2008 global financial crisis

Definition

The 2008 global 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. This crisis exposed vulnerabilities within financial institutions and led to a widespread loss of confidence in the banking system, causing significant downturns in global economies and impacting international trade. It exemplifies how interconnected financial markets can amplify risks and contribute to systemic failures.

5 Must Know Facts For Your Next Test

1. The crisis was primarily triggered by the bursting of the housing bubble in the U.S., which led to a spike in mortgage defaults and foreclosures.
2. Major financial institutions like Lehman Brothers filed for bankruptcy in September 2008, highlighting the extent of the crisis and leading to panic in global markets.
3. Governments around the world implemented stimulus packages and bailouts to stabilize their economies and restore confidence in the financial system.
4. The crisis resulted in significant job losses, foreclosures, and declines in stock markets globally, pushing many economies into recession.
5. Regulatory reforms were introduced post-crisis, including the Dodd-Frank Act in the U.S., aimed at preventing future financial disasters.

Review Questions

• How did the collapse of the housing market contribute to the broader financial crisis of 2008?
  • The collapse of the housing market was at the heart of the 2008 financial crisis, as it triggered a wave of subprime mortgage defaults. As homeowners began to default on their loans, the value of mortgage-backed securities plummeted, leading to significant losses for financial institutions. This erosion of asset values caused a liquidity crisis, where banks became unwilling to lend, further exacerbating economic downturns across global markets.
• In what ways did government interventions during the 2008 crisis seek to address systemic risks within financial institutions?
  • Government interventions during the 2008 crisis aimed to restore confidence and stabilize key financial institutions that were deemed 'too big to fail.' This included bailouts for major banks and insurance companies, along with aggressive monetary policy measures such as lowering interest rates and implementing quantitative easing. By providing liquidity and capital support, governments sought to prevent further systemic failures that could lead to a deeper economic recession.
• Evaluate the long-term impacts of the 2008 global financial crisis on international financial markets and regulatory frameworks.
  • The 2008 global financial crisis had profound long-term impacts on international financial markets and regulatory frameworks. In response to the crisis, countries implemented stricter regulations like the Basel III standards, which aimed at increasing bank capital requirements and improving risk management practices. Additionally, the crisis led to increased scrutiny of complex financial products and greater transparency demands. These changes have reshaped how banks operate globally, aiming to mitigate systemic risk and prevent future crises.

Related terms

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

Liquidity crisis: A situation in which financial institutions or markets are unable to meet short-term obligations due to the lack of liquid assets.

Bailout: Financial support provided by a government or private institution to prevent a company from failing, often used during the financial crisis to stabilize key industries.