The 2008 Financial Crisis

The 2008 Financial Crisis lead to the Global Economic downturn of 2008-2009. There are many competing explanations for the start of the crisis, but there are a few undisputed facts about the crisis. In late 2006, a bubble in the United States housing market began to burst. Housing prices began falling nationwide, which started putting pressure on US financial institutions through their ownership of complex mortgage-backed securities. As the houses behind these securities began to lose value, so did the securities themselves. At this time, other complex securities such as derivatives and credit-default swaps began to lose their value as well, thus, many financial institutions were faced with huge write downs (losses on their accounting books). In late 2007 and early 2008, these changes started snowballing, causing huge losses across the financial industry. Credit shrunk as banks were no longer willing to give out loans, putting further pressure on financial institutions as they were no longer able to get loans to cover their losses caused by the write-downs of their financial assets. By March 2008, financial giant Bear Sterns had to be bought be JP Morgan (through a loan financed by the New York Federal Reserve), and in September, Lehman Brothers filed for bankruptcy, sending shockwaves throughout the global financial system. At this point the economy was in what economists call a liquidity trap, where monetary policy is ineffective.