2008 financial crisis

Definition

The 2008 financial crisis was a severe worldwide economic crisis that occurred in the late 2000s, triggered by the collapse of the housing market in the United States and the subsequent failure of major financial institutions. This crisis highlighted vulnerabilities in global financial systems and led to widespread economic downturns, massive unemployment, and significant government interventions across various countries.

5 Must Know Facts For Your Next Test

1. The crisis was largely fueled by a housing bubble, where home prices inflated dramatically due to easy credit and speculation, leading to unsustainable mortgage lending practices.
2. Financial products such as mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) were heavily invested in by banks, spreading risk throughout the financial system.
3. As housing prices began to fall, many homeowners defaulted on their mortgages, which caused significant losses for banks and triggered a liquidity crisis.
4. Global stock markets experienced significant declines, and many countries entered into recessions as consumer confidence plummeted.
5. In response, central banks and governments around the world implemented unprecedented monetary and fiscal policies to stabilize economies and restore confidence in financial markets.

Review Questions

• What were the main factors that led to the onset of the 2008 financial crisis?
  • The onset of the 2008 financial crisis was primarily driven by the collapse of the housing market in the U.S., which was fueled by subprime mortgage lending practices. Financial institutions engaged in risky behavior by investing heavily in complex financial products like mortgage-backed securities that were tied to these risky loans. As home prices plummeted and borrowers began defaulting en masse, it exposed the vulnerabilities within the banking system and triggered a broader economic collapse.
• How did the failure of Lehman Brothers contribute to the severity of the 2008 financial crisis?
  • The failure of Lehman Brothers acted as a catalyst for the 2008 financial crisis by triggering panic in global markets. When this major investment bank filed for bankruptcy in September 2008, it signaled a loss of confidence in financial institutions' stability. This event exacerbated liquidity issues across the banking sector, leading to a domino effect where other institutions faced increased scrutiny, resulting in widespread credit freezes and further economic turmoil.
• Evaluate the long-term implications of the 2008 financial crisis on global financial regulations and practices.
  • The 2008 financial crisis led to significant changes in global financial regulations aimed at preventing future crises. One notable outcome was the implementation of the Dodd-Frank Act in the U.S., which introduced stricter oversight on banks, enhanced consumer protection measures, and established mechanisms for monitoring systemic risks. Furthermore, international regulatory bodies adopted measures like Basel III to strengthen capital requirements for banks. These reforms aimed not only to stabilize individual economies but also to improve resilience across interconnected global markets.

Related terms

Subprime mortgage: A type of loan offered to individuals with poor credit histories who would otherwise be unable to qualify for conventional mortgages.

Lehman Brothers: An American investment bank whose bankruptcy in September 2008 marked a pivotal moment in the financial crisis and heightened global economic instability.

TARP (Troubled Asset Relief Program): A program established by the U.S. government in 2008 to purchase toxic assets and provide capital to banks to stabilize the financial system.