2008 Financial Crisis

10 Key excerpts on "2008 Financial Crisis"

• 

  eBook - PDF

  A Crisis of Beliefs

  Investor Psychology and Financial Fragility

  • Nicola Gennaioli, Andrei Shleifer(Authors)
  • 2018(Publication Date)
  • Princeton University Press

    (Publisher)

  21 T he financial crisis of 2008 is one of the most dramatic eco-nomic events in modern U.S. history. It featured an effective meltdown of the U.S. financial system, massive government rescues of financial institutions, and a deep and long-lasting recession. Although a decade later the U.S. economy has recovered almost com-pletely, the crisis has left behind fundamental questions about the fragility of the financial system and its impact on the real economy. In this chap-ter, we present the basic narrative of the origins of the financial crisis, the crisis itself, and its immediate aftermath. We begin with the 2008 crisis for two reasons. First, despite being dra-matic, this crisis is actually fairly typical, sharing the essential features of many others. It grew out of a bubble in the housing market, which was to a large extent financed with mortgage debt. The growth of mort-gages led to a huge expansion of household leverage, but also leverage of banks and other financial institutions that were exposed to housing. The crisis was most directly caused by the deflation of the housing bubble beginning in 2006, leading to mortgage defaults, collapses in values of bank assets, losses of financial institutions, and ultimately fire-sale liqui-dations and massive distress. C H A P T E R 1 The Financial Crisis of 2008 A C R I S I S O F B E L I E F S 22 The second reason to look closely is that, because the crisis is so recent, and so heavily investigated and discussed by academics, journalists, and policymakers, we know a great deal about what various participants were thinking in real time as the events unfolded.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Capital Market Instruments

  Analysis and Valuation

  • M. Choudhry, D. Joannas, G. Landuyt, R. Pereira, R. Pienaar(Authors)
  • 2009(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The 2007–8 financial crisis, which precipitated a global recession, will be remem- bered as a milestone event in economic history. Although a proper study of it would belong in a textbook on economics or economic history, no standard text- book on finance can ignore it. Students and practitioners alike will need to famil- iarise themselves with the causes of the crisis, and its impact, which were widespread and carried on to 2009. The final chapter of this book considers the origins of the crisis and its impact across the financial markets. It concludes with policy recommendations for banks and regulators. 489 PART VII The 2007–9 Financial Market Crisis 491 Weakness has been contained to certain portions of the sub-prime market (and to a lesser extent, the Alt-A market), and is not likely to pose a serious systemic threat. Stress tests conducted by investment banks show that, even under sce- narios of nationwide house price declines that are historically unprecedented, most investors with exposure to sub-prime mortgages through securitized struc- tures will not face losses. 1 This was the assessment of the IMF in their quarterly report of April 2007. Only three months later one of the deepest crises since the Great Depression of the 1930s broke out. The IMF quote was characteristic for its time. Many people con- tinued to believe that we were living in a new era where unlimited credit supply was possible without creating excesses. However the ‘this-time-it-is-different’ view appeared not to be so different. Mainstream economists either did not acknowl- edge the build up of the asset price bubble or underestimated its impact. In this chapter we lay out the main causes of the ‘Great Credit Crisis’ of 2007–8. This is not as easy as it sounds. To blame only the US sub-prime mortgage market for this turmoil would be inaccurate and intellectually unsound. The Credit Crunch was the result of imbalances and excesses that had been built up over more than two decades.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Road to Recovery

  Singapore's Journey through the Global Crisis

  • Sanchita Basu Das(Author)
  • 2010(Publication Date)
  • ISEAS Publishing

    (Publisher)

  2 Global Financial and Economic Crisis: Causes, Impact, and Policy Response The global financial turmoil surfaced in the middle of 2007 as a result of defaults of sub-prime mortgage loans in the United States. It was blown into an unprecedented financial crisis in 2008 when a series of major financial institutions in the United States and Europe started to fail. Around the world stock markets fell, financial institutions were bought out, and massive coordinated actions by the authorities were taken to inject liquidity into money markets and restore confidence in the financial systems. Strong calls were made at the Group of Twenty (G-20) 1 level for a new financial system to prevent future financial crises and to maintain global financial stability. As the U.S. sub-prime mortgage crisis spread to the rest of the U.S. financial system and other industrialized-country financial markets, a significant slowdown was observed in economic growth of the U.S., Europe, and Japan. The financial sector crisis subsequently moved to the real economy. Although Asian financial institutionsʼ exposure to sub-prime-related products was limited, the impact was felt through capital flow and trade channels. Global Financial and Economic Crisis 17 Accordingly, the IMF in its World Economic Outlook (WEO) Update publication (January 2010) placed global growth at 3.0 per cent in 2008 and a contraction of –0.8 per cent in 2009. This represented a significant slide from an economic growth of 5.0 per cent observed in 2006–7. The advanced economies were in or close to recession in the second half of 2008 and early 2009, and showed some signs of recovery later in 2009. Growth in most emerging and developing economies was below trend, although key emerging economies in Asia, like China and India, showed higher resiliency. Genesis of the Global Financial Crisis The global financial crisis was triggered in August 2007 when the U.S. sub-prime loan defaults began to rise and foreclosures increased.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Developed Nations and the Economic Impact of Globalization

  • Ken Moak(Author)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  167 The US-originated 2008 Financial Crisis pushed the global economy, particularly those in the West and Japan, into the “Great Recession,” an economic and financial crisis not seen since the 1930s’ Great Depression. In the 2008/2009 period, all major developed economies registered negative growth rates, ranging from −0.5 in the EU to −0.7%. 1 Since then, average annual growth rates in the developed economies have barely surged above 2%. 2 The developed countries’ weak economies reduced global economy to less than 3% since 2008. 3 China’s econ- omy, growing at nearly 10% annually before the crisis, dropped to 6.5% in 2008. 4 Because it affected the global economy, the financial crisis revealed the extent of world economic and financial connectivity. HOW DID THE FINANCIAL CRISIS HAPPEN? There are a number of theories regarding why the 2008 Financial Crisis occurred: US Federal Reserve’s low interest rate policy, excessive saving in Asia, over-leveraging or reckless financial management behavior, and unsustainable fiscal and monetary policies in the West are the most cited. 5 The majority of analysts point to reckless financial management, creat- ing excessive liquidity through over-leveraging of financial and physical assets as the most important cause of the crisis. Whatever the causes, the financial crisis doomed Lehman Brothers in September 2008, sending shockwaves through the global financial system, particularly that of the West. 6 Banks, governments, and consumers in the West found themselves CHAPTER 8 The 2008 Global Financial Crisis: Effects on the Global Economy © The Author(s) 2017 K. Moak, Developed Nations and the Economic Impact of Globalization, DOI 10.1007/978-3-319-57903-0_8 168 K. MOAK buried under a mountain of debts, culminating in a prolonged period of weak aggregate demand. Accounting for over 85% of the economy, it would be difficult for the developed countries to increase GDP growth without appreciable rises in domestic consumption.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Competition Law in Crisis

  The Antitrust Response to Economic Shocks

  • Bruce Wardhaugh(Author)
  • 2022(Publication Date)
  • Cambridge University Press

    (Publisher)

  4 The Financial Crisis of 2008 4.1 introduction While 24 October 1929 – the day that the Dow Jones lost 11 per cent – might serve as a convenient (but inaccurate) point to mark the beginning of the Great Depression, there is no similar date which could serve as a starting point for the financial crisis of 2008. Searching for a definitive date would be futile, as the crisis was an evolving problem, marked by three stages. 1 Stage one consists of the regime which permitted the crisis to occur: this is the shift towards the securitisation model of mortgage financing and the corresponding easing of credit standards. This ended some time during the late summer of 2007. Stage two, from (approximately) August 2007 to September 2008, was a period in which individual institutions found themselves facing problems with liquidity and with the resulting access to financing. At this point, the view was that the problems were isolated and confined to particularly exposed institutions, i.e. there was no systematic threat or risk. The final stage began in mid-September 2008 (here the bankruptcy of Lehman Brothers could be used as an appropriate starting point), when both the scope of the crisis and the threat it posed to the financial system became apparent. The consequences of the 2008 Financial Crisis were profound, both for the financial industry and for those operating in the real economy. In the USA and the UK this crisis led to the deepest recessions since the end of World War II. Unemployment rose to levels almost unseen since the 1930s. By 3 October 2008, American authorities had underwritten a $700 billion bank rescue and some months later a $787 billion fiscal stimulus package.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Financial Globalization

  Growth, Integration, Innovation and Crisis

  • D. Das(Author)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  3 Global Financial Crisis: The Great Recession and the Approaching Recovery 1. Onset of the global financial crisis and recession This book was written over the 2007–10 period, when the present global financial crisis precipitated. This chapter focuses on essential facets of the crisis. In particular its causal factors and how it was sparked in the US and UK and then spread globally. It also delves into the fact that while apprehension of a second Great Depression persisted, it was averted by swift policy action. Although financial deglobalization did occur, signs of a moderate recovery – albeit uneven – became evident in the latter half of 2009. The global financial crisis of 2007–09 will go down in the history indubitably as the foremost economic and financial cataclysm of the twenty-first century, a seismic economic and financial event. It also acquired the dubious distinction of being the gravest crisis since the Great Depression, adversely affecting both the financial and real sec- tors of the global economy. The banking and financial system in the advanced industrial economies, which was at the epicenter of this cri- sis, was driven close to collapse. Soon this had dismal consequences for the global economy. Crises of this dimension transpire once or twice in a century. The contemporary phase of financial globalization was pro- gressing at a commendable pace until the crisis interrupted. According to the McKinsey Global Institute (MGI, 2009a), financial assets in the international markets, which included equities, private and public debt and bank deposits, had increased almost fourfold during the 1980–2007 period. The crisis brusquely stopped three decades of expansion in the international financial markets. Although multiple short- and long-term factors were responsible for the financial crisis (Section 2), it was sparked by the bursting of the 126 Global Financial Crisis 127 housing bubble in the UK and US in the fall of 2007.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Europe's Promise

  Why the European Way Is the Best Hope in an Insecure Age

  • Steven Hill(Author)
  • 2010(Publication Date)
  • University of California Press

    (Publisher)

  107 The economic crash that began in the fall of 2008 stunned the world with its velocity and scope. Like a tsunami that arose seemingly with-out warning — though actually there had been ample alarm bells, but few had listened — it flooded everything in its path. Countries whose prospects had been bright less than a year before suddenly were deluged with bank failures, financial collapse, and ruin. The speedy economic contraction resulted in millions of jobs lost, factories closed, businesses shuttered, exports sitting on the docks, and homes repossessed. It saw the vanishing of more than a trillion dollars in stock market wealth in a single day, with more losses to follow. Worldwide economic activity slowed and seized to a degree that none of the experts had thought pos-sible. The economic pandemic spread from the United States to Europe, China, Japan, Brazil, India, Russia, Korea, Australia, Saudi Arabia, Iran, Pakistan — none were immune from its ravages. Besides the obvi-ous human suffering and government hand-wringing, economic theory SIX THE ECONOMIC CRASH OF 2008 – 9 Wall Street Capitalism vs. Social Capitalism The engine of that growth, the American economy, has gone off the rails and threatens to drag the rest of the world down with it. Worse, the culprit is the American model itself: under the mantra of less government, Washington failed to adequately regulate the financial sector and allowed it to do tremendous harm to the rest of the society. Francis Fukuyama, author, The End of History and the Last Man 108 / SOCIAL CAPITALIST EUROPE itself lay in tatters. The crisis demanded the rewriting of the economics textbooks, because nearly all the experts had been so wrong. What was especially revealing about the crisis was the different ways that the United States and Europe, by far the world’s two leading economies, coped with it.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  History and Financial Crisis

  Lessons from the 20th century

  • Christopher Kobrak, Mira Wilkins(Authors)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  1 We feel that the papers assembled here add new and cogent insights to the recent flood of literature, much of which draws on history, sadly sometimes by rejecting any historical parallels or in some cases by relying on just one narrowly defined precedent. We are convinced that policy makers, business practitioners, regulators, and academics still have much more to learn from history and hope that this special issue will serve to broaden our knowledge and understanding of how our financial world resembles and is distinct from past periods.

  Indeed, without more historical distance and insight, merely labelling the ‘financial crisis’ that stimulated the recent surge of literature entails certain judgements about its nature that we probably cannot now hope to know. Should we call this the ‘2008 Crisis’, as we have in the title, implying that it was a mere short-term banking crisis lasting a year, or the ‘recent crisis’, implying that it is finished, or the ‘current crisis’, implying that we are still in it? Historical analysis reminds us that those living through events rarely have sufficient perspective to judge the historical import and duration of what they are experiencing. They simply lack sufficient clairvoyance to know what is going to follow and are often swept up by the ‘spirit’ of the times.

  ‘Our crisis’ – to use a much less charged term – was probably born in early 2008 out of the earlier bursting of a property bubble, which had been nurtured by fragile financial devices.2 At the time of this writing (September 2010), we have already witnessed capital market calamities, heightened perception of counterparty risk, a nearly worldwide downturn in production and higher unemployment, and widespread government efforts to bolster liquidity and confidence. Despite many calming signs, the recovery has been marked by a great deal of uncertainty, a strong sense of not knowing whether the hopeful indicators signal the beginning of the end or the eye of the hurricane. But in many popular accounts, there are no shortages of historical parallels between this crisis and others, many of which encourage only a bleak outlook. Extreme rhetoric, such as ‘the worst crisis since the Great Depression’ or, as one author put it in his title, ‘the failure of capitalism and the descent into depression’, is frequently heard without much regard for how and why the causes, cures, dimensions, and timing of other crises might resemble or differ from this one, or, for that matter, how some crises of the second half of the twentieth century witnessed deeper downturns and higher unemployment levels, at least in the United States, than this one (see Posner, 2009 ).3 While some pundits claim that this crisis has no precedent, others see it as repeat of (or preface to) what occurred in 1929–33, comparable to the ‘crisis of 1933’ or to the entire 1930s, and, accordingly, must be met with precisely the measures central banks and governments failed to apply then. In any case, a lot of the prescriptions for remedies to the current situation use historical analogy or conversely historical exceptionalism based on classifications of and extrapolations

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Globalization and Growth - Implications for a Post-Crisis World

  Commission on Growth and Development

  • Michael Spence, Danny Leipziger(Authors)
  • 2010(Publication Date)
  • World Bank

    (Publisher)

  PART 1 The Global Financial Crisis: Causes, Mitigation, and Reform Acemoglu 37 CHAPTER 2 The Crisis of 2008: Structural Lessons for and from Economics Daron Acemoglu This chapter was initially published as a paper in CEPR Policy Insight, No. 28 (January 2009). See www.cepr.org/pubs/PolicyInsights/PolicyInsight28.pdf. The author would like to thank David Autor, Ricardo Caballero, Simon Johnson, Bengt Holmstrom, and James Poterba for comments. We do not yet know whether the global financial and economic crisis of 2008 will go down in history as a momentous or even a uniquely catastrophic event. Unwritten history is full of long-forgotten events that contemporaries thought were epochal. On the other side of the scale, many persons in the early stages of the Great Depression belittled its import. Although it is too soon to tell how the second half of 2008 will feature in history books, there should be no doubt that it signifies a critical opportunity for the discipline of economics. It is an opportunity for us—and here I mean the majority of the economics profession, myself included—to be disabused of certain notions that we should not have accepted so readily in the first place. It is also an opportunity for us to step back and consider what are the most important lessons we have learned from our theoretical and empirical investigations—that remain untarnished by recent events—and to ask whether they can provide us with guidance in current policy debates. This chapter presents my views on what intellectual errors we have made and what lessons these errors offer us moving forward. My main objective, 38 The Crisis of 2008: Structural Lessons for and from Economics however, is not to dwell on the intellectual currents of the past, but to stress that economic theory still has a lot to teach economists and policy makers as we make our way through the crisis.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Two Asias: The Emerging Postcrisis Divide

  The Emerging Postcrisis Divide

  • Steven Rosefielde, Masaaki Kuboniwa, Satoshi Mizobata(Authors)
  • 2011(Publication Date)
  • World Scientific

    (Publisher)

  They consider interlinkages between countries and, in particular, the impor-tance of a crisis epicenter. As a possible crisis epicenter, the United States is considered. In principle, when a country holds the epicenter’s securi-ties, it is affected by the finance channel, and a country exporting to this epicenter is hit through the trade channel. An interesting finding of these authors is that exposure to the United States has little impact on crisis inci-dence, and even the small impact may actually be positive. This result would suggest that international financial linkages are even more complex than previously envisaged. 3.5. Country Experiences United States was truly at the heart of the crisis. After the collapse of Lehman came the worst of the quarters in terms of the real economy, as real GDP fell by 6.3% in the fourth quarter of 2008. As in other countries, financial markets were under heavy stress, credit was costly, employment prospects fell, and private consumption was dragged down. In a more pos-itive vein, especially regarding the global imbalances, the US household savings rate finally started to increase, and with that the trade deficit started to shrink. However, the saving rate has again started to fall as the economy has recovered, and trade deficits are again increasing, especially vis-à-vis China. Housing prices fell, and the worsening labor market situ-ation increased problems with loan repayments. At the time of writing (January 2011), the US unemployment rate still hovers between 9 and 10%. What is particularly worrisome is the fact that the duration of unem-ployment has clearly increased in contrast to previous downturns. This suggests that long-term unemployment may become a problem. During the recession, a total of eight million jobs were lost. Similarly, the hous-ing market is still in a weak state, with no sign of improvement. In the US, policy intervention was prompt both on the part of the Federal Reserve and the Treasury.

  Sign up to read

  Learn more about book