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Housing Boom to Financial Gloom: Dissecting the 2008 Crisis

Welcome back to the fascinating world of financial history.

If you’ve been with us so far, you’ll remember that we’ve dived into the intricate details of the Wall Street Crash of 1929 and the Energy Crisis of the 1970’s before seeking out the cause and effects of the tech bubble in the early 21st century. Today, we edge ever closer to the present day – a chapter that left cast an unimaginable shadow over the global financial landscape – the 2008 financial crisis.

Before we break down the complexities of this hugely significant event, remember that our goal is to present you with seemingly complex information in a digestible and engaging way, much like a walk through a museum of financial history, where each exhibit tells a tale of human triumphs and failures. Being financial planners we’re all about setting goals… as long as we achieve them! So, let’s get started.

What Started the 2008 Financial Crisis?

To help you understand the factors that created the perfect storm – the 2008 financial crisis – we will look over a number of economic areas, starting with:

The Housing Bubble

Our story begins in the United States, with a significant boom in the housing market. For a while, everything seemed perfect. House prices were rising, and people were making a lot of money. But as we’ve seen in other bubbles, the situation was too good to last. Rising house prices led to increased borrowing, fuelling a dangerous cycle of debt.

Financial Mis-innovation

While housing bubbles have occurred before, what made this one lethal was the financial innovation accompanying it. We are talking about something known as mortgage-backed securities (MBS). Banks bundled risky mortgages and sold them as safe investments. When the bubble burst, these securities lost their value, leaving investors in a lurch.

Excessive Leverage

When the sun is shining, it’s easy to forget about the rain. Banks, hedge funds, and other financial institutions had borrowed extensively to invest in these ‘seemingly safe’ mortgage-backed securities. But when the bubble burst, they found themselves unable to pay back their debts.

Regulatory Failures

Like a city without its guardians, the financial system lacked effective oversight. Regulatory failures allowed banks to take on excessive risks without sufficient safeguards in place.

Looking at these factors, we begin to paint a picture of the complex web that wove the 2008 financial crisis. However, to fully understand this event, we need to look deeper into the timeline of events that made headlines around the world.

The Timeline of the Financial Crisis 2008: A Chronology of Catastrophe

To get a true understanding of what caused the 2008 financial crisis you have to piece together, in chronological order, some major key causes. Luckily, we’ve done it already:

2000 - 2006:

The American housing market was booming. Many banks, such as Lehman Brothers and Bear Stearns, were heavily involved in mortgage lending, packaging these mortgages into complex financial instruments called mortgage-backed securities (MBS).


The bubble bursts. The housing market started to fall, leading to defaults on mortgages. This left many banks with worthless MBS and a severe lack of liquidity.


What started the 2008 financial crisis was the collapse of Lehman Brothers in September, which echoed around the world, triggering a global banking crisis. The subsequent bailout of banks by governments worldwide was unprecedented.

Domino Effect: Neoliberal Policies and the Crisis

So, how really did the 2008 financial crisis happen? Something worth noting is the policies of neoliberalism that were growing during this period. Neoliberal policies, campaigning for deregulation and privatisation, played a pivotal role in leading to the 2008 financial crisis.

Deregulation made it easier for banks to lend and for customers to borrow. It encouraged risky financial innovations, like subprime lending and the aforementioned mortgage-backed securities. This environment allowed the housing bubble to inflate and burst spectacularly.

When the bubble burst, the impact was not limited to the US. Banks worldwide were caught in the chaos, showing that this was indeed a 2008 global financial crisis. From Iceland’s banking system collapsing to the sovereign debt crisis in Europe, the financial crisis of 2008 had far-reaching effects.

Next, we’ll explore who were the ‘bad guys’ of this tale, which banks caused the 2008 financial crisis, and the consequences they faced.

Unmasking the Villains: Banks and Individuals Responsible

To answer the question – which banks caused the 2008 financial crisis? – we must look at the big players who gambled heavily on the housing market.

Lehman Brothers, a 158-year-old bank, crumbled under the weight of its risky investments. It had become too deeply involved in subprime and prime mortgages, and when the housing bubble burst, Lehman Brothers fell too.

Bear Stearns, another significant player, was the first to fall in March 2008. It had similarly engaged in risky lending practices and was heavily invested in the doomed subprime market. When Bear Stearns collapsed, it was a clear signal that the financial system was in deep trouble.

Many other financial institutions – Merrill Lynch, AIG, Freddie Mac and Fannie Mae – were also implicated. They all had deep ties to the subprime market and suffered huge losses when it collapsed. Their collective failure led to what was the financial crisis in 2008.

Individuals also played a part in the crisis. Notably, few of them faced severe consequences, which leads to the question – who went to jail for the 2008 financial crisis? The answer is disheartening: very few. Despite causing a crisis that led to millions losing their jobs and homes, most of the key players avoided significant legal repercussions.

Impact and Aftermath: The Global Ramifications

The question ‘What happened in the 2008 financial crisis?’ begs a global perspective. The crisis was not confined to the US. As with all of the events we have looked into thus far, it sent ripples around the world.

Europe felt the tremors as many European banks had invested heavily in the American housing market. As these investments soured, the banks found themselves in a crisis, leading to bailouts in several countries and culminating in a sovereign debt crisis for countries such as Greece and Ireland.

Emerging markets were not spared either. The tightening of global credit affected countries like Brazil and India, slowing their growth. Even China, with its insular financial system, experienced a slowdown due to reduced global demand for its exports.

Regulating the Aftermath: A Look at the Solutions

Following the financial calamity, the question on everyone’s lips was – how was the 2008 financial crisis solved? The response was swift, as governments across the globe rushed to stabilise their financial systems.

Firstly, central banks, like the Federal Reserve in the US and the Bank of England, slashed interest rates to near-zero levels to encourage lending and inject life back into the economy.

Next, governments worldwide embarked on a massive campaign of bank bailouts. The US government alone committed over $700 billion to rescue its banking system under the Troubled Asset Relief Program (TARP). While controversial, these bailouts were seen as necessary to avoid a complete collapse of the financial system.

Regulatory reforms were another key solution to the 2008 financial crisis. In the US, this came in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which increased oversight on financial institutions to prevent excessive risk-taking.

What Lessons Have We Learnt?

The 2008 financial crisis was yet another stark reminder of the potential destruction in the world of finance. However, like all of the crises we have explored, it served as a fertile ground for learning. Let’s look at five crucial lessons that we can take away:

Understand the Risk

The financial crisis underscored the importance of understanding the risks associated with investments. Complex financial products, like mortgage-backed securities, can carry hidden risks that can lead to significant losses. As individuals, you must always take the time to understand these risks before investing!

Don't Over-leverage

One of the key factors that led to the financial crisis was the excessive debt taken on by banks and households. Over-leveraging can make you vulnerable to economic downturns. It is critical to manage debt responsibly and within your own personalised means.

The Importance of Diversification

Yes, it’s back again! The financial crisis demonstrated the dangers of putting all your eggs in one basket. We don’t have to say it but we will… Diversification across different asset classes will help protect against significant losses in any one area.

Regulatory Oversight Matters

Regulatory failures played a significant role in the financial crisis. For policymakers, the crisis underscored the importance of effective regulation and oversight of financial institutions.

Global Interconnectedness

The global spread of the 2008 financial crisis highlighted how interconnected the world’s economies have become. For investors, this serves as a reminder that global events can impact local markets and vice versa.

Looking Ahead - Could the 2008 Financial Crisis Happen Again?

When we contemplate how bad the 2008 financial crisis was, it’s only natural to worry about the possibility of history repeating itself. Since the crisis, various measures have been implemented to safeguard against a similar event. But the question that lingers is – could the 2008 financial crisis happen again?

Post-crisis, regulators around the world tightened their reins. Stricter regulations were put into place to avoid excessive risk-taking. Banks were required to have more capital on hand to absorb potential losses. Stress tests became a regular part of the regulatory landscape to ensure banks could withstand economic downturns.

Moreover, a greater emphasis on transparency in the financial markets emerged. This was to avoid the sort of confusion and uncertainty that exacerbated the crisis in 2008. Financial products were suddenly being scrutinised much more closely, and risky practices such as subprime lending were curbed significantly.

Despite these measures, we can never rule out the possibility of another crisis. The financial world is complex and ever-evolving, and new risks can always arise. However, the lessons learned from the 2008 crisis have certainly made the financial system more resilient.

For you, as an individual, understanding these mechanisms and lessons is crucial. Being financially literate, diversifying your investments, and not taking on excessive debt can protect you from potential financial shocks.

Remember, our goal is to provide you with all of the tools through relevant information which gives you the best chance of reaching your financial goals. But the goal is not just to survive, but to thrive even in the face of financial adversity.

Click here if you have any questions or would like to find out more about how we can work with you to enhance various areas of your financial planning.

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