Global financial crisis

Definition

The global financial crisis refers to a severe worldwide economic downturn that occurred in 2007-2008, characterized by the collapse of financial institutions, significant drops in consumer wealth, and widespread unemployment. This crisis highlighted vulnerabilities in the global financial system, leading to massive bailouts of banks and other financial institutions by governments around the world, as well as calls for reform in international financial regulation and oversight.

5 Must Know Facts For Your Next Test

1. The crisis was triggered by the collapse of the housing bubble in the United States, which led to widespread defaults on subprime mortgages.
2. Major financial institutions such as Lehman Brothers filed for bankruptcy in September 2008, marking a significant moment in the crisis.
3. Governments around the world responded with unprecedented fiscal stimulus measures and monetary policy interventions to stabilize their economies.
4. The crisis led to a severe recession in many countries, with millions losing their jobs and homes, and a dramatic decline in global trade.
5. In the aftermath, international financial institutions implemented reforms aimed at increasing transparency and reducing systemic risk within the global financial system.

Review Questions

• What were the primary factors that contributed to the onset of the global financial crisis?
  • The primary factors that contributed to the global financial crisis included reckless lending practices, particularly in subprime mortgage markets, where loans were given to borrowers with poor credit histories. The housing market bubble created inflated property values, which ultimately collapsed when borrowers defaulted en masse. Additionally, complex financial products like mortgage-backed securities obscured risks within financial institutions, making them vulnerable when the housing market crashed.
• Analyze how international financial institutions responded to the global financial crisis and their role in economic recovery.
  • International financial institutions like the International Monetary Fund (IMF) played a critical role during the global financial crisis by providing emergency loans to countries facing severe economic distress. These institutions also coordinated international responses to stabilize markets and prevent further contagion. Their involvement helped restore confidence among investors and facilitated reforms in banking regulations aimed at preventing future crises, illustrating the need for effective oversight in global finance.
• Evaluate the long-term implications of the global financial crisis on global economic governance and regulatory frameworks.
  • The long-term implications of the global financial crisis on global economic governance include significant reforms in regulatory frameworks aimed at enhancing financial stability. This crisis prompted discussions on establishing stricter capital requirements for banks and increased transparency for complex financial products. Moreover, it highlighted the importance of international cooperation among nations in managing systemic risks and ensuring that regulatory standards are harmonized globally. As a result, organizations such as the Financial Stability Board were established to promote effective regulatory measures across countries.

Related terms

subprime mortgage: A type of mortgage that is offered to borrowers with low credit ratings, often leading to higher risks for lenders and contributing to the financial crisis.

liquidity crisis: A situation where financial institutions or businesses cannot meet their short-term financial obligations due to an inability to convert assets into cash quickly.

bailout:

Financial support given to a failing business or economy to prevent its collapse, often involving government intervention or loans.