The 2008 Economic and Financial Crisis

Abstract

The 2008 Financial Crisis was a global economic crisis triggered by subprime mortgages and caused severe contractions of liquid currency in worldwide financial markets. The situation sparked the largest crisis since the Great Depression of the 1930s, along with the collapse of the United States’ housing market. Since then, almost 12 years have passed, but the effects of the crisis are still fresh in the minds of many. We’ll take a small journey, analyzing and explaining the context, causes and short- and long-term effects of the crisis that shook the foundations of one of the most stable economic systems in the world and sent shockwaves across the globe.

Context

The crisis came during especially turbulent times for the world. In the context of the previous food and energy crises having taken place, severely affecting developing countries and economies. Thus, a significant increase in inequality across the world was characteristic to the time frame before the US financial market crashed. The traditional patterns of globalization were, therefore, gravely endangered by the time the economic crisis was in full effect; the interconnected challenges that the world was facing threatened to dramatically shift the way that globalization was viewed on an international level.

The lack of development in regards to international governance structure was one of the most decisive factors in triggering the greatest financial and economic crisis that the world had seen since the Great Depression. With globalization increasing at an accelerated pace, development of international governing structures lagged behind, thus acting as a catalyst of the crisis.

Definitions

Subprime mortgage = A subprime mortgage is a type of home loan issued to borrowers with low credit scores (often below 640 or 600, depending on the lender). Because the borrower is a higher credit risk, a subprime mortgage comes with a higher interest rate and closing costs than conventional loans.

Credit risk = Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection.

Liquidity = Liquidity is the ability of assets to be sold quickly at a price close to the market price. A liquid currency is a currency that can be quickly exchanged for another asset. This means that there are always many sellers and buyers in the liquid market, and therefore the spread will be minimal there.

Lax lending standards = Lending (also known as "financing") occurs when someone allows another person to borrow something. Money, property, or another asset is given by the lender to the borrower, with the expectation that the borrower will either return the asset or repay the lender; lax lending standards entail that the lender’s criteria for the borrower are less rigid or precise.

Recession = A recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

Depression = A depression is a long and severe recession in an economy or market.

Stock market = A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses.

Liability = A liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

Causes

The first trigger of the economic and financial crisis was represented by cheap credits and lax lending standards. These fueled a housing bubble that eventually burst, leaving financial institutions holding trillions of dollars in essentially worthless subprime mortgages; in the wake of the crisis, millions of individuals found themselves owing more money on their mortgages than their homes were worth.

Other initial causes that led to what some called “the Great Recession” were the flood of liquidity in the economy created by the lowering of U.S. Federal funds rates, trade imbalances on the international economic scene and lax lending standards. Among several other factors that played important roles in the triggering of the initial subprime mortgage crisis, which descended into the worst recession since the Great Depression, were the United States government housing policies and the limited regulation of non-depository financial institutions led to the real-estate bubbles bursting.

Effects

The effects of the crisis still loom in many individuals’ minds as a direct result of the havoc it wreaked on the global economy; aftershocks of the crisis are still being felt to this day in numerous industries and by certain age groups.

In the United States alone, nearly $8 trillion were wiped out when the stock market plummeted between 2007 and 2009. Unemployment reached an all-time high in late 2009, peaking at 10 percent. With their home values plummeting and retirement accounts vaporized, American citizens lost close to $9.8 trillion in wealth during the crisis. The Great Recession cost many not only their jobs and life-long savings, but also their homes.

The bankruptcy of Lehman Brothers in September 2008 was the culmination of the crisis, which was sparked by excessive risk-taking, the bursting of the U.S. housing bubble and the decrease of the values of U.S. real-estate securities. The most severe global financial crisis since the Great Depression greatly affected countries across the world, with an emphasis on developing countries and emerging economies; the oil industry and nations whose economies predominantly focus on oil have been spiraling since, with Venezuela as one of the most concrete examples. The economic crisis and its dire effects can still be largely felt in Greece.

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