2008 financial crisis

The 2008 financial crisis was a massive economic event that shook the entire world. While it began in the United States, its effects reached almost every corner of the globe.

The crisis was driven by a combination of risky lending and excessive speculation. Many people and banks believed that property values would always rise. This belief created a housing bubble throughout the 2000s. When the bubble finally burst, it triggered a chain reaction of financial failures. This event worsened the Great Recession, which was a global period of economic decline.

The crisis functioned through a complex web of debt and investment. Much of this involved mortgage-backed securities, or MBS. These are financial tools tied directly to U.S. real estate.

Banks also used credit derivatives to insure these investments. When homeowners began to default on their loans, the value of these securities collapsed. This led to a liquidity crisis, meaning banks lacked enough ready cash to operate. Because many global institutions held these "toxic assets," the trouble spread rapidly through international credit markets.

Several distinct stages marked the progression of the crisis. The first stage was the subprime mortgage crisis in early 2007. Subprime mortgages are high-risk loans often given to low-income homebuyers.

The second stage was a global liquidity crisis that emerged by mid-2007. During this time, central banks had to inject money into the system to keep it moving. The final stage was a massive market crash in late 2008. This period saw major banks fail and stock markets lose huge amounts of value.

History shows that changes in law and policy helped set the stage. In 1999, the U.S. government repealed parts of the 1933 Glass-Steagall Act. This allowed banks to mix low-risk commercial banking with high-risk investment banking.

Between 2000 and 2003, the Federal Reserve lowered the federal funds rate. This encouraged lenders to target racial minorities with risky loans. As interest rates rose between 2004 and 2006, the cost of mortgages went up. This caused housing demand to fall and led to many defaults. By April 2007, the lender New Century Financial had already gone bankrupt.

The significance of the crisis is visible in staggering numbers. In the U.S., unemployment rose from 5% in 2007 to a peak of 11% in October 2009.

About 8.7 million jobs were lost during this time. The Dow Jones Industrial Average fell by 53% between late 2007 and early 2009. Household wealth in the U.S. dropped by $11 trillion by the start of 2009. Globally, the crisis resulted in a loss of more than $2 trillion. In Iceland, the collapse of its three major banks was the largest economic fall relative to its size in history.

Notable events helped define the climax of the crisis in 2008. In March, the investment bank Bear Stearns was sold to JPMorgan Chase in a "fire sale."

On September 15, Lehman Brothers filed for the largest bankruptcy in U.S. history. The next day, the government had to bail out American International Group (AIG). On September 25, Washington Mutual also failed. To fight the collapse, Congress passed the Emergency Economic Stabilization Act. This created the $700 billion Troubled Asset Relief Program (TARP) to buy troubled assets.

The crisis forced a massive change in how the world manages money. Governments used unprecedented bailouts and stimulus to prevent a total collapse. In 2010, the U.S. passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. This law aimed to promote financial stability through stricter oversight.

Many countries also adopted the Basel III standards for capital and liquidity. These rules require banks to keep more money on hand to stay safe. These systemic changes were designed to protect the global economy from similar shocks in the future.