2008 global financial crisis

Definition

The 2008 global financial crisis was a severe worldwide economic crisis that began in the United States, triggered by the collapse of the housing market and the resulting failure of major financial institutions. This crisis led to widespread unemployment, significant government interventions, and changes in banking regulations across the globe, highlighting the interconnectedness of national economies and the need for transnational policy responses to address global social issues.

5 Must Know Facts For Your Next Test

1. The crisis peaked in September 2008 when Lehman Brothers filed for bankruptcy, marking one of the largest bankruptcies in U.S. history.
2. Global stock markets plummeted, wiping out trillions of dollars in wealth and leading to significant declines in consumer spending.
3. Many countries experienced severe recessions, with some economies contracting by over 5% within a year of the crisis.
4. Governments and central banks implemented unprecedented monetary policies, including lowering interest rates and quantitative easing, to stabilize their economies.
5. The aftermath of the crisis prompted widespread reforms in financial regulation, including the Dodd-Frank Act in the United States aimed at preventing future crises.

Review Questions

• How did the collapse of the housing market contribute to the onset of the 2008 global financial crisis?
  • The collapse of the housing market was central to the onset of the 2008 global financial crisis as it triggered a wave of defaults on subprime mortgages. Many homeowners could not meet their mortgage payments due to rising interest rates and declining property values. As these defaults increased, financial institutions that had heavily invested in mortgage-backed securities faced significant losses, leading to a liquidity crisis that spread throughout the global economy.
• Discuss the international implications of the 2008 global financial crisis and how it prompted transnational policy responses.
  • The 2008 global financial crisis had profound international implications, as it revealed how interconnected economies are in a globalized world. Financial institutions worldwide faced severe disruptions due to their exposure to toxic assets. In response, countries collaborated on various fronts, including coordinated monetary policies and regulatory reforms, such as stress tests for banks and improved oversight of financial markets. This collective effort aimed to restore confidence and stabilize economies affected by the crisis.
• Evaluate the effectiveness of government interventions during and after the 2008 global financial crisis in stabilizing economies and preventing future crises.
  • Government interventions during and after the 2008 global financial crisis were pivotal in stabilizing economies; programs like TARP helped restore liquidity in the banking system while central banks enacted low-interest rates and quantitative easing. However, critics argue that these measures also created moral hazards by encouraging risky behavior without accountability. The long-term effectiveness is debated as some regions continue to grapple with economic stagnation and rising inequality, suggesting that while immediate effects were mitigated, structural issues remain unresolved.

Related terms

Subprime mortgage: A type of mortgage that is offered to individuals with poor credit histories, often resulting in higher interest rates and increased risk of default.

TARP (Troubled Asset Relief Program): A U.S. government program designed to purchase toxic assets and equity from financial institutions to strengthen the country's financial sector during the crisis.

Austerity measures: Government policies aimed at reducing public sector debt by cutting spending, often implemented as a response to economic crises.