Global financial crisis

Definition

The global financial crisis refers to a severe worldwide economic crisis that occurred in the late 2000s, which was triggered by the collapse of the housing market in the United States and led to significant failures in financial institutions. This crisis highlighted vulnerabilities within global financial systems, as it caused widespread economic downturns, massive bailouts of banks, and a loss of consumer confidence, ultimately resulting in increased regulatory reforms across many countries.

5 Must Know Facts For Your Next Test

1. The global financial crisis began in 2007 with the bursting of the housing bubble in the United States, leading to a surge in mortgage defaults.
2. Major financial institutions, including Lehman Brothers, collapsed or required government bailouts, which prompted unprecedented intervention by governments worldwide.
3. The crisis led to severe recessions in many countries, resulting in high unemployment rates and significant declines in consumer spending and investment.
4. In response to the crisis, governments and central banks implemented various monetary and fiscal policies, including lowering interest rates and quantitative easing measures.
5. The aftermath of the global financial crisis resulted in sweeping regulatory reforms, such as the Dodd-Frank Act in the U.S., aimed at preventing similar crises in the future.

Review Questions

• How did subprime mortgages contribute to the onset of the global financial crisis?
  • Subprime mortgages were offered to borrowers with low credit scores, leading to a high rate of defaults when housing prices fell. This created a ripple effect throughout the financial system as banks had heavily invested in these risky loans. When homeowners began defaulting en masse, it triggered significant losses for financial institutions and contributed to the collapse of major banks, ultimately leading to the broader economic downturn known as the global financial crisis.
• What role did government intervention play during the global financial crisis, and what were some specific measures taken?
  • Government intervention was crucial during the global financial crisis as it helped stabilize the financial system and prevent further economic collapse. Specific measures included massive bailouts of failing banks and financial institutions, such as AIG and Citigroup, as well as implementing monetary policies like lowering interest rates. These actions were aimed at restoring confidence in the banking system and facilitating lending, which was essential for economic recovery.
• Evaluate the long-term impacts of the global financial crisis on global financial regulations and economic policies.
  • The global financial crisis fundamentally changed how financial systems are regulated around the world. In its aftermath, there was a significant push for increased oversight and stricter regulations to mitigate systemic risks. This led to landmark legislation like the Dodd-Frank Act in the U.S., which aimed to enhance transparency and reduce risk-taking by financial institutions. Additionally, central banks adopted unconventional monetary policies, reshaping economic policy approaches globally. The crisis underscored the interconnectedness of economies and highlighted the need for coordinated international regulatory frameworks.

Related terms

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

Lehman Brothers: An investment bank whose bankruptcy in September 2008 marked a key moment in the global financial crisis, symbolizing the depth of the financial turmoil.

Liquidity Crisis: A situation where financial institutions or businesses are unable to meet their short-term financial obligations due to a lack of liquid assets.