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2008-2009 Global Financial Crisis

"The Great Recession"

What is the Global Financial Crisis of 2008-2009?

The Global Financial Crisis of 2008-2009 refers to the massive financial crisis the world faced from 2008 to 2009. The financial crisis took its toll on individuals and institutions around the globe, with millions of American being deeply impacted. Financial institutions started to sink, many were absorbed by larger entities, and the US Government was forced to offer bailouts to keep many institutions afloat.

The crisis, often referred to as “The Great Recession,” didn’t happen overnight. There were many factors present leading up to the crisis, and their effects linger to this day. Let’s take a look at a brief outline of the Global Financial Crisis of 2009-2009.

 

Global Financial Crisis 2008-2009

 

Summary: 

  • The Global Financial Crisis of 2008-2009 is widely referred to as “The Great Recession.”
  • It began with the housing market bubble, created by an overwhelming load of the newly created mortgage-backed securities which bundled high-risk loans.
  • Reckless lending led to unprecedented numbers of loans in default; bundled together, the loss led many financial institutions to fail and require a governmental bailout.
  • Efforts to revive the economy were made through the American Recovering and Reinvestment Act of 2009.

 

The Housing Market Bubble

The foundation of the global financial crisis was built on the back of the housing market bubble that began to form in 2007. Banks and lending institutions offered low interest rates on mortgages and encouraged many homeowners to take out loans that they couldn’t afford.

With all the mortgages flooding in, lenders created new financial instruments called mortgage-backed securities (MBS), which were essentially mortgages bundled together that could then be sold as securities with minimal risk load due to the fact that they were backed by credit default swaps (CDS). Lenders could then easily pass along the mortgages – and all the risk.

Outdated regulations that weren’t rigorously enforced allowed lenders to get sloppy with underwriting, meaning the actual value of the securities couldn’t be established or guaranteed.

 

The Bubble Bursts

Banks began to lend recklessly to families and individuals without true means to follow through on the mortgages they’d been granted. Such high-risk (subprime) loans were then inevitably bundled together and passed down the line.

As the subprime mortgage bundles grew in number to an overwhelming degree, with a large percentage moving into default, lending institutions began to face financial difficulties. It led to the dismal financial conditions around the world during the 2008-2009 period and continued for years to come.

 

The Aftermath of the Global Financial Crisis of 2008-2009

Many who took out subprime mortgages eventually defaulted. When they could not pay, financial institutions took major hits. The government, however, stepped in to bail out banks.

The housing market was deeply impacted by the crisis. Evictions and foreclosures began within months. The stock market, in response, began to plummet and major businesses worldwide began to fail, losing millions. It, of course, resulted in widespread layoffs and extended periods of unemployment worldwide. Declining credit availability and failing confidence in financial stability led to less and more cautious investments, and international trade slowed to a crawl.

Eventually, the United States responded to the crisis by passing the American Recovery and Reinvestment Act of 2009, which expanded monetary policies, facilitated bank bailouts and mergers, and worked towards stimulating economic growth.

 

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Economic Depression
  • Quantitative Easing
  • Securities and Exchange Commission (SEC)
  • Top Accounting Scandals

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