2008 financial crisis

2008 financial crisis
David Shankbone · CC BY-SA 3.0 · source
Name	2008 financial crisis
Date	2007–2009
Place	United States, United Kingdom, European Union, Iceland, Ireland, Spain, Greece
Causes	Subprime mortgage collapse; securitization; leverage; shadow banking; credit default swaps
Outcome	Global recession; regulatory reforms; bank bailouts; sovereign debt crises

2008 financial crisis was a global systemic crisis originating in the United States mortgage and credit markets that precipitated a severe international downturn and prompted extensive interventions by Federal Reserve System, Bank of England, European Central Bank, and multiple national authorities. The crisis involved failures of major investment banks, insolvencies of commercial banks, distress at insurance companies, and sovereign stress across the Eurozone, triggering policy responses from the International Monetary Fund and financial institutions worldwide.

Background and causes

The proximate causes included a collapse in subprime mortgage underwriting in the United States, expansion of mortgage-backed securities and collateralized debt obligations distributed by firms such as Lehman Brothers, Goldman Sachs, Morgan Stanley, and Bear Stearns, and credit protection via credit default swap markets centering on American International Group. High leverage at institutions like Citigroup and Bank of America amplified losses, while the growth of the shadow banking system—including investment banks, money market funds, and special purpose vehicles—reduced transparency and regulatory oversight. Housing booms in regions such as California, Florida, Nevada, Arizona, and parts of the United Kingdom and Spain were fueled by lax lending standards, adjustable-rate products, and securitization chains involving Fannie Mae and Freddie Mac. Global linkages transmitted shocks through interbank funding markets involving European Investment Bank counterparties and through complex derivatives held by Deutsche Bank, Credit Suisse, UBS, and Royal Bank of Scotland.

Timeline of key events

The crisis unfolded with early signs in 2007 when losses at New Century Financial Corporation and runs on Northern Rock signaled stress. In March 2008, collapse of Bear Stearns led to acquisition by JPMorgan Chase with intervention from the Federal Reserve Bank of New York. In September 2008, Lehman Brothers filed for bankruptcy, while American International Group received a bailout coordinated by the United States Department of the Treasury and the Federal Deposit Insurance Corporation. Simultaneously, the Troubled Asset Relief Program vote in the United States Congress followed emergency liquidity operations and facilities such as the Term Auction Facility and Term Asset-Backed Securities Loan Facility. In Europe, governments nationalized banks including Royal Bank of Scotland, Hypo Real Estate, ABN AMRO, and provided stimulus through institutions like the European Central Bank and European Financial Stability Facility. Sovereign strain emerged in Iceland with failures of Glitnir, Landsbanki, and Kaupthing and later in Greece, Ireland, and Portugal leading to rescue programs involving the International Monetary Fund and the European Commission.

Major participants and affected institutions

Key private-sector participants included Lehman Brothers, AIG, Bear Stearns, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, Citigroup, Barclays, Royal Bank of Scotland, UBS, Credit Suisse, Deutsche Bank, HSBC, Wells Fargo, Fannie Mae, and Freddie Mac. Sovereign and public actors included the United States Department of the Treasury, Federal Reserve System, European Central Bank, Bank of England, Financial Services Authority (UK), Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Securities and Exchange Commission, International Monetary Fund, European Commission, and national treasuries of United Kingdom, Germany, France, Spain, Ireland, Iceland, and Greece. Nonbank entities such as Pension Benefit Guaranty Corporation, Ambac Financial Group, MBIA, Moody's Investors Service, Standard & Poor's, and Fitch Ratings played roles through guarantees, insurance, and credit ratings.

Government and central bank responses

Authorities deployed a mix of monetary, fiscal, and regulatory tools: central banks like the Federal Reserve Bank of New York and European Central Bank cut policy rates and established emergency facilities including the Primary Dealer Credit Facility and bilateral swap lines with the Bank of Japan. Fiscal measures included stimulus packages passed by the United States Congress and national budgets in Germany and United Kingdom. Capital injections and nationalizations affected Citigroup, Royal Bank of Scotland, and AIG, while programs such as the Troubled Asset Relief Program and the Public–Private Investment Program aimed to restore asset markets. Regulatory reforms and coordinated supervisory actions involved institutions like the Financial Stability Board and the Basel Committee on Banking Supervision.

Economic and social impacts

The crisis triggered the Great Recession with contractions in United States GDP, rising unemployment across Spain, Ireland, Greece, and Italy, and sharp declines in global trade monitored by the World Trade Organization. Housing markets collapsed in the United States and United Kingdom, with foreclosures affecting households and localities such as Detroit and Las Vegas. Sovereign debt costs rose for Greece and Ireland, prompting sovereign support mechanisms including the European Financial Stability Facility and later the European Stability Mechanism. Political consequences included electoral shifts in United States, United Kingdom, and Greece, the rise of movements associated with Occupy Wall Street and protests in Athens and Dublin, and long-term effects on labor markets and public finances observed by the Organisation for Economic Co-operation and Development.

Investigations, litigation, and policy reforms

Post-crisis scrutiny produced congressional inquiries in the United States House Committee on Financial Services and United States Senate Committee on Banking, Housing, and Urban Affairs, civil litigation by state attorneys general in New York and California, and enforcement actions by the Securities and Exchange Commission. Major settlements included actions with Bank of America, Goldman Sachs, and JPMorgan Chase. Internationally, reforms culminated in the Dodd–Frank Wall Street Reform and Consumer Protection Act in the United States, Basel III capital and liquidity standards from the Basel Committee on Banking Supervision, and supervisory changes embodied in the European Banking Authority and the Financial Stability Board. Investigations by the Financial Crisis Inquiry Commission and reports from the International Monetary Fund and Federal Reserve influenced policy debates on systemic risk, macroprudential oversight, and shadow banking regulation.

Category:Financial crises Category:2008 in economics