Economics

The 2008 Stock Market Crash

Although the 2008 Stock Market Crash began in the US, its effects were felt worldwide.

The 2008 stock market crash is considered by many economists to be the worst global financial crisis since the Great Depression in the 1930's. The effects will still be felt by the world economy for years to come.

The Beginnings

Starting in 2007, the United States housing market began to show signs of toxicity with many lenders having given out too many mortgages to clients who were unable to meet their financial obligations to the lender and were consequently defaulting on their mortgages. Lenders in the private sector had been somewhat predatory with their lending, knowing their clients were not financially capable of paying their loans, but still lent the money anyway. These bad loans started to pile up, and many began to default on their payments, sometimes even losing their home. Many of these mortgages were bundled together and sold to bigger financial institutions (such as Fannie Mae and Freddie Mac) and were backed by insurance which is known as credit default swap insurance. Because lenders could pass on the risks of lending to another person, criteria to take out a large mortgage loan became increasingly lax, and many who were financially unable to meet their obligations for a loan were still granted one if not multiple.

The high number of new mortgages created many new house buyers and drove prices for housing through the roof. After housing values skyrocketed, many thought that they could take out a large loan against the equity of the inflated value of their house. The real estate 'bubble' would eventually burst and house prices dropped significantly due to a large number of people defaulting on their high-risk mortgages. This large number of defaults also affected the value of financial instruments such as bundled loan portfolios (that were sold on to others by the original lender), credit default swaps, and also derivatives, which are a security with a price dependent on individual underlying assets and factors. This period was challenging for many of the larger financial institutions who had taken on risky mortgage bundles from others. Some large banks who were also heavily invested in the financial instruments experienced a liquidity (cash) crisis due to the devaluation.

The Collapse of Commodities

The prices of commodities such as oil, which had tripled in price-per-barrel over one year from 2007-2008, also collapsed, leaving many Middle Eastern and other oil producers scrambling to recover from a massive dent in their revenue streams. Investment firms and financial management agencies who had invested heavily in the seemingly never-ending commodity boom of the 2000s were also left out-of-pocket. This collapse was similar to the housing market crash in the fact that people thought oil and other commodities were always going to be in incredibly high-demand, no matter the price. James D. Hamilton, an economist from the United States, claims that oil prices skyrocketing through 2007 and 2008 were a significant factor in the global economic crisis of 2008. Furthermore, Hamilton argues that if oil had not gone up to such a high price the United States' economy would have never been in recession territory - the U.S economy would have continued to grow had oil prices been stable.

Bank Failure

The combination of the housing and mortgage crisis as well as the bad lending that had been going on for years caused some banks to begin to fail. Some of these banks were massive, and the scope of their bad lending and credit assets was astonishing. On September 15, 2008, the large American bank Lehman Brothers filed for bankruptcy, and the global stock market began to unravel. This situation began evolving into a full-blown economic crisis, causing banks in Europe to collapse as well as 15 banks or private lenders in the United States to go bankrupt during September of 2008 alone. On October 8, 2008, the Indonesian stock market lost 10% of its value and had to halt trading during that day to stop the market from collapsing further, many other countries around the world followed suit and suspended trading. The United States and the United Kingdom stock exchanges were both stricken by the unstable economic conditions at this time. One week in October (the 6th until the 10th) saw the United States stock exchange lose about 18% of its value and the London stock exchange losing 21% of its value. The International Monetary Fund warned that the world financial system was on the brink of meltdown.

Bank Bail Out

Various fiscal policies were adopted by governments around the world to prevent a collapse of the world's financial system and some governments even bailed out banks with taxpayer money to prevent irreversible damage. These bailouts were laughable because many bankers had proclaimed that free-market capitalism was the way forward for the world economy. In the United States, the Emergency Economic Stabilization Act was swiftly passed through government, and this act allowed the government to purchase up to $700 billion of assets from banks that had been deemed unstable or toxic to stabilize the economy. This act would end up costing every single United States citizen at the time around $2,200 each, which is staggering.

The Great Recession

Following the 2008 crash, there was a period of global economic downturn called The Great Recession in which global economic activity was slowed substantially. The European Debt Crisis also followed soon after the 2008 crash, and many countries that use the Euro currency found difficulty in meeting various financial obligations. The Euro crisis was seen in the near-collapse of the Greek economy as well as the different austerity measures that the Greek government put into place to be financially able to pay back debts to other European countries. The developed economies of the world such as the United States, United Kingdom, France, Germany, and Russia fell into a definite recession whereas economies that were still developing such as China and India were growing during this period.

The crash of the real estate and stock market has also been portrayed in various movies and television series, most notably 2010's Wall Street 2: Money Never Sleeps and 2015's The Big Short.

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