global financial crisis (2007–2008)

global financial crisis (2007–2008)
Name	global financial crisis (2007–2008)
Date	2007–2008
Causes	Subprime mortgage collapse; securitization; leverage; shadow banking
Locations	United States; United Kingdom; Europe; Iceland; Asia
Outcome	Bank failures; bailouts; regulatory reform; Great Recession

global financial crisis (2007–2008) The global financial crisis (2007–2008) was a severe worldwide disruption originating in the United States mortgage market that precipitated failures at major financial institutions, sharp contractions in credit, and a deep recession across multiple regions including European Union member states and Japan. It intertwined complex instruments such as mortgage-backed securitys and credit default swaps with high leverage at firms like Lehman Brothers, Bear Stearns, and AIG, prompting coordinated interventions by actors including the Federal Reserve System, HM Treasury, and the European Central Bank.

Background and causes

The crisis traced to housing booms and busts in the United States, driven by lax underwriting, rising subprime mortgage originations, and the expansion of securitization through collateralized debt obligations and mortgage-backed securitys sold by firms such as Goldman Sachs, Morgan Stanley, Citigroup, and Bank of America. Regulatory gaps in the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Securities and Exchange Commission intersected with growth in the shadow banking sector—including investment banks, money market funds, and hedge funds—while credit-rating agencies like Standard & Poor's, Moody's Investors Service, and Fitch Ratings assigned high ratings to complex tranches. Global imbalances involving the People's Republic of China, Germany, and Petroleum Exporting Countries fueled capital flows into United States Treasurys and mortgage-backed security markets, compressing yields and encouraging leverage at institutions such as Icelandic banks and Royal Bank of Scotland.

Timeline of major events

From 2007, the collapse of mortgage originations and the failure of New Century Financial signaled distress, followed by the 2008 collapse of Bear Stearns and emergency acquisition by JPMorgan Chase. The crisis peaked with the bankruptcy of Lehman Brothers in September 2008, the federal takeover of Fannie Mae and Freddie Mac, and the near-failure of American International Group requiring a bailout coordinated by the United States Department of the Treasury and the Federal Reserve System. European pressures mounted with bank rescues for HBOS, Banco Santander, and Hypo Real Estate, and sovereign strains emerged in Greece, Ireland, and Iceland. Global markets reacted through panic selling on exchanges such as the New York Stock Exchange and the London Stock Exchange, prompting international summits at the G20 and interventions by central banks including the Bank of England and the People's Bank of China.

Key actors and instruments

Major private actors included Lehman Brothers, Bear Stearns, AIG, Goldman Sachs, Morgan Stanley, Citigroup, JPMorgan Chase, and Deutsche Bank; sovereign and multilateral actors included the Federal Reserve System, U.S. Department of the Treasury, European Central Bank, International Monetary Fund, and Bank for International Settlements. Prominent instruments and markets were subprime mortgages, mortgage-backed securitys, collateralized debt obligations, credit default swaps, repo markets, and commercial paper funding. Regulatory entities such as the Securities and Exchange Commission, Office of Thrift Supervision, and national finance ministries confronted systemic risk as contagion spread through interbank lending and short-term funding lines.

Policy responses and interventions

Authorities employed monetary policy shocks and fiscal measures: the Federal Reserve System implemented emergency lending facilities and lowered the federal funds rate, while the U.S. Treasury Department enacted the Troubled Asset Relief Program and infused capital into banks including Bank of America and Wells Fargo. The Bank of England and European Central Bank provided liquidity to sterling and euro markets; the International Monetary Fund offered programs to countries such as Iceland and Greece. Legislative responses included reforms debated in the United States Congress culminating in the Dodd–Frank Wall Street Reform and Consumer Protection Act and bank stress tests overseen by the Federal Reserve Board. Central bank coordination occurred at G7 and G20 meetings and through institutions like the Bank for International Settlements.

Economic and social impacts

The shock triggered the Great Recession with severe contractions in United States output, rising unemployment, and prolonged weakness in housing markets that affected homeowners and investors tied to entities like Countrywide Financial. European sovereign debt crises strained Eurozone cohesion and precipitated austerity politics in countries including Greece and Spain. Social consequences included foreclosures, declines in household wealth, and political backlash that influenced movements such as Occupy Wall Street and electoral changes in national governments like those in the United Kingdom and the United States. Global trade slowed, affecting exporters such as Germany and China, while commodity prices and capital flows experienced volatility impacting producers in Brazil and Russia.

Investigations, litigation, and reforms

Post-crisis investigations involved the Financial Crisis Inquiry Commission, inquiries by the U.S. Senate Committee on Banking, Housing, and Urban Affairs, and probes in the United Kingdom and EU institutions. Litigation targeted banks including Goldman Sachs and Citigroup over disclosure and securitization practices, while settlements involved the U.S. Department of Justice and state attorneys general. Regulatory reforms included the creation of the Consumer Financial Protection Bureau, enhanced capital and liquidity standards through Basel III under the Basel Committee on Banking Supervision, and resolution regimes such as the Orderly Liquidation Authority to limit taxpayer exposure to failing systemically important institutions like AIG.

Legacy and long-term consequences

The crisis reshaped global finance through strengthened prudential rules, revised central bank toolkits including quantitative easing by the Federal Reserve System and Bank of Japan, and persistent debates over macroprudential policy in forums like the Financial Stability Board. Political realignments and populist movements influenced policy in countries from Greece to the United States and the United Kingdom, contributing to reforms in international cooperation at the G20. Long-term effects include changes in bank business models at Deutsche Bank and UBS, elevated public debt burdens in many OECD states, and ongoing scholarly reassessment by economists such as Ben Bernanke, Paul Krugman, and Joseph Stiglitz.

Category:Financial crises