their debts in order to avoid damaging the status of the euro itself. The actions surrounding this will be discussed separately in Chapter 4, as they raise their own issues of democracy. The main outcome of the 2008 crisis was therefore a reduction in the living standards of the great majority of people, and a consequent growth in feelings of insecurity. Employment levels were gradually restored, but frequently with inferior and insecure forms of contract. Public services nearly everywhere suffered long-term damage. Living standards took a major step backwards; for the first time in many years, populations were unable to look forward to gradually growing incomes year on year. To some extent at least, this was inevitable. Much of the increase in incomes since the 1990s had been an illusion, based on the growth of financial asset prices in the secondary markets that did not represent substantive growth. A serious correction was inevitable, though there was room for debate over how that correction should be distributed across the population, between public and private sectors and over time. In most countries the main burden was born by lower and lower-middle earners. The very poorest were spared some of the impact through social policy, but after a year or two of adjustment the richest escaped largely unscathed. The banks, whose behaviour had caused the problems in the first place, seemed relatively immune from the damage...
eBook - ePubCrisis and Inequality
The Political Economy of Advanced Capitalism
- Mattias Vermeiren(Author)
- 2021(Publication Date)
- Polity(Publisher)
...Because national fiscal authorities remained entirely responsible for bailing out their banks and supporting their economy, peripheral governments’ fiscal deficits soared in ways that undermined investors’ confidence in the sustainability of their public debt and led to spiralling interest rates on their sovereign bonds. The resulting sovereign debt crisis imposed a severe macroeconomic adjustment process on these countries, as we will see in the next chapter. Market-based banking, regulatory capture and financialization Many commentators and banking scholars have argued that regulatory capture of public agencies and public policy by leading banks was one of the main causal factors behind the financial crisis of 2007–9. This, it is claimed, resulted in a permissive regulatory environment that turned a blind eye to excessive risk taking by banks: ‘government agencies have been frequently described as being at the mercy of the financial sector, often allowing financial interests to hijack political, regulatory and supervisory processes in order to favouring their own private interests over the public good’. 36 In the United States the political clout of financial lobbies has repeatedly been seen as an important source of the regulatory failures that were at the heart of the crisis: US financial industry groups were able to influence regulatory policies by using their financial resources to finance electoral campaigns...
