2008 global financial crisis

Definition

The 2008 global financial crisis was a severe worldwide economic downturn that began in the United States due to the collapse of the housing bubble and subsequent failures in financial institutions. It led to widespread unemployment, significant losses in wealth, and a decrease in economic activity across many countries, including New Zealand. The crisis prompted governments and central banks around the world to implement extraordinary measures to stabilize their economies and restore confidence in the financial system.

5 Must Know Facts For Your Next Test

1. The crisis was triggered by a combination of high-risk mortgage lending practices, particularly with subprime mortgages, leading to massive defaults and foreclosures.
2. Financial institutions like Lehman Brothers collapsed, which sent shockwaves through global markets and prompted emergency interventions by governments.
3. New Zealand's economy was affected, with rising unemployment rates and a slowdown in economic growth as a result of the global downturn.
4. The Reserve Bank of New Zealand lowered interest rates significantly to encourage borrowing and spending as part of its response to the crisis.
5. In response to the crisis, many countries adopted regulatory reforms aimed at increasing transparency and reducing risk in the financial sector.

Review Questions

• How did the collapse of the housing bubble contribute to the onset of the 2008 global financial crisis?
  • The collapse of the housing bubble was a key factor that triggered the 2008 global financial crisis. As housing prices soared, many individuals took out subprime mortgages, which were high-risk loans offered to borrowers with poor credit. When home prices began to fall, these borrowers defaulted on their loans, leading to significant losses for financial institutions that had invested heavily in mortgage-backed securities. This created a ripple effect throughout the economy, contributing to widespread financial instability.
• Discuss the measures taken by New Zealand's government and Reserve Bank in response to the global financial crisis and their effectiveness.
  • In response to the global financial crisis, New Zealand's government implemented various measures, including fiscal stimulus packages and support for affected industries. The Reserve Bank of New Zealand also slashed interest rates to promote borrowing and spending. These actions helped stabilize the economy by encouraging investment and consumer confidence. However, while these measures were effective in mitigating some impacts, New Zealand still faced challenges such as rising unemployment and slower economic growth during this period.
• Evaluate the long-term implications of the 2008 global financial crisis on financial regulation and economic policy in New Zealand.
  • The 2008 global financial crisis had significant long-term implications for financial regulation and economic policy in New Zealand. In response to the vulnerabilities exposed by the crisis, regulatory reforms were introduced aimed at increasing oversight of financial institutions and enhancing transparency. This included measures like stricter lending standards and improved risk management practices. Additionally, policymakers recognized the need for a more proactive approach to economic stability, leading to ongoing discussions about macroprudential policy tools to mitigate future risks. These changes have shaped New Zealand's economic landscape and continue to influence how authorities respond to potential financial crises.

Related terms

Subprime Mortgage: A type of mortgage that is typically offered to borrowers with poor credit histories, which contributed to the housing bubble and subsequent financial instability.

Quantitative Easing: A monetary policy used by central banks to stimulate the economy by increasing the money supply, often implemented in response to economic downturns like the 2008 crisis.

Global Recession: A significant decline in economic activity across multiple countries, which occurred as a result of the 2008 financial crisis and its aftermath.