The entire world faced an economical deterioration from the mid of 2007 to early 2009. This incident got the name Global Recession 2008 since the situation got worse around mid-2008. Many scholars define this as the biggest ever economic decline happened in the world since 1930. Because, the world faced a deeper deterioration in 1930. And it was known as Great Depression.

As you know, commercial banks carry a firm inter relationship with each other. Hence, a failure of one bank impacts a failure in every other bank too. Likewise, in Global Recession 2008, a failure in the bank system caused this utter mess. And it created a crisis in the entire world. In other words, the interlink of world financial systems allowed this mess to enter every other country.

What was the root cause of Global Recession 2008?

The unusual price decline of the houses caused this situation. US banks and other lenders provided loans in large scales for the housing projects. But shortly, the housing industry started to fall. This made the banks and other lenders of United States to face an unexpected loan default.

Up to 2007, US economic statistics motivated housing projects. Because, till early 2007, US maintained a steady economic growth. Further, they kept the inflation rate healthily. This improved the usual cash balance of the individuals. And it increased the household demand for houses. Consequently, it increased the house prices. Therefore, investors started borrowing from the banks to invest in housing projects. But the unexpected price fall of the houses made investors unable to repay. Hence, it created number of default loans.

How did the rise in housing projects turn into a crisis?

All the investors focused housing projects same time. This provided the basic reason for this failure. In fact, many investors expected a continuous growth in house prices. This trend made banks to be careless about housing investor’s repaying ability. Likewise, the trend motivated the borrowers to borrow and the lenders to lend unlimitedly. This resulted Global Recession 2008, as the prices of the houses started falling drastically.

Mortgage Backed Securities were a mistake

Banks and similar lenders enthusiastically focused on housing projects. Therefore, they gave birth to a new financial asset. It was known as Mortgage Backed Securities (MBS). This MBS formed a key fact to Global Recession 2008.

MBS was a loan package made as a collection of individual Mortgage Loans. The high demand for the housing projects made MBS more complexed. But nobody saw its risk. Because the price hike made everybody blind. Consequently, MBS never carried strict regulations

Further, the price hike motivated the banks and lenders to borrow too. In fact, price trend made the banking system a debtor. Because, banks and other lenders build funds by borrowing loans, to lend their borrowers.

House Prices Started Falling

As per the basics of economics, a higher supply declines the price level. Accordingly, the too much availability of housing projects made the house prices declined.

This made the borrowers to face losses. Because they borrowed huge sums and built houses. But now they cannot sell those houses at least for a price which could settle the loan liability. This gave the startup to Global Recession 2008. Banks and other lenders lent huge sums, and now their borrowers could not repay them.

This initial crisis signaled the Global Recession 2008. The downfall of house prices deteriorated the preference for MBS as well.

From US to the Globe

This US economic crisis created a Global Recession 2008. Because, the crisis spread to other countries as well. US banks had rich inter connections with foreign economies as well. Because, US was the most powerful economy of the world. These interconnections made loopholes which the crisis got leaked into other countries.

The incident of Lehman Brothers caused the Global Financial Crisis 2007 – 2009 to be popular as Global Recession 2008!

It was a US financial firm, which is recognized as the first financial company to fail due to the crisis. A failure of a financial company persuades the depositors of every bank to go for panic withdrawals. Because they fear that their bank will fall too. Same thing happened here. Ultimately, this made the entire financial industry nearly out of function.

How they overcame the Global Recession 2008?

As the first treatment for the Global Recession 2008, the Central banks lowered the interest rates. They pumped large amounts of money to the Banks along with good financial assets. In fact, these assets were hardly found in the financial market. Therefore, it gave a great opportunity to the banks to get recovered. Meanwhile, this boosted the purchase of financial assets as well. This near zero interest rate situation and the purchasing of financial securities created a quantitative easing.

Secondly, the governments increased government spending. This strengthened market demand. Further it made the demand – supply condition healthier. Ultimately, this fixed the market conditions. Also, this boosted demand improved the employment as well.

Getting lessons from the Global Recession 2008, authorities provided a strict oversight for the banks and other lenders. For example, following regulations could be provided.

  • Assessing before lending in a much closer manner.
  • Operating with a lower leverage than before.
  • Restricting form using short term loans to fund customer loans.

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