The Financial Crisis of 2008
The “global” financial crisis that began in the US is often referred to as the Great Recession and affected the entire world to some extent. The worst economic downturn since the Great Depression (1929–c. 1939) occurred during the Great Recession (2007–09). Even though this financial disaster happened in 2008, its causes can date back to 2001, when the twin towers crashed!! Its devastating effects could be seen in 2008 as well. In this essay, I aim to do a brief analysis of the causes and effects of the ‘2008 Financial Crisis’.
The two decades before 2008 were insanely prosperous for America, with rising GDP, low inflation, and only two minor recessions. However, in 2001, the twin towers crashed which led to an economic crash; everyone was scared to go out and the international trading had reduced. In reaction to this, the American Government reduced loan taxes especially mortgages from 6.75% to 1.75%; this made the customer buy more things now that the loan interest rates had been reduced. Because of this, the early 2000s was an amazing year for the housing industry. Property and real estate values had been continuously rising, encouraging people to invest in real estate and purchase homes. According to the laws of supply and demand, more people wanted to buy homes which shot up the real estate industry and house values. Mortgage lenders rushed to approve as many house loans as they could to cash in on the boom and make the most out of it, especially to customers with less-than-ideal credit. These high-risk loans, known as subprime mortgages, would later be blamed for the Great Recession. The people who couldn’t buy normal loans were able to buy sub-prime mortgages which were made available to them and made the market overloaded with homebuyers. The availability of low-cost housing loans caused a boom in housing demand. This contributed to the creation (and eventual bursting) of the housing bubble in the mid-2000s, which resulted in a rapid rise in home prices. Interest rates began to climb in 2004 in reaction to an overheated economy and inflation worries. The federal funds rate was 1.25 percent in mid-2004, reaching 5.25 percent by mid-2006. Mortgage lenders began to experience financial difficulties as the number of subprime mortgage packages expanded to an alarming level, with a large percentage of them going into failure; this was the main cause of the 2008 financial crisis!!
After the financial crisis, the effects were quite devastating. First of all, The total net wealth of American people decreased by roughly $17 trillion in today's time, which is a loss of 26%. It also affected the country's GDP and it dropped by 7% which is a loss of $70000 in every American's life. When a country’s economy is affected, its employment rate obviously decreases. During the crisis, nearly 7.5 million jobs were lost between 2007 and 2009, which doubled the unemployment rate to 10%. The fact was more brutal on lower-income Americans and middle-class Americans as they had to slog through the crisis. However, the employment rate started to increase slowly by the end of 2009. If we look at the effects from a broader perspective, millions of families lost their homes, their businesses went bankrupt and in order to survive the crisis, they had to spend money from their lifetime savings accounts. Millions also fell into poverty and had to work hard for years to come to live a stable/ decent life in the US.
The US government, banks, and even the citizens learn a lot of lessons after this devastating crisis. The housing industry too had a lesson for a lifetime as they understood the significance of lending money and why it should be only given to people who can pay it back; thus, they shouldn’t just lend money to anyone. The aftereffects were devastating but they have recovered from and more importantly, it was a life lesson that if looked at positively, might save them trillions of dollars in the future.