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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.
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:
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.
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:
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.
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.
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.
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.
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.
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.
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:
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.
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.
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