2007–2008 financial crisis
Worldwide economic crisis / From Wikipedia, the free encyclopedia
Dear Wikiwand AI, let's keep it short by simply answering these key questions:
Can you list the top facts and stats about 2008 global financial crisis?
Summarize this article for a 10 year old
The 2007–2008 financial crisis, or Global Economic Crisis (GEC), was the most severe worldwide economic crisis since the Great Depression. Predatory lending in the form of subprime mortgages targeting low-income homebuyers,[1] excessive risk-taking by global financial institutions,[2] a continuous buildup of toxic assets within banks, and the bursting of the United States housing bubble culminated in a "perfect storm", which led to the Great Recession.
Mortgage-backed securities (MBS) tied to American real estate, as well as a vast web of derivatives linked to those MBS, collapsed in value. Financial institutions worldwide suffered severe damage,[3] reaching a climax with the bankruptcy of Lehman Brothers on September 15, 2008, and a subsequent international banking crisis.[4]
The preconditioning for the financial crisis was complex and multi-causal.[5][6][7] Almost two decades prior, the U.S. Congress had passed legislation encouraging financing for affordable housing.[8] However, in 1999, parts of the Glass-Steagall legislation, which had been adopted in 1933, were repealed, permitting financial institutions to commingle their commercial (risk-averse) and proprietary trading (risk-taking) operations.[9] Arguably the largest contributor to the conditions necessary for financial collapse was the rapid development in predatory financial products which targeted low-income, low-information homebuyers who largely belonged to racial minorities.[10] This market development went unattended by regulators and thus caught the U.S. government by surprise.[11]
After the onset of the crisis, governments deployed massive bail-outs of financial institutions and other palliative monetary and fiscal policies to prevent a collapse of the global financial system.[12] In the U.S., the October 3, $800 billion Emergency Economic Stabilization Act of 2008 failed to slow the economic free-fall, but the similarly-sized American Recovery and Reinvestment Act of 2009, which included a substantial payroll tax credit, saw economic indicators reverse and stabilize less than a month after its February 17 enactment.[13] The crisis sparked the Great Recession which resulted in increases in unemployment[14] and suicide,[15] and decreases in institutional trust[16] and fertility,[17] among other metrics. The recession was a significant precondition for the European debt crisis.
In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the US as a response to the crisis to "promote the financial stability of the United States".[18] The Basel III capital and liquidity standards were also adopted by countries around the world.[19][20]
The crisis sparked the Great Recession, which, at the time, was the most severe global recession since the Great Depression.[22][23][24][25][26] It was also followed by the European debt crisis, which began with a deficit in Greece in late 2009, and the 2008–2011 Icelandic financial crisis, which involved the bank failure of all three of the major banks in Iceland and, relative to the size of its economy, was the largest economic collapse suffered by any country in history.[27] It was among the five worst financial crises the world had experienced and led to a loss of more than $2 trillion from the global economy.[28][29] U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 (~$14.1 trillion in 2023) trillion.[30] The increase in cash out refinancings, as home values rose, fueled an increase in consumption that could no longer be sustained when home prices declined.[31][32][33] Many financial institutions owned investments whose value was based on home mortgages such as mortgage-backed securities, or credit derivatives used to insure them against failure, which declined in value significantly.[34][35][36] The International Monetary Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009.[37]
Lack of investor confidence in bank solvency and declines in credit availability led to plummeting stock and commodity prices in late 2008 and early 2009.[38] The crisis rapidly spread into a global economic shock, resulting in several bank failures.[39] Economies worldwide slowed during this period since credit tightened and international trade declined.[40] Housing markets suffered and unemployment soared, resulting in evictions and foreclosures. Several businesses failed.[41][42] From its peak in the second quarter of 2007 at $61.4 trillion, household wealth in the United States fell $11 trillion, to $50.4 trillion by the end of the first quarter of 2009, resulting in a decline in consumption, then a decline in business investment.[43][44] In the fourth quarter of 2008, the quarter-over-quarter decline in real GDP in the U.S. was 8.4%.[45] The U.S. unemployment rate peaked at 11.0% in October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours per work week declined to 33, the lowest level since the government began collecting the data in 1964.[46][47]
The economic crisis started in the U.S. but spread to the rest of the world.[41] U.S. consumption accounted for more than a third of the growth in global consumption between 2000 and 2007 and the rest of the world depended on the U.S. consumer as a source of demand.[citation needed][48][49] Toxic securities were owned by corporate and institutional investors globally. Derivatives such as credit default swaps also increased the linkage between large financial institutions. The de-leveraging of financial institutions, as assets were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated the solvency crisis and caused a decrease in international trade. Reductions in the growth rates of developing countries were due to falls in trade, commodity prices, investment and remittances sent from migrant workers (example: Armenia[50]). States with fragile political systems feared that investors from Western states would withdraw their money because of the crisis.[51]
As part of national fiscal policy response to the Great Recession, governments and central banks, including the Federal Reserve, the European Central Bank and the Bank of England, provided then-unprecedented trillions of dollars in bailouts and stimulus, including expansive fiscal policy and monetary policy to offset the decline in consumption and lending capacity, avoid a further collapse, encourage lending, restore faith in the integral commercial paper markets, avoid the risk of a deflationary spiral, and provide banks with enough funds to allow customers to make withdrawals. [52] In effect, the central banks went from being the "lender of last resort" to the "lender of only resort" for a significant portion of the economy. In some cases the Fed was considered the "buyer of last resort".[53][54][55][56][57] During the fourth quarter of 2008, these central banks purchased US$2.5 (~$3.35 trillion in 2023) trillion of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action in world history. Following a model initiated by the 2008 United Kingdom bank rescue package,[58][59] the governments of European nations and the United States guaranteed the debt issued by their banks and raised the capital of their national banking systems, ultimately purchasing $1.5 trillion newly issued preferred stock in major banks.[44] The Federal Reserve created then-significant amounts of new currency as a method to combat the liquidity trap.[60]
Bailouts came in the form of trillions of dollars of loans, asset purchases, guarantees, and direct spending.[61] Significant controversy accompanied the bailouts, such as in the case of the AIG bonus payments controversy, leading to the development of a variety of "decision making frameworks", to help balance competing policy interests during times of financial crisis.[62] Alistair Darling, the U.K.'s Chancellor of the Exchequer at the time of the crisis, stated in 2018 that Britain came within hours of "a breakdown of law and order" the day that Royal Bank of Scotland was bailed-out.[63] Instead of financing more domestic loans, some banks instead spent some of the stimulus money in more profitable areas such as investing in emerging markets and foreign currencies.[64]
In July 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the United States to "promote the financial stability of the United States".[65] The Basel III capital and liquidity standards were adopted worldwide.[66] Since the 2008 financial crisis, consumer regulators in America have more closely supervised sellers of credit cards and home mortgages in order to deter anticompetitive practices that led to the crisis.[67]: 1311
At least two major reports on the causes of the crisis were produced by the U.S. Congress: the Financial Crisis Inquiry Commission report, released January 2011, and a report by the United States Senate Homeland Security Permanent Subcommittee on Investigations entitled Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, released April 2011.
In total, 47 bankers served jail time as a result of the crisis, over half of which were from Iceland, where the crisis was the most severe and led to the collapse of all three major Icelandic banks.[68] In April 2012, Geir Haarde of Iceland became the only politician to be convicted as a result of the crisis.[69][70] Only one banker in the United States served jail time as a result of the crisis, Kareem Serageldin, a banker at Credit Suisse who was sentenced to 30 months in jail and returned $24.6 million in compensation for manipulating bond prices to hide $1 billion of losses.[71][68] No individuals in the United Kingdom were convicted as a result of the crisis.[72][73] Goldman Sachs paid $550 million to settle fraud charges after allegedly anticipating the crisis and selling toxic investments to its clients.[74]
With fewer resources to risk in creative destruction, the number of patent applications was flat, compared to exponential increases in patent application in prior years.[75]
Typical American families did not fare well, nor did the "wealthy-but-not-wealthiest" families just beneath the pyramid's top.[76][77][78] However, half of the poorest families in the United States did not have wealth declines at all during the crisis because they generally did not own financial investments whose value can fluctuate. The Federal Reserve surveyed 4,000 households between 2007 and 2009, and found that the total wealth of 63% of all Americans declined in that period and 77% of the richest families had a decrease in total wealth, while only 50% of those on the bottom of the pyramid suffered a decrease.[79][80][81]