Financial crisis of 2008: causes and consequences

11 min read
Financial crisis of 2008: causes and consequences
Picture: scu.edu
Share

The global economic crisis that developed countries faced in 2008 was the largest in history since the Great Depression of the 30s of the 20th century.

Most countries of the world entered this crisis state almost simultaneously. From the moment the crisis began to the moment when it was possible to overcome its consequences, it took many states up to 5 years. In a number of regions, echoes of the crisis were noted before 2015.

General origins of the 2008 crisis and its main causes

Economists agree that the global crisis of 2008 has the following causes:

  • natural transition of the world economy from a cycle of growth to recession;
  • imbalance in international trade;
  • imbalance in capital flows;
  • overheating of the economy against the background of the uncontrolled growth of mortgage lending to the population.

Who predicted the 2008 crisis

There were people who predicted the 2008 crisis. Among them: economist Gary Shilling, fund manager James Stack, IMF chief economist Raghuram Rajan. The first spoke about a “mortgage bubble” in the US back in 2000, the second and third warned about a recession 2 years before the mortgage crisis in the US. The 2008 crisis in the world was also predicted by John Mauldin, who is the head of the board of Mauldin Economics.

Crisis in the USA

The precondition for the Great Recession was the mortgage crisis in the United States that arose in 2007. The first manifestations of the recession appeared in the United States back in 2006. It was then that the American real estate market began to experience a noticeable decline in home sales. In the spring of 2007, the high-risk subprime mortgage crisis hit the United States. The borrowers of such loans were US citizens with low incomes who did not have the best credit history.

2008 financial crisis
Picture: pbs.org

The mortgage crisis hit reliable borrowers quite quickly. Already in the summer of 2007, the American crisis began to have a pronounced financial nature. Due to difficulties encountered by borrowers in refinancing loans and rising interest rates on them, a banking liquidity crisis erupted. In early autumn 2008, banks stopped lending to the population.

American financier George Soros noted that the beginning of the 2008 crisis actually occurred at the end of the summer of 2007. He pointed out that this was when central banks began to try to preserve their liquidity.

Measures to support the US banking system were unsuccessful. In the early autumn of 2008, there was a banking collapse. The large investment bank Lehmsn Brothers went bankrupt. The same fate befell such mortgage companies as Fannie Mae and AIG. The Freddie Mac company repeated their fate. In total, over 45 financial institutions in the country went bankrupt.

Black swan – black consequences
Black swan – black consequences
7 min read
Ratmir Belov
Journalist-writer

The 2008 US mortgage crisis was a consequence of the collapse of stock market prices. This process became especially pronounced in early October 2008. The fall of the US stock market for the period from October 6 to October 10, 2008 was considered a record in the previous 20-year history of the country. Shares of American companies have depreciated by 50% or more. The process continued in early 2009.

Reasons

The American Congress, in the report of its specially created commission, formulated the following reasons why the 2008 crisis occurred:

  • inadequate regulation of the financial sector;
  • mistakes made in corporate governance;
  • huge debts among American households;
  • excessive distribution of derivatives (a type of securities), the reliability of which is questionable and insufficiently studied;
  • growth of the “shadow” banking sector.

Consequences

The crisis in America of 2008, taking into account the reasons, had the following consequences for the United States:

  • decrease in production volumes throughout the country;
  • decrease in capital of American companies by 40%;
  • general decrease in demand;
  • decrease in prices for various raw materials;
  • an unprecedented increase in the number of unemployed throughout the country;
  • decrease in incomes of US citizens belonging to the middle class, its further weakening;
  • increasing income gap between rich and poor US citizens;
  • sharp decline in oil prices;
  • curtailment of a number of government projects for the construction and improvement of infrastructure

The redistribution of property that was a consequence of the 2007-2008 crisis in the United States led to the mass eviction of bankrupt borrowers from the houses they had previously purchased. This process was especially pronounced in 2009 and 2010.

Oil prices in US dollars during the 2008 global crisis
Oil prices in US dollars during the 2008 global crisis
Despite the crisis, shares of some companies showed amazing growth. According to Forbes, the shares of the Paulson & Co investment fund, due to their growth during the crisis years, brought its creator $3.7 billion.

The development of the crisis in the world

The history of the crisis goes through the following stages:

  1. February 2008. Global inflation rises to record levels.
  2. Simultaneous reduction of interest rates by almost all the world’s leading central banks in October 2008.
  3. Approval of an anti-crisis plan by the then G8 participants in October 2008.
  4. Holding an anti-crisis summit within the G20 in November 2008.
  5. Interest rate cuts by both the European Central Bank and the Bank of England in December 2008.
  6. Eurostat reported in December 2008 that the European economy had entered a recession with GDP declining by 0.2%.
  7. Introduction of austerity measures by the European Central Bank in December 2008. Development of credit crunch in the eurozone.
  8. In April 2009, the G20 summit approved a plan to overcome the 2008 economic crisis. Measures are being taken to strengthen the IMF’s resources.
  9. Growing protest movements against the backdrop of economic instability in the countries of the North African and Middle Eastern regions.
  10. Decrease in global trade volumes at the end of 2009 by 11.89%.

The global financial crisis of 2008 continued into 2010. Then the currency war began. The United States, the European Union, as well as Japan and China tried to reduce the prices of their national currencies to facilitate their export.

Forbes conducted a study and found out which stocks grew during the 2008 crisis. These included shares of the German automobile company Porsche. And all thanks to the timely purchase of a 30% stake in Volkswagen.

Development of the crisis in Russia and the states of the former Soviet Union

The economic crisis of 2008 in Russia had both internal and external causes.

Reasons

The 2008 financial crisis in Russia was additionally provoked by foreign policy events. The main one was the five-day war in South Ossetia, which took place in early August 2008. The consequence of the conflict was an increased outflow of foreign investment from Russia.

2008 financial crisis
Picture: thebalancemoney.com

But the main reasons are as follows:

  • strong dependence of the country’s economy on the export of resources (oil, gas and metals) abroad, which through a chain reaction led to a recession from the USA and Europe;
  • decline in oil prices, which further hit the financial sector;
  • low competitiveness of a number of Russian manufacturers compared to foreign companies;
  • significant presence of foreign investment in the Russian economy;
  • large debts of Russian enterprises to foreign investors;
  • high inflation.

Results of the crisis

The following results of the 2008 crisis in Russia can be highlighted:

  • collapse of the Russian stock market;
  • crisis in the banking system, which led to the bankruptcy of many of them or their merger with each other;
  • active withdrawal of foreign investment from Russia;
  • increase in cost of loans;
  • weakening flow of investment from abroad;
  • decrease in the ruble exchange rate;
  • deterioration in the profitability of Russian companies;
  • problematicity of obtaining loans from foreign banks;
  • weakening economic growth;
  • decrease in oil export prices;
  • mass bankruptcy of organizations due to debt traps;
  • slowdown in residential real estate construction across the country;
  • inflation acceleration.
Globalization: Causes, Consequences, Problems, Role in the World Economy
Globalization: Causes, Consequences, Problems, Role in the World Economy
9 min read
Editorial team
Editorial team of Pakhotin.org

The 2008-2009 crisis in Russia led to a decrease in citizens’ salaries. Population incomes have decreased significantly (now there is also a decline in household incomes and the threat of a crisis). At the same time, consumption also decreased. The main consequence of the 2008 crisis in the Russian Federation is layoffs, which have become widespread. All this has additionally led to increased stress among citizens. If we talk briefly about the 2008 crisis in Russia, as a result of it, the quality of life of the population in the country significantly decreased.

Crisis phenomena in the economies of Belarus and Ukraine

Due to the fact that the Belarusian stock market is poorly integrated into the international financial system, the crisis in this country manifested itself somewhat later than in other countries. The first signs of recession appeared in the weakening demand for Belarusian export products. This is especially true for petroleum products and ferrous metals. Belarus also experienced a shortage of foreign investment. Its gold and foreign exchange reserves were also limited.

2008 financial crisis
Picture: fortune.com

The global economic crisis of 2008 was most pronounced in Belarus in 2011. It was then that the Belarusian ruble devalued greatly. During the first half of 2011, the state currency depreciated by 75% in relation to foreign currencies. For most of the year, citizens and organizations of Belarus were not able to purchase currency. Inflation for the year reached 79.6%. In 2011, the Belarusian ruble depreciated by 270% against the dollar.

The global crisis of 2008 affected Ukraine the most. The country’s industry suffered. Production fell by 19.8%. The metallurgy, mechanical engineering and chemical industries suffered the most. The decline in all three industries exceeded 35%, and in metallurgy – 45%. There was a devaluation of the hryvnia. During the crisis of 2008, the dollar to hryvnia exchange rate reached such values ​​as: 1 dollar = 8 hryvnia. This rate was set on the date: December 18, 2008; back in the summer of 2008, 4-5 hryvnia were given per dollar (now 1 dollar is approximately 25 hryvnia).

The population’s deposits in hryvnias became worthless. Banks increased interest rates by 1.5 times. But already in November 2008, lending to the population actually stopped. Ukraine’s GDP fell by 14.8% in 2009. This is one of the worst indicators in the world.

Crisis phenomena in other countries

Greece

The crisis in Greece in 2008 was associated with the country’s huge budget deficit and the presence of debt to cover it. Already at the beginning of 2010, the state’s external debt acquired a catastrophic size. The Greek government tried to reduce the cost of maintaining the state system. Demonstrations and riots began in the country. Greece has repeatedly received loans from both the European Union and the IMF to overcome the crisis. Due to debt overload in July 2015, the country was in real danger of default.

China

The economic crisis in the United States in 2008 also affected the Chinese economy. After a successful 2007, the Chinese economy began to stagnate. First, there was a reduction in gold and foreign exchange reserves, and already in November 2008, a critical unemployment rate in the country was officially announced. Chinese industry was forced to reduce demand for raw materials. As a result, prices for metallurgical products fell throughout the world. The worst period for the Chinese economy was the first quarter of 2009. Then the state’s GDP rose only by 6.1%, and exports fell by 30.9%. But later in the year there was a way out of the crisis situation.

Inflation: causes and consequences
Inflation: causes and consequences
10 min read
Editorial team
Editorial team of Pakhotin.org

Japan

The economic crisis of 2008 greatly affected the Japanese economy. Thus, the Nikkei 225 index collapsed by 9.62% in October 2008. At the same time, a large Japanese insurance organization, Yamato Life Insurance Co., went bankrupt. Ltd.

Iceland

The Icelandic crisis of 2008 is considered the largest economic disaster within a single country. The recession manifested itself in the bankruptcy of three large state banks, a sharp depreciation of the Icelandic krona against the dollar and a decrease in the capitalization of the Icelandic stock exchange by 90% (according to Wikipedia). The country was practically declared bankrupt. The government requested loans from the IMF. But it was Iceland that overcame this crisis faster than anyone else in Europe. Already in 2011, the country’s economy reached pre-crisis levels.

Portugal and Ireland

The 2008 crisis in Europe also hit Portugal hard. Along with Greece, this country had large debts to the IMF. Ireland also faced serious economic problems in 2008, which forced the country’s leadership to ask for help from the IMF.

Global consequences of the crisis

If we talk briefly about the causes and consequences of the 2008 crisis, it led to a widespread reduction in production. In most countries, the most important types of industry suffered from the recession. For many years, prices for petroleum products have been declining all over the world. The liquidity crisis of 2008 led to the collapse of the world’s largest banks, which caused a significant decline in the mortgage market. Citizens of many countries were unable to pay their mortgage debts and lost their homes.
2008 financial crisis
Picture: thebalancemoney.com

The recession has led to unemployment around the world. Its indicators in all countries increased significantly over the period from 2008 to 2010. However, the trend continues to this day. The 2008 crisis, in simple terms, led to a deterioration in the lives of middle-class people around the world. Due to the recession, the income gap between rich and poor has become enormous. The problem of income inequality has become even more acute than before.

The 2008 recession in literature and cinema

The event formed the basis of many literary works. An analysis of the 2008 recession and its comparison with the Great Depression of 1929 was carried out by US economist Joseph Stiglitz in the book Steep Dive.

The following books are devoted to the topic of the 2008 crisis:

  • “The Shock Doctrine” by N. Klein;
  • “Too Big to Fail” by E.R. Sorkin;
  • “Shifts and Shocks” by M. Wolfe;
  • “The Short Game” and “Boomerang” by M. Lewis;
  • The End of Wall Street by R. Lowenstein;
  • “The Devil’s Casino” by W. Ward.

An article in Rolling Stone about the 2008 crisis, written by journalist Matt Taby, became famous. In the article “The Great Takeover,” the author expresses his vision of the problem associated with the critical situation of the AIG insurance corporation in 2008.

A number of films about the 2008 crisis in the United States were made about the economic events of 2008-2009. Among them:

  • “Wall Street. Money Never Sleeps” 2010;
  • “Risk Limit” 2011;
  • Assault on Wall Street 2013;
  • “Short Game” 2015.

The causes of the recession are described in detail in the film “The Insiders”. The 2010 film about the 2008 financial crisis contains interviews with prominent financial figures, as well as politicians and bankers.

Article rating
0.0
0 Ratings
Rate this article
Editorial team
Please write your opinion on this topic:
avatar
  Comment notifications  
Notify of
Content Rate it Comments
Share

You may also like

10 Best Personal Finance Books – List from a Financial Advisor
2 min read
5.0
(1)
Inna Filatova
Inna Filatova
Financial Consultant
Inflation: causes and consequences
10 min read
Editorial team
Editorial team of Pakhotin.org
Trade war between the USA and China: causes, consequences, course of the game
12 min read
Nikolai Dunets
Member of the Union of Journalists of Russia. Winner of the "Golden Pen" contest