2008 financial crisis

Definition

The 2008 financial crisis was a severe worldwide economic downturn that began in the United States due to the collapse of the housing bubble and widespread mortgage defaults. It led to the failure of major financial institutions, a significant drop in consumer wealth, and a sharp decline in economic activity across various sectors. The crisis necessitated unprecedented government responses and bailout programs aimed at stabilizing the economy and preventing a complete financial system collapse.

5 Must Know Facts For Your Next Test

1. The crisis was triggered by a combination of high-risk lending practices, particularly in the subprime mortgage market, and an overheated housing market.
2. Major financial institutions like Lehman Brothers went bankrupt, leading to panic in financial markets and a loss of confidence among investors.
3. The U.S. government intervened with bailout programs, most notably TARP, which allocated $700 billion to support struggling banks and stabilize the financial system.
4. The crisis resulted in severe impacts on various sectors including housing, banking, and consumer goods, causing millions to lose their homes and jobs.
5. Global economies were also affected, leading to widespread recession, increased government debt levels, and changes in regulatory policies aimed at preventing future crises.

Review Questions

• How did government responses during the 2008 financial crisis address the failures of major financial institutions?
  • Government responses during the 2008 financial crisis included significant bailout programs like TARP, which aimed to stabilize major financial institutions that were deemed 'too big to fail.' By purchasing toxic assets from these banks, the government provided them with necessary liquidity to prevent their collapse. This intervention was critical in restoring confidence in the banking system and ensuring that credit continued to flow to consumers and businesses.
• Evaluate the impact of the 2008 financial crisis on different sectors of the economy and how they recovered over time.
  • The 2008 financial crisis had profound impacts across various sectors. The housing market experienced drastic declines, with millions facing foreclosures and home values plummeting. The banking sector saw increased regulations as a response to risky lending practices. Consumer goods suffered as spending dropped sharply during the recession. Recovery varied by sector; while housing has gradually improved since then, the banking industry faced tighter regulations and a slower return to pre-crisis profitability.
• Assess how the lessons learned from the 2008 financial crisis have shaped current financial regulations and practices.
  • The 2008 financial crisis highlighted critical weaknesses in financial regulation, leading to significant reforms like the Dodd-Frank Act. This legislation aimed to increase transparency, reduce risks associated with high-risk lending practices, and establish more robust oversight of financial institutions. These changes sought to prevent another similar crisis by addressing systemic risks, improving consumer protections, and ensuring that banks maintain sufficient capital buffers to absorb losses. As a result, current regulatory practices emphasize risk management and aim for greater stability within the financial system.

Related terms

Subprime Mortgage: A type of mortgage that is offered to borrowers with poor credit histories, often resulting in higher interest rates and a greater risk of default.

TARP (Troubled Asset Relief Program): A program initiated by the U.S. government to purchase toxic assets from financial institutions to stabilize the banking system during the 2008 crisis.

Great Recession:

The global economic downturn that followed the 2008 financial crisis, marked by high unemployment rates and significant declines in consumer spending and investment.