The Global Financial crisis of 2007–2008

The Global Financial crisis of 2007–2008

It took years for the financial crisis of 2007–2008 to develop. By the summer of 2007, financial markets all across the world were indicating that a protracted binge on cheap borrowing was finally coming to an end. BNP Paribas was alerting investors that they might not be able to withdraw money from three of its funds, two Bear Stearns hedge funds had collapsed, and the British bank Northern Rock was preparing to apply for emergency assistance from the Bank of England.

Nevertheless, despite the warning indications, few investors were aware that the world financial system was going to be hit by the biggest crisis in nearly eight decades, which would knock Wall Street’s titans to their knees and cause the Great Recession.

Many common people lost their jobs, their life savings, their houses, or all three as a result of this enormous financial and economic catastrophe. Let’s examine how this financial crisis took place with a timeline.

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What caused the financial crisis of 2008?

With accessible credit and loose lending guidelines that drove a housing bubble, the 2008 financial crisis had its start. When the subprime mortgage bubble broke, the banks were left with trillions of dollars in worthless investments. Many lost their homes, savings, and jobs as a result of the Great Recession that followed.

The beginning of the financial crisis

A house price bubble in the US and internationally was driven by years of historically low interest rates and tax lending rules, which laid the groundwork for the financial catastrophe. As usual, things got off to a good start. The Federal Reserve reduced the federal funds rate from 6.5% in May 2000 to 1% in June 2003 in response to the September 11 terrorist attacks, the dot-com bubble crash, and a slew of corporate accounting scandals. By making money inexpensively available to consumers and businesses, the economy was intended to be boosted. Home prices increased dramatically as a result of buyers taking advantage of the low mortgage rates.

The Wall Street banks bought the loans from the banks after which they packaged them into what were marketed as low-risk financial vehicles, such as mortgage-backed securities and collateralized debt obligations (CDOs). Subprime loan origination and distribution soon saw the growth of a sizeable secondary market. The Securities and Exchange Commission (SEC) lowered the net capital requirements for five investment banks—Goldman Sachs (NYSE: GS), Merrill Lynch (NYSE: MER), Lehman Brothers, Bear Stearns, and Morgan Stanley—in October 2004, encouraging banks to take on more risk (NYSE: MS). As a result, they were able to multiply their initial investments by up to 30 or even 40 times.

The start of trouble: August of 2007

By August 2007, it was clear that the subprime crisis could not be resolved by the financial markets and that its effects extended far beyond the boundaries of the United States. Because of widespread uncertainty, the interbank market that keeps money flowing around the world entirely shut down. Due to a liquidity issue, Northern Rock had to seek the Bank of England for emergency funding. The first big bank to report losses from investments tied to subprime mortgages was the Swiss bank UBS in October 2007. These losses totaled $3.4 billion. The global credit markets, which were collapsing due to falling asset values, would receive billions of dollars in loans from the Federal Reserve and other central banks in the upcoming months. Financial institutions were having trouble determining the value of the hazardous mortgage-backed assets worth trillions of dollars that were still listed on their books.

Recession of March 2008

The U.S. economy had entered a full-fledged recession by the winter of 2008, and as financial institutions struggled to maintain liquidity, stock markets worldwide were seeing their steepest decline since the September 11 terrorist attacks. In an effort to stop the economy’s decline, the Fed reduced its benchmark rate by three-quarters of a percentage point in January 2008, the largest reduction in twenty-five years.

Bad news kept coming in from every direction. The British government was compelled to nationalise Northern Rock in February. Bear Stearns, a major Wall Street institution that dates back to 1923, collapsed in March and was bought for pennies on the dollar by JPMorgan Chase.

The fall of Lehman brothers

By the summer of 2008, the financial industry was being decimated. The two largest home lenders in the nation, Fannie Mae and Freddie Mac, were also taken over by the government of the United States, making IndyMac Bank one of the biggest banks to collapse in American history. However, the bankruptcy of the famous Wall Street bank Lehman Brothers in September, which was the biggest in American history, became a symbol of the destruction brought on by the global financial crisis for many.The major American indices experienced some of their greatest losses ever during that same month when the financial markets were in free collapse. To stem the bleeding and regain economic confidence, the Fed, the Treasury Department, the White House, and Congress tried to come up with a comprehensive plan.

A large government purchase of “toxic assets,” a major investment in bank stock, and financial lifelines for Fannie Mae and Freddie Mac were just a few of the many measures contained in the package. The sum of money that the government has spent under the Troubled Asset Relief Program (TARP). After selling the assets it acquired during the crisis at a profit, it was able to recover $442.6 billion. Widespread public outrage was present. It seemed as though the reckless economic collapse caused by bankers was being rewarded. But it helped to restart the economy. It should be highlighted as well that the government fully recovered its investments in the banks together with interest. The stock markets were stabilized when the bailout plan was approved, and after they reached their lowest point in March 2009, they started the longest bull market in history. Even so, there was great human misery and economic loss. The 10% unemployment rate, foreclosures resulted in the loss of houses for about 3.8 million Americans.

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