2008 financial crisis

Definition

The 2008 financial crisis was a severe worldwide economic crisis that began in the United States, primarily due to the collapse of the housing bubble and risky financial products like mortgage-backed securities. This event led to widespread bank failures, massive government bailouts, and significant declines in consumer wealth, triggering a global recession that impacted economies around the world.

5 Must Know Facts For Your Next Test

1. The crisis was triggered by the burst of the housing bubble in 2006, which led to a dramatic increase in foreclosures and defaults on subprime mortgages.
2. Lehman Brothers filed for bankruptcy in September 2008, marking a significant event that intensified the financial turmoil and loss of confidence in banks.
3. The federal government responded with unprecedented interventions, including TARP, which allocated over $700 billion to rescue failing banks and stabilize the financial system.
4. Global stock markets plummeted as investor confidence evaporated, resulting in trillions of dollars in losses across various economies.
5. The aftermath of the crisis led to stricter regulations on financial institutions through reforms like the Dodd-Frank Act, aiming to prevent future crises.

Review Questions

• How did the housing bubble contribute to the onset of the 2008 financial crisis?
  • The housing bubble was fueled by easy access to credit and subprime mortgages, which allowed individuals with poor credit histories to buy homes. As housing prices soared, many borrowers took on loans they could not afford. When housing prices began to decline, many homeowners defaulted on their loans, leading to a wave of foreclosures that significantly weakened financial institutions heavily invested in mortgage-backed securities.
• Discuss the role of government intervention during the 2008 financial crisis and its impact on the economy.
  • During the 2008 financial crisis, the U.S. government implemented several interventions to stabilize the economy, including TARP, which aimed to purchase toxic assets from banks. This intervention was crucial in preventing a complete collapse of the financial system and restoring confidence among investors and consumers. While it successfully mitigated immediate economic damage, it also sparked debates about moral hazard and government involvement in private markets.
• Evaluate the long-term effects of the 2008 financial crisis on regulatory policies and consumer behavior.
  • The 2008 financial crisis led to significant changes in regulatory policies, notably through the Dodd-Frank Act, which imposed stricter regulations on banks and financial institutions to reduce risk-taking behavior. Additionally, consumer behavior shifted as many became more cautious about debt and home ownership, leading to changes in spending patterns. This crisis fundamentally reshaped both regulatory frameworks and societal attitudes towards finance and investment practices.

Related terms

Subprime Mortgages: Loans given to borrowers with low credit ratings, often leading to higher default rates and contributing to the housing bubble.

TARP (Troubled Asset Relief Program): A program established by the U.S. government in 2008 to purchase toxic assets from financial institutions to stabilize the economy.

Recession: A period of economic decline characterized by falling GDP, rising unemployment, and decreasing consumer spending.