The Great Recession of 2008 was a global financial crisis that had a significant impact on economies around the world. Understanding the causes and effects of this recession is crucial for preventing future financial crises.
Contents
Causes of the Great Recession
The Great Recession of 2008 was caused by a number of factors, including:
- The housing market bubble: In the early 2000s, there was a bubble in the housing market as home prices rose rapidly. This was fuelled by low interest rates and lax lending standards, which made it easy for people to borrow money to buy homes.
- Subprime mortgages: Many banks and lenders began to offer subprime mortgages, which are mortgages given to borrowers with poor credit. These loans had higher interest rates and were more risky, but they were also more profitable for the lenders.
- Financial derivatives: Many banks and financial institutions invested in financial derivatives, such as mortgage-backed securities, which are securities that are backed by mortgages. These derivatives were highly complex and difficult to value, and many banks had no idea of the risk they were taking on.
As housing prices soared in the mid-2000s, many homeowners took out second mortgages or refinanced their homes to take advantage of the equity they had built up. However, when the housing market began to decline in 2007, many homeowners found themselves with mortgages that were worth more than their homes. This led to a wave of foreclosures, which further exacerbated the decline in housing prices.
Impact on the global economy and financial markets
- The S&P 500, a stock market index that represents the 500 largest publicly traded companies in the United States, declined by more than 50% from its peak in October 2007 to its low in March 2009.
- The Dow Jones Industrial Average, another major stock market index, declined by more than 50% from its peak in October 2007 to its low in March 2009.
- The U.S. housing market saw a decline in home prices of more than 30% from its peak in 2006 to its low in 2012, according to the Case-Shiller Home Price Index.
- More than 9 million Americans lost their homes to foreclosure during the crisis, according to data from the U.S. Census Bureau.
- The global economy experienced its worst recession since the Great Depression, with GDP declining by more than 3% in 2009, according to the International Monetary Fund.
- The crisis had a ripple effect on the global financial system, leading to the failure of more than 200 banks and financial institutions around the world, according to data from the Federal Deposit Insurance Corporation.
- The U.S. government spent more than $700 billion to bail out troubled financial institutions and stimulate the economy through the Troubled Asset Relief Program (TARP).
- The crisis had a lasting impact on the global economy, with many countries taking years to recover from the recession. The U.S. unemployment rate, for example, peaked at 10% in October 2009 and did not return to pre-crisis levels until 2017.
The crisis was exacerbated by the fact that many of these subprime mortgages had been bundled together into complex financial instruments called mortgage-backed securities, which were sold to investors around the world. When the housing market began to decline, the value of these securities plummeted, leading to losses for banks and other financial institutions that held them.
The crisis had a ripple effect on the global financial system, as banks and other financial institutions that were heavily invested in these securities began to fail. This led to a credit crunch, as banks became hesitant to lend money to each other or to borrowers.
How did it affect Canada?:
- The S&P/TSX Composite Index, a stock market index that represents the largest publicly traded companies in Canada, declined by more than 40% from its peak in June 2008 to its low in March 2009.
- The Canadian housing market saw a decline in home prices of around 15% from its peak in 2007 to its low in 2009, according to the Teranet-National Bank House Price Index.
- The Canadian economy experienced a recession in 2009, with GDP declining by 2.8%, according to data from Statistics Canada.
- The crisis had a ripple effect on the Canadian financial system, leading to the failure of several smaller banks and financial institutions.
- The Canadian government implemented a number of measures to stimulate the economy and stabilize the financial system, including fiscal stimulus measures, bank bailouts, and guarantees for interbank lending.
Effects of the Great Recession
The Great Recession had a number of significant effects on economies around the world, including:
- Unemployment: The recession led to a sharp increase in unemployment, as many people lost their jobs. This had a knock-on effect on consumer spending, as people had less money to spend on goods and services.
- GDP: The recession also led to a decrease in GDP (Gross Domestic Product), as economic activity slowed down. This had a negative impact on businesses and governments, as they had less revenue coming in.
- Financial institutions: Many financial institutions, such as banks and investment firms, were significantly impacted by the recession. Some went bankrupt, while others were bailed out by governments.
- Stock markets: The stock markets also took a hit, with many stock prices falling sharply. This had a negative impact on investors, as they saw the value of their investments decrease.
Conclusion
The Great Recession of 2008 was a significant global financial crisis that had a lasting impact on economies around the world. By understanding the causes and effects of the recession, we can work to prevent future financial crises.
Sources:
- “The Financial Crisis: An Inside View,” Federal Reserve Bank of St. Louis
- “The Subprime Mortgage Market,” Federal Reserve Bank of San Francisco
- “The Global Financial Crisis: Causes, Consequences and Countermeasures,” International Monetary Fund
