2008 financial crisis

Definition

The 2008 financial crisis was a severe worldwide economic downturn that began in the United States and quickly spread across the globe, primarily triggered by the collapse of the housing market and risky financial practices. It led to the failure of major financial institutions, a significant decline in consumer wealth, massive government bailouts, and a deep recession that impacted economic indicators like unemployment and GDP growth.

5 Must Know Facts For Your Next Test

1. The 2008 financial crisis led to the largest global recession since the Great Depression, with millions losing their jobs and homes.
2. Housing prices peaked in 2006 before plummeting, resulting in a wave of mortgage defaults and foreclosures that severely impacted banks and investors.
3. The crisis was exacerbated by complex financial products such as mortgage-backed securities and derivatives that spread risk throughout the financial system.
4. Governments worldwide implemented stimulus packages and financial regulations post-crisis to prevent a similar occurrence in the future.
5. The aftermath of the crisis saw significant changes in monetary policy, including low interest rates and quantitative easing measures by central banks.

Review Questions

• How did subprime mortgages contribute to the onset of the 2008 financial crisis?
  • Subprime mortgages were offered to borrowers with poor credit histories, making them more likely to default on their loans. As housing prices rose, many borrowers took on these risky loans under the assumption that they could refinance later. However, when housing prices fell dramatically, defaults surged, leading to a collapse in mortgage-backed securities that banks held, ultimately triggering the broader financial crisis.
• Discuss the role of TARP in addressing the fallout from the 2008 financial crisis and its impact on economic recovery.
  • The Troubled Asset Relief Program (TARP) was implemented as an emergency response to stabilize the banking sector during the 2008 financial crisis. By purchasing toxic assets from troubled banks, TARP aimed to restore confidence in the financial system and encourage lending. This infusion of capital helped prevent further collapses of major financial institutions, ultimately aiding in the gradual recovery of the economy.
• Evaluate the long-term effects of the 2008 financial crisis on economic indicators such as unemployment rates and GDP growth.
  • The 2008 financial crisis had lasting impacts on economic indicators like unemployment rates and GDP growth. In the years following the crisis, unemployment peaked at 10% in the U.S., leading to significant social and economic challenges for millions. GDP growth remained sluggish for several years as recovery efforts took hold, prompting ongoing debates about monetary policy effectiveness and regulatory reforms aimed at ensuring stability in future economic cycles.

Related terms

Subprime mortgage: A type of mortgage offered to borrowers with poor credit histories who are considered higher risk, often leading to higher interest rates and greater chances of default.

TARP (Troubled Asset Relief Program): A program enacted by the U.S. government in 2008 to purchase toxic assets and equity from financial institutions to strengthen the financial sector during the crisis.

Recession: A significant decline in economic activity across the economy lasting longer than a few months, typically measured by GDP contraction and increased unemployment.