The 2008 Financial Crisis – Everything You Need To Know
The global economy was greatly disrupted by the 2008 financial crisis. It is recorded among the worst economic disasters – second only to the Great Depression of 1929. Even the U.S Department of Treasury and the Federal Reserve failed to stop it despite their continuous efforts.
More than ten years later, many people are still not sure exactly how this crisis occurred. Today, we take a comprehensive look at the causes, results, and lessons to be learned from the 2008 financial crisis. Hopefully, it will make us all better prepared for the future.
Causes of the 2008 Financial Crisis
Numerous factors led to the great recession of 2008, making its true cause highly complex. However, what initiated the chain reaction (considering that the global economy is interconnected) is the American housing market.
Housing prices fell to an all-time low in 2006, and realtors began applauding. After all, they expected the prices to bounce back up to a sustainable level. However, what they didn’t consider was factors such as homeowners with questionable credit getting mortgage loans (some more than 100% of the home’s value).
These mortgage-backed securities exposed cracks in the financial system. American homes were worth significantly less than what Americans paid for them. Banks started to panic in early 2007 when it was clear that they could not absorb these losses. Because they didn’t want other banks’ worthless mortgages as collateral, Libor (interbank borrowing costs) started rising.
Then, the Lehman Brothers firm went bankrupt crippling both the European and American economies. The public was quickly made aware of the shortcomings within the banking sector. Therefore, there were significant global disruptions. Although the Federal Reserve tried to pump liquidity into the failing banking system (via the Term Auction Facility), it was too late to avoid the 2008 financial crisis.
March 2008 marked the beginning of the crisis. Investors sold off shares of Bear Stearns investment bank (because they had numerous toxic assets). Now, Bear had no choice but to request JP Morgan Chase to bail them out from the situation.
However, the Fed decided to offer a $30 billion guarantee to help sweeten the deal. Wall Street started deteriorating due to this situation, and it continued all through the summer of 2008. Therefore, congress authorized a $187 billion takeover of mortgage companies (Freddie Mac and Fannie Mae) through the Treasury Secretary.
On 17th September 2018, the crisis led to a run-on money market funds. Companies parked profits to earn interest overnight, and banks took advantage of this to issue short-term loans. The run ensured companies moved $172 billion – a record high – into safer Treasury bonds.
A $700 billion bailout package was submitted to Congress three days later to help stop the run. In early 2009, things started to turn around thanks to this infamous Wall Street bailout. The banks were able to continue operating, thus slowly restarting the economy.
No one expected Lehman Brothers to collapse. However, it did crash and burn despite its 150 years of existence. What we can learn from the 2008 financial crash becomes vital. Here are a few of these lessons to keep in mind:
Crashes are Unforeseeable
Thinking that you can foresee a financial crisis is ridiculously optimistic. Markets change and self-correct all the time. Investors claiming to see disasters before they occur are often wrong. For instance, the 2008 financial crisis started taking shape in 2006, and no one saw it coming.
Invest in Long-Term Gains
Differentiating a market crash from regular market volatility is almost impossible. A crisis is probably almost over before it becomes obvious to the general public. The U.S. economy is also quite resilient, and it takes a lot to cause a dent. Therefore, your best bet is to avoid panic and stick to long-term gains.
Politics Don’t Always Count for Much
The market, and therefore the economy, exists independent of political views. Countries where politicians have tried throwing money at a recession have only ended up causing longer-lasting problems. Crashes and recoveries happen, and politicians can do relatively little about them. The best cause of action for them is to avoid making things worse.
Start Smart Investments Today
The causes of the 2008 financial crisis were complex – while some signs were missed, others were simply unforeseeable. It is pointless for an investor to try predicting the next global crash. Therefore, you need to take better control of your financial future by making smart investments.
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