essay on global financial crisis 2008

The Great Recession and Its Aftermath

The period known as the Great Moderation came to an end when the decade-long expansion in US housing market activity peaked in 2006 and residential construction began declining. In 2007, losses on mortgage-related financial assets began to cause strains in global financial markets, and in December 2007 the US economy entered a recession. That year several large financial firms experienced financial distress , and many financial markets experienced significant turbulence. In response, the Federal Reserve provided liquidity and support through a  range of programs  motivated by a desire to improve the functioning of financial markets and institutions, and thereby limit the harm to the US economy. 1    Nonetheless, in the fall of 2008, the economic contraction worsened, ultimately becoming deep enough and protracted enough to acquire the label “the  Great Recession ." While the US economy bottomed out in the middle of 2009, the recovery in the years immediately following was by some measures unusually slow. The Federal Reserve has provided unprecedented monetary accommodation in response to the severity of the contraction and the gradual pace of the ensuing recovery.  In addition, the financial crisis led to a range of major reforms in banking and financial regulation, congressional legislation that significantly affected the Federal Reserve.

Rise and Fall of the Housing Market

The recession and crisis followed an extended period of expansion in US housing construction, home prices, and housing credit. This expansion began in the 1990s and continued unabated through the 2001 recession, accelerating in the mid-2000s. Average home prices in the United States more than doubled between 1998 and 2006, the sharpest increase recorded in US history, and even larger gains were recorded in some regions. Home ownership in this period rose from 64 percent in 1994 to 69 percent in 2005, and residential investment grew from about 4.5 percent of US gross domestic product to about 6.5 percent over the same period. Roughly 40 percent of net private sector job creation between 2001 and 2005 was accounted for by employment in housing-related sectors.

The expansion in the housing sector was accompanied by an expansion in home mortgage borrowing by US households. Mortgage debt of US households rose from 61 percent of GDP in 1998 to 97 percent in 2006. A number of factors appear to have contributed to the growth in home mortgage debt. In the period after the 2001 recession, the Federal Open Market Committee (FOMC) maintained a low federal funds rate, and some observers have suggested that by keeping interest rates low for a “prolonged period” and by only increasing them at a “measured pace” after 2004, the Federal Reserve contributed to the expansion in housing market activity (Taylor 2007).  However, other analysts have suggested that such factors can only account for a small portion of the increase in housing activity (Bernanke 2010).  Moreover, the historically low level of interest rates may have been due, in part, to large accumulations of savings in some emerging market economies, which acted to depress interest rates globally (Bernanke 2005). Others point to the growth of the market for mortgage-backed securities as contributing to the increase in borrowing. Historically, it was difficult for borrowers to obtain mortgages if they were perceived as a poor credit risk, perhaps because of a below-average credit history or the inability to provide a large down payment. But during the early and mid-2000s, high-risk, or “subprime,” mortgages were offered by lenders who repackaged these loans into securities. The result was a large  expansion in access to housing credit , helping to fuel the subsequent increase in demand that bid up home prices nationwide.

Effects on the Financial Sector

After home prices peaked in the beginning of 2007, according to the Federal Housing Finance Agency House Price Index, the extent to which prices might eventually fall became a significant question for the pricing of mortgage-related securities because large declines in home prices were viewed as likely to lead to an increase in mortgage defaults and higher losses to holders of such securities. Large, nationwide declines in home prices had been relatively rare in the US historical data, but the run-up in home prices also had been unprecedented in its scale and scope. Ultimately, home prices fell by over a fifth on average across the nation from the first quarter of 2007 to the second quarter of 2011. This decline in home prices helped to spark the financial crisis of 2007-08, as financial market participants faced considerable uncertainty about the incidence of losses on mortgage-related assets. In August 2007, pressures emerged in certain financial markets, particularly the market for asset-backed commercial paper, as money market investors became wary of exposures to subprime mortgages (Covitz, Liang, and Suarez 2009). In the spring of 2008, the investment bank Bear Stearns was acquired by JPMorgan Chase with the assistance of the Federal Reserve. In September, Lehman Brothers filed for bankruptcy, and the next day the  Federal Reserve provided support to AIG , a large insurance and financial services company. Citigroup and Bank of America sought support from the Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation.

The Fed’s support to specific financial institutions was not the only expansion of central bank credit in response to the crisis. The Fed also introduced a number of  new lending programs  that provided liquidity to support a range of financial institutions and markets. These included a credit facility for “primary dealers,” the broker-dealers that serve as counterparties for the Fed’s open market operations, as well as lending programs designed to provide liquidity to money market mutual funds and the commercial paper market.  Also introduced, in cooperation with the US Department of the Treasury, was the Term Asset-Backed Securities Loan Facility (TALF), which was designed to ease credit conditions for households and businesses by extending credit to US holders of high-quality asset-backed securities.

Initially, the expansion of Federal Reserve credit was financed by reducing the Federal Reserve’s holdings of Treasury securities, in order to avoid an increase in bank reserves that would drive the federal funds rate below its target as banks sought to lend out their excess reserves. But in October 2008, the Federal Reserve gained the authority to pay banks interest on their excess reserves. This gave banks an incentive to hold onto their reserves rather than lending them out, thus mitigating the need for the Federal Reserve to offset its expanded lending with reductions in other assets. 2

Effects on the Broader Economy

The housing sector led not only the financial crisis, but also the downturn in broader economic activity. Residential investment peaked in 2006, as did employment in residential construction. The overall economy peaked in December 2007, the month the National Bureau of Economic Research recognizes as the beginning of the recession. The decline in overall economic activity was modest at first, but it steepened sharply in the fall of 2008 as stresses in financial markets reached their climax. From peak to trough, US gross domestic product fell by 4.3 percent, making this the deepest recession since World War II. It was also the longest, lasting eighteen months. The unemployment rate more than doubled, from less than 5 percent to 10 percent. 

In response to weakening economic conditions, the FOMC lowered its target for the federal funds rate from 4.5 percent at the end of 2007 to 2 percent at the beginning of September 2008. As the financial crisis and the economic contraction intensified in the fall of 2008, the FOMC accelerated its interest rate cuts, taking the rate to its effective floor – a target range of 0 to 25 basis points – by the end of the year. In November 2008, the Federal Reserve also initiated the first in a series of large-scale asset purchase (LSAP) programs, buying mortgage-backed securities and longer-term Treasury securities. These purchases were intended to put downward pressure on long-term interest rates and improve financial conditions more broadly, thereby supporting economic activity (Bernanke 2012).

The recession ended in June 2009, but economic weakness persisted. Economic growth was only moderate – averaging about 2 percent in the first four years of the recovery – and the unemployment rate, particularly the rate of long-term unemployment, remained at historically elevated levels. In the face of this prolonged weakness, the Federal Reserve maintained an exceptionally low level for the federal funds rate target and sought new ways to provide additional monetary accommodation. These included additional LSAP programs, known more popularly as quantitative easing, or QE. The FOMC also began communicating its intentions for future policy settings more explicitly in its public statements, particularly the circumstances under which exceptionally low interest rates were likely to be appropriate. For example, in December 2012, the committee stated that it anticipates that exceptionally low interest rates would likely remain appropriate at least as long as the unemployment rate was above a threshold value of 6.5 percent and inflation was expected to be no more than a half percentage point above the committee’s 2 percent longer-run goal. This strategy, known as “forward guidance,” was intended to convince the public that rates would stay low at least until certain economic conditions were met, thereby putting downward pressure on longer-term interest rates.

Effects on Financial Regulation

When the financial market turmoil had subsided, attention naturally turned to reforms to the financial sector and its supervision and regulation, motivated by a desire to avoid similar events in the future. A number of measures have been proposed or put in place to reduce the risk of financial distress. For traditional banks, there are significant increases in the amount of required capital overall, with larger increases for so-called “systemically important” institutions (Bank for International Settlements 2011a;  2011b).  Liquidity standards will for the first time formally limit the amount of banks’ maturity transformation (Bank for International Settlements 2013).  Regular stress testing will help both banks and regulators understand risks and will force banks to use earnings to build capital instead of paying dividends as conditions deteriorate (Board of Governors 2011).    

The  Dodd-Frank Act of 2010  also created new provisions for the treatment of large financial institutions. For example, the Financial Stability Oversight Council has the authority to designate nontraditional credit intermediaries “Systemically Important Financial Institutions” (SIFIs), which subjects them to the oversight of the Federal Reserve. The act also created the Orderly Liquidation Authority (OLA), which allows the Federal Deposit Insurance Corporation to wind down certain institutions when the firm’s failure is expected to pose a great risk to the financial system. Another provision of the act requires large financial institutions to create “living wills,” which are detailed plans laying out how the institution could be resolved under US bankruptcy code without jeopardizing the rest of the financial system or requiring government support.

Like the  Great Depression  of the 1930s and the  Great Inflation  of the 1970s, the financial crisis of 2008 and the ensuing recession are vital areas of study for economists and policymakers. While it may be many years before the causes and consequences of these events are fully understood, the effort to untangle them is an important opportunity for the Federal Reserve and other agencies to learn lessons that can inform future policy.

• 1  Many of these actions were taken under Section 13(3) of the Federal Reserve Act, which at that time authorized lending to individuals, partnerships, and corporations in “unusual and exigent” circumstances and subject to other restrictions. After the amendments to Section 13(3) made by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Federal Reserve lending under Section 13(3) is permitted only to participants in a program or facility with “broad based eligibility,” with prior approval of the secretary of the treasury, and when several other conditions are met.
• 2  For more on interest on reserves, see Ennis and Wolman (2010).

Bibliography

Bank for International Settlements. “ Basel III: A global regulatory framework for more resilient banks and banking system .” Revised June 2011a.

Bank for International Settlements. “ Global systemically important banks: Assessment methodology and the additional loss absorbency requirement .” July 2011b.

Bernanke, Ben, “The Global Saving Glut and the U.S. Current Account Deficit,” Speech given at the Sandridge Lecture, Virginia Association of Economists, Richmond, Va., March 10, 2005.

Bernanke, Ben,“Monetary Policy and the Housing Bubble,” Speech given at the Annual Meeting of the American Economic Association, Atlanta, Ga., January 3, 2010.

Bernanke, Ben, “Monetary Policy Since the Onset of the Crisis,” Speech given at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyo., August 31, 2012.

Covitz, Daniel, Nellie Liang, and Gustavo Suarez. “The Evolution of a Financial Crisis: Collapse of the Asset-Backed Commercial Paper Market.” Journal of Finance 68, no. 3 (2013): 815-48.

Ennis, Huberto, and Alexander Wolman. “Excess Reserves and the New Challenges for Monetary Policy.” Federal Reserve Bank of Richmond Economic Brief   no. 10-03 (March 2010).   

Federal Reserve System, Capital Plan , 76 Fed Reg. 74631 (December 1, 2011) (codified at 12 CFR 225.8).

Taylor, John,“Housing and Monetary Policy,” NBER Working Paper 13682, National Bureau of Economic Research, Cambridge, MA, December 2007.     

Written as of November 22, 2013. See disclaimer .

Essays in this Time Period

• Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
• Federal Reserve Credit Programs During the Meltdown
• The Great Recession
• Subprime Mortgage Crisis
• Support for Specific Institutions

Related People

Ben S. Bernanke Chairman

Board of Governors

2006 – 2014

Timothy F. Geithner President

New York Fed

2003 – 2008

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The Global Financial Crisis has been a watershed event not only for many advanced economies but also emerging markets around the world. This book brings together research and policy work over the last nine years from staff at the IMF. It covers a wide range of issues such as the origins of the financial crisis, the policy response, spillovers and contagion, case studies, bank stress testing, and debt sustainability and sovereign debt restructuring.

• Front Matter
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What Was the 2008 Great Recession?

Understanding the great recession, origins and consequences, response to the great recession, the bottom line.

• International Markets

Great Recession: What It Was and What Caused It

Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit.

NoNo Flores / Investopedia

The Great Recession was the sharp decline in economic activity that started in 2007 and lasted several years, spilling into global economies. It is considered the most significant downturn since the Great Depression in the 1930s.

The term “Great Recession” applies to both the U.S. recession, officially lasting from December 2007 to June 2009, and the ensuing global recession in 2009. The economic slump began when the U.S. housing market went from boom to bust, and large amounts of mortgage-backed securities (MBS) and derivatives plummeted in value.

Key Takeaways

• The Great Recession refers to the economic downturn from 2007 to 2009 after the bursting of the U.S. housing bubble and the global financial crisis.
• The Great Recession was the most severe economic recession in the United States since the Great Depression of the 1930s.
• In response to the Great Recession, unprecedented fiscal, monetary, and regulatory policy was unleashed by federal authorities, which some—but not all—credit with the subsequent recovery.

The term “Great Recession” is a play on the term “Great Depression” of the 1930s, when gross domestic product (GDP) declined more than 10% and unemployment hit 25%.

While no explicit criteria exist to differentiate a depression from a severe recession, there is a near consensus among economists that the downturn of 2007–2009 was not a depression. During the Great Recession, U.S. GDP declined by 0.3% in 2008 and 2.8% in 2009, while unemployment briefly reached 10%.

Causes of the Great Recession

According to a 2011 report by the Financial Crisis Inquiry Commission, the Great Recession was avoidable. The appointees, which included six Democrats and four Republicans, cited several key contributing factors that they determined led to the downturn.

First, the report identified failure on the part of the government to regulate the financial industry. This failure to regulate included the Federal Reserve ’s inability to stop banks from giving mortgages to people who subsequently proved to be a bad credit risk.

Next, too many financial firms took on too much risk. The shadow banking system , which included investment firms, grew to rival the depository banking system but was not under the same scrutiny or regulation. When the shadow banking system failed, the collapse impacted the flow of credit to consumers and businesses.

Other causes that the report identified included excessive borrowing by consumers and corporations, along with lawmakers who did not fully understand the collapsing financial system. This created asset bubbles , especially in the housing market, as mortgages were extended at low interest rates to unqualified borrowers who subsequently could not repay them. The ensuing selloff caused housing prices to fall and left many other homeowners underwater . This, in turn, severely impacted the market for the mortgage-backed securities (MBS) that banks and other institutional investors held, and demand for which allowed lenders to give mortgages to risky borrowers.

The 2001 dotcom bubble implosion, followed by the terrorist attacks of Sept. 11, 2001, hammered the U.S. economy . The Fed responded by cutting interest rates to the lowest levels since Bretton Woods to stimulate the economy. The Fed held interest rates low through mid-2004.

Combined with federal policy to encourage homeownership, low interest rates helped spark a boom in real estate and financial markets and a dramatic expansion of the volume of total mortgage debt . Financial innovations, such as new types of subprime and adjustable mortgages , allowed borrowers—many of whom otherwise might not have qualified—to obtain home loans on generous terms based on the expectation that interest rates would remain low and home prices would continue to rise.

However, from 2004 through 2006, the Federal Reserve raised interest rates to control inflation . As interest rates rose, the flow of new credit through traditional banking channels into real estate slowed. More seriously, rates on existing adjustable mortgages and exotic loans began to reset at much higher rates than many borrowers expected (or were led to expect by lenders). As monthly mortgage payments rose beyond borrowers’ ability to pay (and they could not simply refinance, as prices had stopped steadily rising), many borrowers started to sell. The increase in supply burst what was later widely recognized to be a housing bubble .

During the U.S. housing boom, financial institutions sold mortgage-backed securities and complex derivative products at unprecedented levels. When the real estate market collapsed in 2007, these securities declined precipitously in value. The credit markets that had financed the housing bubble quickly followed housing prices into a downturn as a credit crisis began unfolding in 2007. The solvency of over-leveraged banks and financial institutions hit a breaking point with the collapse of Bear Stearns in March 2008.

Things came to a head later that year with the bankruptcy of Lehman Brothers , the country’s fourth-largest investment bank, in September 2008. The contagion quickly spread to other economies around the world, most notably in Europe. As a result of the Great Recession, the United States alone lost more than 8.7 million jobs, according to the U.S. Bureau of Labor Statistics, doubling the unemployment rate. Further, U.S. households lost roughly $19 trillion in net worth as the stock market plunged, according to the U.S. Department of the Treasury. The Great Recession’s official end date was June 2009.

The 2010 Dodd-Frank Act gave the government control of failing financial institutions and the ability to establish consumer protections against predatory lending.

The aggressive monetary policies that the Fed took, along with other central banks around the world, was widely credited with preventing even greater damage to the global economy. However, some also criticized the moves, claiming they made the recession last longer and laid the groundwork for later recessions .

Monetary and Fiscal Policy

For example, the Fed lowered a key interest rate to nearly zero to promote liquidity  and, in an unprecedented move, provided banks with a staggering $7.7 trillion of emergency loans in a policy known as quantitative easing (QE) .

Along with the inundation of liquidity, the U.S. federal government embarked on a massive program to stimulate the economy in the form of $787 billion in spending under the American Recovery and Reinvestment Act . These monetary and fiscal policies reduced immediate losses to major financial institutions and large corporations.

The Dodd-Frank Act

Not only did the government introduce stimulus packages, but new financial regulation was also put into place. In the 1990s, the U.S. repealed the Glass-Steagall Act , a Depression-era regulation that separated investment from retail banking to reduce systemic risk. Some economists say this move helped cause the crisis. The repeal allowed some large U.S. banks to merge and form larger institutions, many of which later failed and had to be bailed out .

In response, in 2010, the U.S. Congress passed and then-President Barack Obama signed the Dodd-Frank Act, which gave the government expanded power to regulate the financial sector, including greater control over financial institutions that were deemed on the cusp of failing. It also created consumer protections against predatory lending.

However, critics of Dodd-Frank note that the financial-sector players and institutions that actively drove and profited from predatory lending and related practices during the housing and financial bubbles were also deeply involved in both the drafting of the new law and with the agencies charged with its implementation. 

The U.S. federal government spent $787 billion to stimulate the economy during the Great Recession under the American Recovery and Reinvestment Act, according to the Congressional Budget Office.

Recovery From the Great Recession

Following these policies, the economy gradually recovered. Real GDP bottomed out in the second quarter of 2009 and regained its pre-recession peak in the second quarter of 2011, 3½ years after the initial onset of the official recession. Financial markets recovered as the flood of liquidity washed over Wall Street.

The Dow Jones Industrial Average (DJIA) , which had lost over half its value from its August 2007 peak, began to recover in March 2009 and, four years later—in March 2013—broke its 2007 high.

For workers and households, the picture was less rosy. Unemployment was at 5% at the end of 2007, reached a high of 10% in October 2009, and did not recover to 5% until 2015, nearly eight years after the beginning of the recession. Real median household income did not recover to pre-recession levels until 2016.

Critics of the policy response and how it shaped the recovery argue that the tidal wave of liquidity and deficit spending propped up politically connected financial institutions and big business at the expense of ordinary people. It also may have delayed recovery by tying up economic resources in industries and activities that deserved to fail, when those assets and resources could have been used by other businesses to expand and create jobs.

How Long Did the Great Recession Last?

According to official Federal Reserve data, the Great Recession lasted 18 months, from December 2007 through June 2009.

Have There Been Recessions Since the Great Recession?

Not officially. While the economy did suffer and markets fell following the onset of the global COVID-19 pandemic in early 2020, stimulus efforts were effective in preventing a full-blown recession in the U.S. Some economists, however, fear that a recession may still be on the horizon.

How Much Did the Stock Market Crash During the Great Recession?

On Oct. 9, 2007, the Dow Jones Industrial Average closed at its pre-recession high of 14,164.53. By March 5, 2009, the index had fallen more than 50% to 6,594.44.

On Sept. 29, 2008, the Dow fell nearly 778 points in one day. It was the largest point drop in history until the market crashed in March 2020 at the start of the COVID-19 pandemic.

The Great Recession lasted from roughly 2007 to 2009 in the U.S., although the contagion spread around the world, affecting some economies longer. The root cause was excessive mortgage lending to borrowers who normally would not qualify for a home loan, which greatly increased risk to the lender.

Lenders were willing to take this risk, as they could simply package the loans into an instrument they sold, passing the risk on to investors. Low interest rates and poor regulatory oversight following the repeal of the Glass-Steagall Act compounded the problem, as credit was cheap and lending institutions had been freed from regulations that would have hampered their ability to mix commercial and investment banking, which Glass-Steagall had separated.

As the economy imploded and financial institutions failed, the U.S. government launched a massive bailout program, which included assistance for consumers and the many unemployed people via the $787 billion American Recovery and Reinvestment Act (ARRA). Most credit the bailouts and the ARRA with providing much-needed relief to the public and with saving the financial industry (along with other industries) from total failure; however, some assert the money used to bail out insolvent institutions could have been directed to more productive enterprises rather than using it to save failed ones.

Federal Reserve Economic Data (FRED), Federal Reserve Bank of St. Louis. “ Gross Domestic Product (GDP) .”

GovInfo. “ The Financial Crisis Inquiry Report .”

International Monetary Fund. “ Shadow Banks: Out of the Eyes of Regulators .”

Federal Reserve Economic Data (FRED), Federal Reserve Bank of St. Louis. “ Federal Funds Effective Rate (FEDFUNDS) .”

Congress.gov, U.S. Congress. “ H.R.4173—Dodd-Frank Wall Street Reform and Consumer Protection Act: Text .”

Federal Reserve Bank of St. Louis. “ Quantitative Easing: How Well Does This Tool Work? ”

NPR. “ Congress Approves $787 Billion Stimulus Plan .”

Yahoo! Finance. “ Dow Jones Industrial Average (^DJI) .”

Federal Reserve History. “ The Great Recession and Its Aftermath .”

Reuters. “ Economic Outlook Has ‘Darkened,’ Business and Government Leaders Warn in Davos .”

• Recession: Definition, Causes, Examples and FAQs 1 of 37
• What Causes a Recession? 2 of 37
• 7 Ways to Recession-Proof Your Life 3 of 37
• 5 Things You Shouldn’t Do During a Recession 4 of 37
• How Do Asset Bubbles Cause Recessions? 5 of 37
• What Happens to Unemployment During a Recession? 6 of 37
• How the Federal Reserve Fights Recessions 7 of 37
• What Happens to Interest Rates During a Recession? 8 of 37
• Why Is Deflation Bad for the Economy? 9 of 37
• Why Is Stagflation Bad for the Economy? 10 of 37
• Are Economic Recessions Inevitable? 11 of 37
• Do Recessions Have a Silver Lining? 12 of 37
• The Impact of Recessions on Businesses 13 of 37
• 9 Businesses That Thrive in Recessions 14 of 37
• Industries That Can Thrive During Recessions 15 of 37
• What’s the Best Investing Strategy to Have During a Recession? 16 of 37
• How to Spot Recession-Resistant Companies 17 of 37
• 3 Ways to Take Advantage of a Recession 18 of 37
• 4 Ways to Hedge Against the Next Recession 19 of 37
• US Recessions Throughout History: Causes and Effects 20 of 37
• Great Recession: What It Was and What Caused It 21 of 37
• American Recovery and Reinvestment Act (ARRA): Objectives and FAQs 22 of 37
• 5 Top Investors Who Profited From the Global Financial Crisis 23 of 37
• Double-Dip Recession: Overview, History, FAQ 24 of 37
• Economic Cycle: Definition and 4 Stages of the Business Cycle 25 of 37
• Economic Recovery: Definition, Process, Signs, and Indicators 26 of 37
• What Is Economic Stimulus? How It Works, Benefits, and Risks 27 of 37
• All About Fiscal Policy: What It Is, Why It Matters, and Examples 28 of 37
• Growth Recession: What It Is, How It Works 29 of 37
• Inverted Yield Curve: Definition, What It Can Tell Investors, and Examples 30 of 37
• Recession Proof: Overview and Example 31 of 37
• Recession Resistant: Definition, How It Works, and Examples 32 of 37
• K-Shaped Recovery: Definition, K-Curve Chart Example, and Causes 33 of 37
• L-Shaped Recovery: Meaning, Examples, FAQs 34 of 37
• U-Shaped Recovery: What It Means, How It Works, and Examples 35 of 37
• V-Shaped Recovery: Definition, Characteristics, Examples 36 of 37
• W-Shaped Recovery: What it is, How it Works, FAQs 37 of 37

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The Financial Crisis of 2008

By: Gunnar Trumbull

This case presents excerpts from the speeches of observers to the 2008 financial crisis, including former and current central bankers, a private banker, and a Nobel-prize winning economist. They…

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• Publication Date: Dec 16, 2008
• Discipline: Finance
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This case presents excerpts from the speeches of observers to the 2008 financial crisis, including former and current central bankers, a private banker, and a Nobel-prize winning economist. They present different interpretations of the causes of the financial crisis, and make proposals about how a similar crisis might be stopped in the future. The goal of the case is to provide students with alternative perspectives and broad historical data so that they can evaluate both causes of and responses to the crisis.

Learning Objectives

To consider the causes of the 2008 financial crisis and appropriate policy responses.

Dec 16, 2008

Discipline:

Harvard Business School

709036-PDF-ENG

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The Global Financial Crisis, Essay Example

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The present paper is dedicated to the examination of the global financial crisis and its impact on the economy of the USA and other countries of the world. Major attention is drawn to the underlying causes of the crisis, the impact of the US critical situation on the world’s financial situation, international trade, and other aspects of international cooperation such as FDI and international stock exchange. Various aspects of the crisis impact are investigated, e.g. the effect on the US housing market, the impact on borrowing money, and the commodity boom and bust. Further on, the variety of global implications is observed: the impact of the US crisis on the global financial system, the impact on globalization etc. is in the center of focus. A brief overview of implications for separate countries and regions of the world is undertaken. Finally, a series of conclusions and recommendations for the future perspectives of the global crisis as well as the ways to have avoided the crisis are presented in the concluding part of the work.

Introduction

It is obvious that nowadays the world is still deeply involved in the global crisis, recession, and depression in the majority of significant sectors of national and international economy. Both the developed and developing countries of the world have been stuck by the soaring figures of economic growth, large-scale lays off and enormous financial losses due to the financial market collapse. As a result of the fall of the US financial market due to the prior boom of the housing and consumption market, the interconnected commodity and financial markets showed the sudden downturn in 2008. The financial consequences of the major financial firms’ collapse could not have been predicted at that period of time, but soon the situation revealed its dramatic image. The mass lays off led the country to the increased borrowing practices in an attempt of the nation to pay its debts off in a conventional manner. However, the second facet of the US market, an unrivaled fall of lending capacity and lender confidence, completed the picture by leaving people without borrowed money and without any possibility to find it.

One can imagine to what results the comprehensive troubles in the financial market of the US led; since the majority of capital in the country was mortgage-backed, it collapsed at the foreground of soaring housing prices and led to the overall despair. People without jobs and without money were urged to sell their homes, but they could not do that because of the collapsing housing market. The unpredictability of the financial situation, the dramatic problems in the banking sector leading the most stable financial firms, bankers, and insurers to nationalization and being bailed out by the Federal Reserve caused subsequent reactions in other countries. Capital was gathered from developing countries to save the economy of the US, thus aggravating the international relations situation and hindering the whole process of international cooperation. Developing countries feeling lack of finance showed in economic growth and decreased the levels of import, thus infecting the whole global economy. There seemed to be no way out of the situation, and there is hardly any at the present period of time, taking into consideration the disastrous consequences of the US economic destruction.

Taking into consideration the current catastrophic situation in practically all markets of the world, and consequently the field of international trade and financial exchange, one should think it is appropriate to investigate the causes and stages of the US financial crisis in depth, and to produce a set of conclusions on how the crisis emerged and expanded, how it managed to affect other countries of the world so bitterly, and whether there initially were any ways out to predict and prevent the crisis at its roots. It is logical that the US financial market turned out to be too much inter-related with other economies and markets of the world, which caused the global spread of the crisis infection. In addition, the US market was too reliable on the risky mortgage-backed securities, which led to the enormous systemic risk causing the downturn of one sector of economy after another. The US marker has always been of central importance in the global economy, which caused the serious impact on other countries. Hence, the ways to restore the situation in the USA and the whole world are seen in the reconsideration of reliance on risky securities, the comprehensive action on the macro- and micro-economic level, and the international cooperation and mutual support by countries deeply affected by the crisis in the USA.

Literature Overview

The present paper relies heavily on four major sources chosen for consideration. The first source deals with the exploration of the global financial crisis and its implications on the global economy. Baily and Elliott analyze the initial burst of the housing market as the first step to the critical situation that began to manifest itself in 2005, and overview the consequent stages of crisis development in the field of housing and commodity consumption (Baily & Elliott 6). The authors’ main thesis statement is that the problem was aggravated because of the large-scale unemployment that made the domestic economy literally stuck. People who had no jobs and no money for spending could not push the economy out of the economic recession because they had no purchasing power for that.

No purchases were undertaken, but only sales of property by citizens in despair were a typical image for 2008 and the beginning of 2009 (Baily and Elliott 7-8). Therefore, the authors see the systemic impact on the crisis from the consumption field and from the direct effect of the nation’s reaction to the situation. The conclusion they make is that too much reliance was evident on the banks with much lending power, much borrowing which was practically always mortgage-based and little economizing and saving for the sake of securing one’s future in case of trouble (Baily & Elliott 10).  The high-risk lending practices have also been indicated as the driving force of the US crisis by Brandon and Welch; the authors explored the role of financial planning in the outbreak of the crisis and as a measure of its mitigation (Brandon & Welch 96).

The purely financial angle of attention to the US financial crisis is taken in the work of Dick K. Nanto; the author provides a detailed analysis of the four stages of the financial crisis that were evident in the USA (Nanto 8-10). Among other issues of Nanto’s attention are the measures for coping with macroeconomic effects of the crisis and regulatory and financial market reform steps (Nanto 10-12). The author pays attention to the importance of eliminating political, social, and security effects of the crisis as well: among the problems of number one priority  he names coping with poverty and coping resources allocation, problems of international leadership and formulation of healthy attitude to the US, and organization of proactive political leadership on the national level (Nanto 15).

Baily and Elliott explore the causes for the global impact of the financial crisis in the US and see the prime reason for this in the excessive confidence in the mortgage-based CDOs and CDSs (the essence of notions will be explained further) that lost tremendously in price as soon as the troubles in the housing, and consequently financial, market became evident in the USA (Baily & Elliott 5). Nanto also pays much attention to CDOs and CDSs in the formation of the crisis in its current state, and indicates that CDOs appeared to be the primary cause of the AIG collapse (Nanto 4). The main reason for the global reach of the crisis is seen by Nanto in the overall reliance on American securities that lost their prices in 2008 and paralyzed economies of the major part of the world (Nanto 2).

The final source taken for the present analysis is the 2009 estimate of the critical situation all over the world by IMF. The measures IMF specialists outline as a source of overcoming the financial tragedy in the major part of the countries in the world include repairing the financial sectors in a domestic manner, supporting aggregate demand of the nation, easing the external financial constraints (through promotion of financial cooperation despite the hard financial conditions), and facing the medium-run policy challenges (IMF xiii). The most serious impact on the global economy is estimated in the IMF is seen in weakening the national currencies (especially the ones of developing countries), curtailed access to external financing, and fiscal deficits that widen sharply (IMF xvi). Speaking about finding the coping solutions, the IMF specialists underline the expected hardships in the process of building the saving potential by households, and the reduction of financial leverage that will inevitably occur (IMF xvii).

The Crisis in Perspective

Upon a thorough investigation of the crisis outbreak, the majority of researchers come to a unified conclusion that the problems in the housing market appeared the major cause of problems. Baily and Elliott note that the residential investment in the USA reached high volumes at the beginning of the 21 st century, which caused a rise in the commodity market as well (e.g. buying new furniture, appliances etc.) (Baily & Elliott 6). However, the market had become saturated by 2005, and the following years witnessed a growing decline (-18% in 2007, -21% in 2008, and -38% in 2009) (Baily & Elliott 6). The logical reaction to the decline was the fall in housing prices. As a result of that trend, households lost $13 trillion in equities and home prices – mortgages remained the same while the prices fell, and the families appeared unable to pay off their mortgage loans on the background of the declining economy and national financial prices (Baily & Elliott 6).

The problem revealed itself when the levels of consumer spending started to fall; during the period of the boom ‘innovative’ products of the financial market and consumer spending (and consequently borrowing) fueled each other to reinforce the economic growth. However, as soon as the decline started, the two deeply interrelated fields started to drown each other due to the systemic correlation they represented (Baily & Elliott 7). At that point, the problems in the housing market transformed into problems in the financial market, which was revealed in the borrowing issues (Brandon & Welch 96).

Borrowing money from the banks and large financial institutions has for a long time constituted the core of the US prosperity and high living standards. While the crisis was still not evident, people did not have saving habits and enjoyed the high level of trust from lenders, therefore obtaining many possibilities for financing their large-scale acquisitions like homes or cars with the help of borrowed capital. Confidence in the securities was also rather high, so people made investments and saved money in the form of CDOs and CDSs. The credit default swaps (CDSs) and collateralized debt obligations (CDOs) are the central figure in the financial side of the crisis. CDOs were primarily based on subprime mortgages. Payoffs and collateral calls on CDSs issued subprime mortgage CDOs became the largest cause of AIG problems (Nanto 3-4). The 2007 liquidity crisis hit was another point in the downward direction of the US financial market (Baily & Elliott 5).

Therefore, the crisis that began as a burst of US housing gave rise to the foreclosures in the market and resulted in the global financial and economic crisis. As the credit flows froze in 2008, and lenders’ confidence dropped, the fundamental weaknesses in the financial systems worldwide were revealed in the systemic inter-reliance on each other (Nanto 2). The US attempt to save its domestic economy from a crash resulted in the worldwide crash of less stable and more dependent economies. As a result of pulling capital from other countries, the US managed to achieve partial restoration of its financial structure, but at the same time the chain reaction because of lack of external financing caused the downturn of economies worldwide, which still returned to the USA in the form of international trade decline (Nanto 2).

Consumption market in the USA could not help affecting the overall state of the economy, and added to the aggravating effect of the crisis. The reason for this is the direct relationship of consumption habits and the borrowing possibilities of US citizens. As Baily and Elliott note, the US took the first step of tightening the bank lending standards, with the total freeze of loans shortly after that (Baily & Elliott 8). What was seen as an urgent rescue measure for the financial market in the US, turned out to be the total drama for the US consumers. At the background of massive lays off, as estimated by Nanto at the level of 111,182 in May 2009, people were left without the prime source of income, without health insurance, and with huge mortgage debts they had to pay off to remain with a dwelling (Nanto 82).

Therefore, consumers left without financial sources cut their expenditures dramatically, which was the start of the commodity market collapse. Later on, with the cuts of external financing for the developing countries, the US was left without a significant share of import reported to decline by 34% (Baily & Elliott 16). This tendency appeared to aggravate the state of the US domestic market seriously, and revealed the heavy dependence of the USA on the capital flows from the rest of the world (Baily & Elliott 20).

Global Crisis

As it has already become evident from the information above, the US financial and economic crisis produced the disastrous effect on all economies of the world. The reason for such vast effect of financial problems in one country is the close relationship between economies in the international trade and financing nowadays. Each country depends on the set of others in terms of securitization of the financial market and the globalization of the stock exchange, the internalization of business due to the increase in emergence of multinational corporations tying the international business into a unified biological organism. Thus, problems in one organ of the body inevitably cause the infection of all organs and systems of organs, which actually took place with the global economy. The Asian market that thought to be shielded by the sound banking system and corporate balance sheets witnessed a decline from 10% to 25%, mainly in new industrialized economies such as Singapore, Korea, Taiwan, and SAR (IMF 711). The main reason for such a dramatic downturn was the quick fall in demand for consumer durable goods in the USA and other countries impacted by the recession (IMF 71).

Europe appeared vulnerable to the turbulence in the US economy as well. The main causes for the plunge in the US markets were the lower expectations about the future income European households had, which resulted in the decrease of the international trade (IMF 75). The crisis in Europe had begun earlier than the US financial collapse manifested itself because of the increase in oil prices (IMF 75). However, the countries hit the most by the recession were the CIS countries that represent the emerging European economies, and developing countries depending heavily on FDI. The CIS economies are thought to have experienced the triple blow of the crisis, including the effect of financial turbulence, the slumping demand in terms of export to advanced economies, and the fall in commodity prices, namely the prices for energy (IMF 84).

As one can see from the present research paper, the US financial crisis started as a problem of financing the growing consumption demands of the US citizens, and the crisis of lending practices. Further on, the inter-relation of the global community in terms of finance, trade, and economy revealed itself in the systemic risk; the initial efforts taken by the US policymakers caused the unrivaled economic downturn all over the world, with the most distant and independent economies affected. The main consequences for the advanced economies included the collapse of financial and security markets, freezes in the domestic housing and commodity markets, and huge job losses. The developing economies were troubled much more as they appeared paralyzed in their development and advancement because of the lack of external financing from the US and other advanced countries. Being the bystanders of the crash in the most developed and prosperous markets of the world, developing countries became the innocent victims of the downturn, so they need urgent help as well, being unable to cope with the crisis only due to their internal resources.

Generally speaking, it is clear that only a comprehensive effort of the US financial legislators and the cooperative measures from other countries can help the contemporary world get out of the deep slump of the economy, consumption, and securities market. To outline the major perspectives of coping with the crisis for the near future, one should turn to Nanto’s consideration of the solutions proposed by the US Congress. They include:

• Introducing strong financial regulations to detect threatening institutions and economically unstable enterprises
• Establishing comprehensive supervision of financial markets
• Protecting consumers and investors from financial abuse
• Providing the government with tools to manage increased international regulatory standards (Nanto 6-7).

It is clear that the whole world, the US included, will need several decades to cope with the crisis and its consequences. The destructive ideas on self-reliance hinder the international trade, so a new level of mutual trust should be established for countries to regain confidence in each other. Households will need more financial guarantees and time to accumulate capital for securing themselves from another turn of the crisis. Therefore, coping with the crisis and restoring the trusting and deeply interconnected international trade space is a long-term perspective that should be given a number one priority alongside with domestic restoration and recovery.

Works Cited

Baily, Neil Martin, and Elliott, J. Douglas. “The US Financial and Economic Crisis: Where Does It Stand and Where Do We Go From Here?” Initiative on Business and Public Policy at Brookings . 2009. Web. 30 November 2010.

Brandon, E. Denby, and H. Oliver Welch. The History of Financial Planning: The Transformation of Financial Services . San Francisco, CA: John Wiley and Sons, 2009.

IMF. “World Economic Outlook: Crisis and Recovery”. World Economic and Financial Surveys . April 2009. Web. 30 November 2010.

Nanto, K. Dick. Global Financial Crisis: Analysis and Policy Implications . Washington, DC: DIANE Publishing, 2010. Print.

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Global financial crisis in 2008.

979 words | 4 page(s)

Introduction For the United States and the world at large, the occurrence of the global financial crisis in 2008 brought upon the greatest recession that the country has experienced since the Great Depression of the 1930s. This crisis caused a shockwave within the financial world that was barely stopped by the implementation and wide-scale use of government funds to bail out major banking institutions in order to prevent a systemic collapse of the global financial system.

Housing Bubble and the Global Financial Crisis One of the main causes of the global financial crisis stemmed from the housing bubble that was experienced in the United States. After the occurrence of the tech bubble collapse in the early 2000s and the terrorist attacks on the United States, the Federal Reserve enabled policies that lowered interest rates in order to boost spending within the economy (Bernanke, 2010). This caused a cascading effect in which lending standards were lowered in order to allow consumers of all income levels to be able to purchase homes. Often dubbed NINJA (No Income No Job Or Asset) loans of hundreds of thousands of dollars were given to individuals who would not have been able to acquire such currency by other means (Martin, 2011).

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The huge increase in loans and drop in interest rates fueled a huge increase in the price of real estate, as investors were in the search of an investment that would be reliable in the face of the systemic collapse of tech investment within the early 2000s. The system was shaken, and investor confidence determined that the housing market would be the best area of investment due to its history of stable prices and long-term value increases in the past 30 years.

The obsession with real estate became systemic as myriad of investors would speculate on home prices. Huge housing projects were funded and created in areas that would not have otherwise supported such a housing boom; such projects raised the prices in a number of neighborhoods which incentivized non-investors to attempt to speculate in the housing market through the use of home equity and other credit lines available to consumers. As the housing bubble popped, many of these individuals with unsustainable loans were left unable to pay their debts due to the dramatic drop in housing prices that occurred.

Credit Rating Agencies Credit rating agencies also played a significant role in the financial crisis, as they were primarily responsible for the aftereffects of the loans that were given out to consumers (White, 2010). For the vast majority of home loans, the lending institution did not hold on to them, but instead bundled them into securities and sold them off based on their credit rating. Credit ratings were assigned by credit rating agencies, which judged the veracity and reliability of the loan payments that would be made by home owners in order to determine whether the security was investment grade or not.

These agencies, however, did not maintain proper rating standards for such securities and assigned investment grade ratings to bonds that would never have passed inspection otherwise (Sinclair, 2010). By handing out false securities ratings, the demand for securities would have been significantly higher as the risk within these securities would have been obvious, rather than hidden. False credit ratings gave investors a false sense of security, as they were not aware of the significant risk that they were undertaking by investing in these items (Katz, et al., 2009). Furthermore, the rating agencies frequently had conflict of interests when involved within these operations. The investment firms who sold such securities, such as Goldman-Sachs would frequently short the very same securities that they were selling to their customers.

Derivatives Derivatives were a new method of securitization that was used to shift the risk of an investment between parties. Due to the secretive and private nature of these derivative agreements, they were often used as methods for hiding the credit risk from a third party while protecting the counterparties within these agreements (Crotty, 2009). While this did not cause the financial crisis, it exacerbated the effects of which due to the inability of investors to properly appreciate the risk undertaken through these transactions. The use of derivatives to disguise risk posed a major problem, and significantly contributed to the lack of financial caution experienced in the pre-recession world.

The large scale use of these securities derivatives contracts by highly influential financial institutions poses a significant chance of systemic risk, as this created a culture of institutional interdependence between major firms. Simplified, the crisis within a single institution will spread the crisis throughout the system. The chain-reaction of default and collapse could triggered a systemic crisis as the proper conditions were met (Simkovic, 2010). The risk of a financial crisis was increased by the complete lack of regulation within the derivatives market.

Conclusion In the overall picture, all three factors were critical to the creating and the occurrence of the financial crisis. Unfortunately, a number of lessons from this crisis were not learned as proper regulation of the financial industry has yet to occur. The impact on the crisis still continues to display its effect on the global economy.

• Bernanke, B. S., 2010. Monetary Policy and the Housing Bubble, s.l.: Speech at Annual Meeting.
• Crotty, J., 2009. Structural causes of the global financial crisis: a critical assessment of the ‘new financial architecture’. Cambridge Journal of Economics, 33(4), pp. 563-580.
• Katz, J., Munoz, E. S. & Stephanou, C., 2009. Credit rating agencies: no easy regulatory solutions. The World Bank Group
• Martin, R., 2011. The local geographies of the financial crisis: from the housing bubble to economic recession and beyond. Journal of Economic Geography, 11(4), pp. 587-618.
• Simkovic, M., 2010. Paving the Way for the Next Financial Crisis. Banking & Financial Services Policy Report, 29(3).
• Sinclair, T. J., 2010. Credit rating agencies and the global financial crisis. Economic Sociology, 12(1), p. 7.
• White, L. J., 2010. Markets: The Credit Rating Agencies. The Journal of Economic Perspectives, Volume 4, pp. 211-226.

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2008 Global Financial Crisis: Crises of Capitalism? Essay

Introduction, main discussion.

I concur with Harvey’s account of the infamous 2008 global financial crisis and how the past events could help in explaining the synopsis of the global meltdown. I also agree with Harvey on the issue of the goalpost shifting of different financial problems since capitalism is not interested in finding permanent solutions. The capitalist market is more comfortable when the crisis is shifted to another region. Although I had an idea of the possible catalysts of the 2008 global financial meltdown before watching the video, Harvey presented a clear report of the events that occurred before the crisis and put them into perspective, especially in terms of how the American financial market operates at the macro level.

Harvey subjected the financial market in America to a microscopic analysis in order to highlight the glaring imbalances resulting from subjecting markets to the capitalistic orientation. In the video, Harvey carried out a comparative analysis of the 2008 financial crisis and similar events in the past. The findings are analogous, indicating that capitalism is the root cause of all the past financial crises in the US that spills to other regions. In the view of Harvey, capitalism can only survive if it grows in order to retain a functional facet.

In the process of growth, capitalism shifts financial problems to different geographical locations. The shift occurs because capitalism is functional only when it grows and is successfully managed, irrespective of the direction. In the video, Harvey was specific about if the growth of capitalism is negative in the markets where it is functional, the shortfalls have to be shifted to another geographic location. The constant shift causes capitalism to spread and in the meantime incurs eventual financial crisis whenever it fails to grow in the market. This, in turn, compels a significantly wide scale of the financial crisis even when the meltdown originates from one region.

I concur with the post on underlying factors that precipitated facilitate the financial crisis to spread worldwide as a result of capitalism. Based on Harvey’s talk, I can refer to the 2008 financial crisis as an institutional failure in one market as having the potential to spread like a bush fire to other geographical regions. It happened because an institutional failure under the capitalistic markets is not static and confined to one region since there is constant inter-and intra-market trade. To further clarify the institutional failure as catalyzing the crisis, the functionality of capitalism is purely based on its successes in implementation. These successes should be sustainable for the market to remain sound and economically viable. In the event of improper institutional regulation, there is bound to be a ripple effect on the market forces operating at the macro level. If the situation of institutional failure persists, there is no alternative but to move capitalistic shortfalls to other geographic markets.

The shift often occurs abruptly because of the interrelatedness of different markets, as influenced by institutions mandated to manage the financial market indicators such as the balance of payment. Unfortunately, if the shift is too sudden, there are considerably high chances of an instant spillage of high magnitude to the primary and secondary markets across the globe. If unchecked because of the persistent institutional failure, a global financial crisis of a different kind might occur to complete the recurring cycle, which often takes a different shape yet bringing the same results.

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IvyPanda. (2024, April 16). 2008 Global Financial Crisis: Crises of Capitalism? https://ivypanda.com/essays/crises-of-capitalism/

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1. IvyPanda . "2008 Global Financial Crisis: Crises of Capitalism?" April 16, 2024. https://ivypanda.com/essays/crises-of-capitalism/.

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IvyPanda . "2008 Global Financial Crisis: Crises of Capitalism?" April 16, 2024. https://ivypanda.com/essays/crises-of-capitalism/.

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How Did Europe Get Left Behind?

Since the global financial crisis of 2008, the eu has seen little growth, with a gdp of around $15 trillion, while the u.s. has marched ahead to a gdp of $27 trillion. but why.

If the United Kingdom or France joined the United States, they would become the  poorest states in the country, with a GDP per capita lower than even Mississippi . Germany would be the second poorest. For most of the second half of the 20th century, Europe and the U.S. rivaled each other in GDP. In 2008, the EU and U.S. had GDPs of $14.2 trillion and $14.8 trillion, respectively. Closing 2023, the EU has seen little growth, with a GDP of around $15 trillion, while the U.S. has marched ahead to a GDP of $27 trillion.

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The EU GDP growth clocked in at  0.1 percent for 2023’s last quarter, a small fraction of the U.S.’s 3.4 percent during the same period. The UK fell into recession in the back half of last year, but the French economy looks to an optimistic forecast of 0.9 percent growth for 2024 to put six months of stagflation in the rearview mirror. While inflation has come down to just above 3 percent, similar to the U.S., the European Central Bank’s rate hikes have taken a larger toll on the nation-states.

One reason Europe has fallen behind? A spending handicap.

After the 2008 Global Financial Crisis (GFC), which originated in the U.S. real estate debt and loaning markets in 2007 and triggered a recession in Europe in the second quarter of 2008 , the U.S. and Europe increased stimulus spending and access to liquidity. This increased the debt-to-GDP percent in the U.S. from 61.8 percent in 2007 to 82.0 percent in 2009 and from around 60 percent to 73 percent for the average EU government in the same time period. Because the U.S. benefits from the dollar’s reserve currency status, it can comfortably borrow large amounts at relatively low rates due to the high demand and liquidity of the U.S. treasury market. Europeans cannot take advantage of the same privilege, and thus saw a growing debt crisis in the years following the GFC in countries like Ireland, Greece, Portugal and Spain, which were having trouble paying back the debt their governments had borrowed. The crisis peaked in 2010 when Greece’s sovereign debt was downgraded to junk by rating agencies. Numerous European countries required bailouts from the IMF and EU and  instituted new austerity policies  that limited public spending.

Such austerity policies became handicaps in dealing with future crises: during the COVID pandemic, the U.S. distributed  $5 trillion  in stimulus, while the U.K. and Germany spent $500 billion, France spent $235 billion, and Italy $216 billion, as per  Moody’s . Though controversial then and a contributor to the steep inflation that followed, the cash cascade likely helped the U.S. spend itself out of a recession. Household savings were at dramatic highs following the pandemic, allowing consumer spending—contributing to 70 percent of the U.S. GDP—to be strong through the Federal Reserve rate hikes . Post-pandemic, the U.S. has continued its public investment streak with the Infrastructure Investment and Jobs Act, CHIPS Act and Inflation Reduction Act, contributing another $2 trillion to its manufacturing and construction sectors and far exceeding EU contributions.

The privileged ability to spend through the dollar’s global reserve status, though amounting to a national debt of unprecedented size, has allowed the U.S. to run circles around Europe in public spending and crisis-time stimulus while subverting debt crises.

A variety of other factors

The explanation of why the U.S. economy has outpaced Europe cannot be reduced to just one reason. Broad structural differences are at play: the U.S. enjoys a large single free trade zone, where capital and labor can unquestionably cross state boundaries without additional tax, tariff or currency conversion costs. Brexit and many other hurdles have tested the EU’s free trade zone. The U.S. is also unusually entrepreneurial: more start-ups are  founded in the U.S. than in the European Union, and the U.S. leads the world in VC funding .  Eight of the ten largest companies globally by market cap are American; none are European. The U.S. is also the globe’s most attractive place for investment, making the New York Stock Exchange  larger than every European stock exchange combined  (and that is just one of the U.S.’s equity exchanges). Recent events also serve as obstacles: energy embargos on Russia have been far more taxing on Europe, with the cost of electricity far higher than in the U.S. and  not yet returning  to pre-sanction levels.

Recent events also serve as obstacles: energy embargos on Russia have been far more taxing on Europe, with the cost of electricity far higher than in the U.S. and  not yet returning  to pre-sanction levels.

What’s next?

European leaders are eager to act. “We’re in danger of falling out of touch. There is no time to waste. The gap between the European Union and the U.S. in terms of economic performances is becoming bigger and bigger,” former Italian Prime Minister Enrico Letta admitted in a  recent report .

Last week, European leaders gathered to discuss the “European Competitiveness Deal,” aimed at helping the continent catch up to the U.S. and China. The policy would upskill workers, make Europe more attractive for capital, reduce the cost of energy and strengthen trade, as per the European Commission . Among Europe’s long-term challenges is that its leaders ultimately need to make their markets an attractive place for Europeans to invest their savings; French President Emmanuel Macron noted that  “Europe has more savings than the United States of America … and every year, around 300 billion euros of these savings go to finance the American economy.”

The U.S. greatly benefits from a stronger Europe, giving it an ally to help curtail Chinese and Russian influence. However, the U.S. has recently levied tariffs against Europe while implementing trade and subsidy policies. European leaders have criticized it as protectionist , reducing Europe’s global competitiveness and growth potential.

• SEE ALSO : Spotify CEO Daniel Ek: ‘Monetization Remains Our Top Priority’

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The number of U.K.-listed companies issuing profit warnings is higher than during the Global Financial Crisis, new report finds

British companies haven’t had a chance to catch their breath since the COVID-19 pandemic. From business closures to slow demand and high costs, several factors have continued to weigh on them. 

The result?

Nearly 20% of U.K.-listed companies have issued profit warnings in the past 12 months, according to a new report released Monday by EY-Parthenon, the consulting arm of Big Four firm Ernst & Young. 

That’s marginally higher than the figure recorded at the peak of the Global Financial Crisis in 2008 at 18%. 

Companies typically issue profit warnings when they expect their results to fall short of market estimates . 

The issue seems especially dire given that the number of companies listing in the U.K. has fallen by 6%, while companies issuing warnings about their profits have ticked up. 

“Macroeconomic pressures, while less intense, have not relented in 2024, and the full impact of interest rate increases is yet to be felt by many businesses,” said Jo Robinson, a partner at EY-Parthenon. 

She gave the example of luxury goods, which have generally shown resilience amid periods of economic volatility but lately have seen demand fall through the cracks. 

It’s true—some of the world’s most prominent luxury players, whether France’s LVMH or Britain’s Burberry , have been hurt by slowed consumer spending impacting their sales. Other companies like Gucci owner Kering have also issued two profit warnings in two months , underscoring the sluggish state of business in contrast to the pandemic years. 

Other homegrown retailers such as The Body Shop and Ted Baker have also folded in recent months. Wilko, the discount chain, was another high-profile victim of the same trend, resulting in 12,000 job losses .

The report reflects these trends, as the highest proportion of companies issuing warnings belong to the personal and leisure goods categories. Their reasons ranged from supply-chain snarls to canceled contracts and higher financing costs. 

Smaller companies have been the worst hit as costs have trended upward. In January, a government report found that the number of bankrupt businesses hit a 30-year high in England and Wales last year, surpassing 25,000 . 

The only other sector that struggled more financially was industry-support services, EY-Parthenon noted, which includes recruitment agencies and industrial supply providers.  

While the odds might be stacked against U.K. companies now, there are still things to look forward to as the worst might be behind us. Inflation has been cooling over the past few months , and interest rates are widely expected to be slashed this summer, offering respite to businesses and consumers alike. The U.K. consumer sentiment is also beginning to turn, slowly but surely.

“Although this looks like an economically easier year on paper, companies still need to be scenario planning as the macroeconomic pressures we have seen over recent years are far from over,” Robinson said.

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