Name: Fawad Uddin

Roll No. : 09

Course: Introduction to Money & Bank

Submitted to: Sir Farrukh

The global financial crisis and the 2008 financial crisis, was a severe worldwide economic
crisis considered by many economists to have been the most serious financial crisis since
the Great Depression of the 1930s, to which it is often compared. It began in 2007 with a crisis in
the subprime mortgage market in the United States, and developed into a full-blown
international banking crisis with the collapse of the investment bank Lehman Brothers on
September 15, 2008. Massive bail-outs of financial institutions and other palliative monetary and
fiscal policies were employed to prevent a possible collapse of the world financial system. The
crisis was nonetheless followed by a global economic downturn, the Great Recession.

Banking crisis
High mortgage approval rates led to a large pool of homebuyers, which drove up housing prices.
This appreciation in value led large numbers of homeowners (subprime or not) to borrow against
their homes as an apparent windfall. This "bubble" would be burst by a rising single-family
residential mortgages delinquency rate beginning in August 2006 and peaking in the first quarter,
2010.

The high delinquency rates led to a rapid devaluation of financial instruments (mortgage-backed
securities including bundled loan portfolios, derivatives and credit default swaps). As the value
of these assets plummeted, the market (buyers) for these securities evaporated and banks that
were heavily invested in these assets began to experience a liquidity crisis. Freddie
Mac and Fannie Mae were taken over by the federal government on September 7, 2008. Lehman
Brothers filed for bankruptcy on September 15, 2008. Merrill Lynch, AIG, HBOS, Royal Bank
of Scotland, Bradford & Bingley, Fortis, Hypo Real Estate, and Alliance & Leicester were all
expected to follow—with a US federal bailout announced the following day beginning with $85
billion to AIG. In spite of trillions paid out by the US federal government, it became much more
difficult to borrow money. The resulting decrease in buyers caused housing prices to plummet. In
2018, Alistair Darling, who was the U.K.'s Chancellor of the Exchequer at the time, spoke out
and stated that Britain came within hours of "a breakdown of law and order" the day
that RBS was bailed-out.
Consequences
While the collapse of large financial institutions was prevented by the bailout of banks by
national governments, stock markets still dropped worldwide. In many areas, the housing market
also suffered, resulting in evictions, foreclosures, and prolonged unemployment. The crisis
played a significant role in the failure of key businesses, declines in consumer wealth estimated
in trillions of US dollars, and a downturn in economic activity leading to the Great Recession of
2008–2012 and contributing to the European sovereign-debt crisis. The active phase of the crisis,
which manifested as a liquidity crisis, can be dated from August 9, 2007, when BNP
Paribas terminated withdrawals from three funds citing "a complete evaporation of liquidity".

The bursting of the US housing bubble, which peaked at the end of 2006, caused the values
of securities tied to US real estate pricing to plummet, damaging financial institutions globally.
The financial crisis was triggered by a complex interplay of policies that encouraged home
ownership, providing easier access to loans for subprime borrowers; overvaluation of bundled
subprime mortgages based on the theory that housing prices would continue to escalate;
questionable trading practices on behalf of both buyers and sellers; compensation structures that
prioritize short-term deal flow over long-term value creation; and a lack of adequate capital
holdings from banks and insurance companies to back the financial commitments they were
making. Questions regarding bank solvency, declines in credit availability, and damaged investor
confidence affected global stock markets, where securities suffered large losses during 2008 and
early 2009. Economies worldwide slowed during this period, as credit tightened and international
trade declined. Governments and central banks responded with unprecedented fiscal
stimulus, monetary policy expansion and institutional bailouts. In the US, Congress passed
the American Recovery and Reinvestment Act of 2009.
Causes:

Many factors directly and indirectly caused the Great Recession (which started in 2007 with the
US subprime mortgage crisis), with experts and economists placing different weights on
particular causes.

Major causes of the initial subprime mortgage crisis and following recession include:
International trade imbalances and lax lending standards contributing to high levels of developed
country household debt and real-estate bubbles that have since burst; U.S. government housing
policies; and limited regulation of non-depository financial institutions. Once the recession
began, various responses were attempted with different degrees of success. These included fiscal
policies of governments; monetary policies of central banks; measures designed to help indebted
consumers refinance their mortgage debt; and inconsistent approaches used by nations to bail out
troubled banking industries and private bondholders, assuming private debt burdens or
socializing losses.

One narrative describing the causes of the crisis begins with the significant increase in savings
available for investment during the 2000–2007 periods when the global pool of fixed-
income securities increased from approximately $36 trillion in 2000 to $80 trillion by 2007. This
"Giant Pool of Money" increased as savings from high-growth developing nations entered global
capital markets. Investors searching for higher yields than those offered by U.S. Treasury
bonds sought alternatives globally.

The temptation offered by such readily available savings overwhelmed the policy and regulatory
control mechanisms in country after country, as lenders and borrowers put these savings to use,
generating bubble after bubble across the globe.

While these bubbles have burst, causing asset prices (e.g., housing and commercial property) to
decline, the liabilities owed to global investors remain at full price, generating questions
regarding the solvency of consumers, governments, and banking systems. The effect of this debt
overhang is to slow consumption and therefore economic growth and is referred to as a "balance
sheet recession" or debt-deflation.

The fall in asset prices (such as subprime mortgage-backed securities) during 2007 and 2008
caused the equivalent of a bank run on the U.S., which includes investment banks and other non-
depository financial entities. This system had grown to rival the depository system in scale yet
was not subject to the same regulatory safeguards. Struggling banks in the U.S. and Europe cut
back lending causing a credit crunch. Consumers and some governments were no longer able to
borrow and spend at pre-crisis levels. Businesses also cut back their investments as demand
faltered and reduced their workforces. Higher unemployment due to the recession made it more
difficult for consumers and countries to honor their obligations. This caused financial institution
losses to surge, deepening the credit crunch, thereby creating an adverse feedback loop.

The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It
concluded that "the crisis was avoidable and was caused by: Widespread failures in financial
regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic
breakdowns in corporate governance including too many financial firms acting recklessly and
taking on too much risk; An explosive mix of excessive borrowing and risk by households and
Wall Street that put the financial system on a collision course with crisis; Key policy makers ill
prepared for the crisis, lacking a full understanding of the financial system they oversaw; and
systemic breaches in accountability and ethics at all levels."

Effects of Recession

Real gross domestic product (GDP) began contracting in the third quarter of 2008, and by early
2009 was falling at an annualized pace not seen since the 1950s. Capital investment, which was
in decline year-on-year since the final quarter of 2006, matched the 1957–58 post war record in
the first quarter of 2009. The pace of collapse in residential investment picked up speed in the
first quarter of 2009, dropping 23.2% year-on-year, nearly four percentage points faster than in
the previous quarter. Domestic demand, in decline for five straight quarters, is still three months
shy of the 1974–75 record, but the pace – down 2.6% per quarter vs. 1.9% in the earlier period –
is a record-breaker already.

The crisis affected all countries in some ways, but certain countries were vastly affected more
than others. By measuring currency devaluation, equity market decline, and the rise in sovereign
bond spreads, a picture of financial devastation emerges. Since these three indicators show
financial weakness, taken together, they capture the impact of the crisis. The Carnegie
Endowment for International Peace reports in its International Economics Bulletin that Ukraine,
as well as Argentina and Jamaica, are the country’s most deeply affected by the crisis. Other
severely affected countries are Ireland, Russia, Mexico, Hungary, the Baltic states, United
States and United Kingdom. By contrast, China, Japan, Brazil, India, Iran, Peru and Australia are
"among the least affected.”