September 15, 2008
Imagine losing everything you have ever owned: your house, your car, your job, your life savings. While this may sound extreme, this was the unfortunate reality for millions during the 2008 financial crisis. Many of the people reading this were likely born around 2008, give or take, so this article aims to provide a full recap of the worst modern financial crisis, separated into three sections: the Rise, the Peak, the Aftermath.
The Rise:
The two decades before the 2008 financial crisis are called “the Great Moderation.” This was a period of steady and consistent growth. With such a stable growth trend, many investors and average citizens alike began taking unnecessary risks under the false assumption that the economy would continue to grow consistently. This caused actions such as excessive spending and taking on debt to appear as insignificant issues.
The most significant cause of this recession was the subprime mortgage crisis. Because of the risks that people were taking, fears of inflation and an overheated economy began spreading, leading the FED (Federal Reserve) to increase the interest rate from 1.25% in 2004 to 5.25% in just two years. At the same time, housing prices began increasingly rapidly after supply started outpacing demand. This combination of high-interest rates and housing prices made it very difficult for homeowners to make payments on their houses. As a result, defaults on subprime mortgages began rising (subprime mortgages are mortgages provided to people with low credit scores). The deathly blow came in April of 2007, when New Century Financial, the largest provider of subprime mortgages at the time, filed for bankruptcy. Over the next few months, the FED and other central banks began providing billions of dollars in loans to credit markets in a desperate attempt at cleaning up the mess. It was apparent, however, that the US was now officially in an economic recession.
The Peak:
By March of 2008, one of the largest investment banks in the US, Bear Stearns, officially collapsed. This was the first major blow to the financial sector since the recession had started, and it showed that the economic crisis had spread well beyond the real estate market at this point. This was followed by the failure of IndyMac Bank and the country’s two largest home lenders, Fannie Mae and Freddie Mac, being seized by the US government. The US economy was already in a detrimental state; however, nothing would compare to what would come next.
Investopedia explains that “the collapse of the venerable Wall Street bank Lehman Brothers in September marked the largest bankruptcy in U.S. history, and for many became a symbol of the devastation caused by the global financial crisis.” Prior to the collapse on September 15, 2008, Lehman Brothers had been in operation for over 160 years and had $600 billion dollars globally in assets. The collapse of Lehman Brothers marked the peak of the 2008 financial crisis, and it couldn’t get any worse. Unemployment reached a staggering 10%, and almost 4 million Americans lost their homes.
The Aftermath:
In September 2008, Congress approved the “Bailout Bill,” providing $700 billion in emergency liquidity to the market. While many criticized the bill, as it seemed like banks were being rewarded for recklessly handling the economy, it got the economy moving again.
Today, the 2008 financial crisis has taught society many things. It has taught the importance of accountability. Bailouts made it seem like no matter what banks did with their money, they would get everything back. Measures were put in place since then to make sure this would not happen again. It also taught the importance of preparing for the unexpected volatility of the market. The US economy had been steadily growing for the two decades before the recession, and nobody expected the sudden downward spiral. While the 2008 financial crisis was a devastating blow to many people, it has helped citizens and financial institutions alike learn and understand what is needed to create and maintain a prosperous economy.
