Causes of the 2008 global economic crisis

Subprime mortgage crisis The s were the decade of subprime borrowers; no longer was this a segment left to fringe lenders.

Causes of the 2008 global economic crisis

The Financial Crisis of Written By: Presented as archival content. Unlike most articles on Britannica. Rather, they are presented on the site as archival content, intended for historical reference only.

In the world economy faced its most dangerous Crisis since the Great Depression of the s. The contagion, which began in when sky-high home prices in the United States finally turned decisively downward, spread quickly, first to the entire U. The casualties in the United States included a the entire investment banking industry, b the biggest insurance company, c the two enterprises chartered by the government to facilitate mortgage lending, d the largest mortgage lender, e the largest savings and loan, and f two of the largest commercial banks.

The carnage was not limited to the financial sector, however, as companies that normally rely on credit suffered heavily. The American auto industry, which pleaded for a federal bailout, found itself at the edge of an abyss. Still more ominously, banks, trusting no one to pay them back, simply stopped making the loans that most businesses need to regulate their cash flows and without which they cannot do business.

In December the National Bureau of Economic Research, the private group recognized as the official arbiter of such things, determined that a recession had begun in the United States in Decemberwhich made this already the third longest recession in the U. By the end of the year, Germany, Japan, and China were locked in recession, as were many smaller countries.

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Many in Europe paid the price for having dabbled in American real estate securities. Japan and China largely avoided that pitfall, but their export-oriented manufacturers suffered as recessions in their major markets—the U. Less-developed countries likewise lost markets abroad, and their foreign investment, on which they had depended for growth capital, withered.

With none of the biggest economies prospering, there was no obvious engine to pull the world out of its recession, and both government and private economists predicted a rough recovery. University students and graduates seek employment at a job fair in Shanghai on November 22, How did a crisis in the American housing market threaten to drag down the entire global economy?

It began with mortgage dealers who issued mortgages with terms unfavourable to borrowers, who were often families that did not qualify for ordinary home loans. Some included prepayment penalties that made it prohibitively expensive to refinance. These features were easy to miss for first-time home buyers, many of them unsophisticated in such matters, who were beguiled by the prospect that, no matter what their income or their ability to make a down payment, they could own a home.

Signs advertising residential property for sale line a street in south London in April Frequently they sold these loans to a bank or to Fannie Mae or Freddie Mac, two government-chartered institutions created to buy up mortgages and provide mortgage lenders with more money to lend.

Then the security would be sliced into perhaps 1, smaller pieces that would be sold to investors, often misidentified as low-risk investments. What began as insurance, however, turned quickly into speculation as financial institutions bought or sold credit default swaps on assets that they did not own.

As long as housing prices kept rising, everyone profited.

Causes of the 2008 global economic crisis

Mortgage holders with inadequate sources of regular income could borrow against their rising home equity. The agencies that rank securities according to their safety which are paid by the issuers of those securities, not by the buyers generally rated mortgage-backed securities relatively safe—they were not.

When the housing bubble burst, more and more mortgage holders defaulted on their loans. By the mild slump in housing prices that had begun in had become a free fall in some places.

What ensued was a crisis in confidence:The financial crisis of –, also known as the global financial crisis and the financial crisis, is considered by many economists to have been the worst financial crisis . May 14,  · The Financial Crisis of In the world economy faced its most dangerous Crisis since the Great Depression of the s.

The contagion, which began in when sky-high home prices in the United States finally turned decisively downward, spread quickly, first to the entire U.S. financial sector and then to financial. The Great Recession – Causes and Effects of the Financial Crisis Posted by Ryan Guina Last updated on November 8, | Family & Home The Great Recession is the name commonly given to the – financial crisis that affected millions of Americans.

The financial crisis is the worst economic disaster since the Great Depression of It occurred despite Federal Reserve and Treasury Department efforts to prevent it.

It led to the Great Recession. Global economic crisis of resulted due to some fundamental and undesirable changes that took place in the efficient use of resources in America (Davis , p.

1). According to Davis (), some changes that could be easily perceived were breakdown of information technology and the ever increasing globalization across the world. Today, six members of the Financial Crisis Inquiry Commission—created by the last Congress to investigate the causes of the financial crisis—are releasing their .

The Great Recession - Causes & Effects of the Financial Crisis