The credit crunch (2007-08), in which the global banking system ran out of funds, caused a drop in confidence and bank lending, was the fundamental cause of the Great Recession. The causes of the credit crunch were complex, but here’s a quick rundown.
- Sub-prime mortgage loans increased dramatically in the United States between 2000 and 2007. These mortgages were extremely hazardous, but there was a lot of ‘irrational exuberance’ and the expectation that housing values would continue to rise.
- These ‘risky mortgage bundles’ were sold to banks all around the world by US mortgage businesses. (Despite the fact that they were extremely dangerous, credit rating agencies gave them AAA ratings.)
- Interest rates in the United States began to rise about 2005, and homeowners in the United States began to fail on these riskier mortgages.
- Banks in the United States lost money, but banks all around the world later discovered that the’safe’ mortgage packages they purchased were actually worthless. Many banks around the world saw their liquidity and asset values plummet.
- Financial instability has caused a drop in consumer and business confidence.
- Because of overvalued exchange rates and high bond yields in Europe, the single currency has generated extra challenges.
- Great restraint. From 2000 to 2007, the economy grew rapidly, inflation was low, and unemployment was low. Central banks seemed to be effective in achieving their goals of low inflation and economic stability. However, beneath the surface of macroeconomic stability, credit and financial markets were becoming increasingly unstable.
- There is a housing bubble. House prices in many countries have risen rapidly. House prices increased faster than inflation and salaries. A rise in bank lending and a strong level of confidence aided the housing bubble. Several countries, including Ireland and Spain, saw a surge in home construction.
- Loans that aren’t good. Banks became increasingly aggressive and willing to take risks in lending in the run-up to the credit crunch. Banks and mortgage businesses, particularly in the United States, relaxed their lending restrictions. Many homeowners received big mortgages with few checks on their ability to pay them back. People, on the other hand, were stuck with mortgages they couldn’t afford during the economic collapse.
- Repackaged and resold bad loans These “bad” mortgage loans were sold to financial institutions all around the world. Many UK and European banks, for example, bought these mortgage bundles (CDOs) from the US and were so exposed to any possible losses in the US housing market.
- The real estate bubble burst. The housing market bubble in the United States crashed in 2006. House prices began to decline, and mortgage defaults increased. Banks began to realize that the US mortgage defaults had cost them a large amount of money.
- Banks are cash-strapped. The size of bank losses began to grow, making it more difficult for banks to borrow money on the money markets. As a result, banks cut back on lending and mortgages. Because banks were losing money, obtaining credit and liquidity became difficult. Some banks lost so much money that they ran out of cash. The government had to bail out large banks in various nations, including the United Kingdom, Ireland, and the United States. However, the realization that banks were cash-strapped undermined consumer and investor trust. Lower spending and investment were the result of the drop in confidence.
- Oil prices have risen. Oil prices also reached a high point in 2008. This made things more problematic because it resulted in cost-push inflation. Central banks were more hesitant to decrease interest rates as a result of this cost-push inflation. Increased oil costs also reduced discretionary income, resulting in lower spending. Oil prices usually fall during a recession. However, rising oil prices were seen as a result of rising demand in China and India, even as Europe and the United States slid into recession. Another factor lowering demand was high energy and commodity prices.
The impact of the credit crunch and recession
- In 2008, the real GDP of all major economies fell precipitously. Normal bank lending was substantially hampered by the banking crisis. As a result, investment and consumer expenditure fell, resulting in a substantial reduction in real GDP.
- Another aspect that contributed to the recession was the drop in property values. Higher consumer spending was fueled by growing property prices (and wealth) during the boom years. When house values fell, many homeowners found themselves in a negative equity situation. As a result, they reduced their spending and were no longer able to rely on re-mortgaging to obtain equity withdrawal.
- Because of the worldwide scope of the crisis, there was a decline in global trade. As a result of the global crisis, countries suffered a reduction in exports.
- Debt owed by the government. The recession caused a significant increase in government debt. Many European governments sought to cut spending as a result of this, ushering in a period of ‘austerity.’
- The European Union is experiencing a crisis. Bond rates in the Eurozone rose in 2010-12, partially due to the recession and partly due to the lack of a Central Bank prepared to assist.
Response to the great recession
- Banks are being rescued. To begin with, governments felt compelled to engage in the banking sector in order to prevent banks and financial organizations from failing. However, bailing out individuals who were blamed for the crisis was met with some skepticism. In 2008, the United States opted to let Lehman Brothers fail. This resulted in a significant loss of confidence. Following the fear that ensued, governments realized they could not allow this to happen again. In the United Kingdom, the government intervened to save big banks like Northern Rock and Lloyds TSB.
- Interest rate reductions. Central banks reduced interest rates to historic lows in the second part of 2008 and early 2009. The Bank of England dropped interest rates from 5% to 0.5 percent in the United Kingdom. A significant reduction in interest rates would usually make borrowing less expensive and boost consumption and investment. (For example, when the UK lowered interest rates in 1992, the economy soon recovered.) Cuts in interest rates, on the other hand, were less successful during this time.
- Fiscal policy that is expansionary. Because government tax income vanished during the harsh recession, budget deficits skyrocketed. This was especially obvious in countries that rely on stamp duty and finance-related taxes. However, budgetary expansion was moderate in the United Kingdom and the United States. VAT was temporarily reduced in the United Kingdom. There was also a moderate fiscal boost in the United States.
- It’s worth mentioning that, in contrast to the Great Depression of the 1930s, the Great Recession avoided two things.
- A large number of bank failures were avoided (In the 1930s, in the US over 500 commercial banks went bankrupt)
- There was no significant trade war. In the 1930s, governments fought to defend domestic industries by waging a tariff war.
Why did the GDP fall in 2009?
The economy shrank by 6.1 percent, owing in part to lower inventories. This was the third consecutive quarter of decline, and the fourth since the recession began in the fourth quarter of 2007. The slowdown in the first quarter was only slightly less than the 6.3 percent dip in the fourth quarter of 2008.
What happened to the UK economy in 2009?
In 2009, the UK’s Gross Domestic Product declined by -4.1 percent compared to the previous year. This rate is 38 tenths of a percent lower than the previous year’s rate, which was -0.3 percent lower. The GDP statistic in 2009 was $2,421,020 million, leaving United Kingdom placed 6th in the ranking of GDP of the 196 nations that we report.
What went wrong with the economy in 2009?
The Great Recession lasted from December 2007 to June 2009, making it the longest downturn since World War II. The Great Recession was particularly painful in various ways, despite its short duration. From its peak in 2007Q4 to its bottom in 2009Q2, real gross domestic product (GDP) plummeted 4.3 percent, the greatest drop in the postwar era (based on data as of October 2013). The unemployment rate grew from 5% in December 2007 to 9.5 percent in June 2009, before peaking at 10% in October 2009.
The financial repercussions of the Great Recession were also disproportionate: home prices plummeted 30% on average from their peak in mid-2006 to mid-2009, while the S&P 500 index dropped 57% from its peak in October 2007 to its trough in March 2009. The net worth of US individuals and charity organizations dropped from around $69 trillion in 2007 to around $55 trillion in 2009.
As the financial crisis and recession worsened, worldwide policies aimed at reviving economic growth were enacted. Like many other countries, the United States enacted economic stimulus measures that included a variety of government expenditures and tax cuts. The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 were two of these projects.
The Federal Reserve’s response to the financial crisis varied over time and included a variety of unconventional approaches. Initially, the Federal Reserve used “conventional” policy actions by lowering the federal funds rate from 5.25 percent in September 2007 to a range of 0-0.25 percent in December 2008, with the majority of the drop taking place between January and March 2008 and September and December 2008. The significant drop in those periods represented a significant downgrading in the economic outlook, as well as increasing downside risks to output and inflation (including the risk of deflation).
By December 2008, the federal funds rate had reached its effective lower bound, and the FOMC had begun to utilize its policy statement to provide future guidance for the rate. The phrasing mentioned keeping the rate at historically low levels “for some time” and later “for an extended period” (Board of Governors 2008). (Board of Governors 2009a). The goal of this guidance was to provide monetary stimulus through lowering the term structure of interest rates, raising inflation expectations (or lowering the likelihood of deflation), and lowering real interest rates. With the sluggish and shaky recovery from the Great Recession, the forward guidance was tightened by adding more explicit conditionality on specific economic variables such as inflation “low rates of resource utilization, stable inflation expectations, and tame inflation trends” (Board of Governors 2009b). Following that, in August 2011, the explicit calendar guidance of “At least through mid-2013, the federal funds rate will remain at exceptionally low levels,” followed by economic-threshold-based guidance for raising the funds rate from its zero lower bound, with the thresholds based on the unemployment rate and inflationary conditions (Board of Governors 2012). This forward guidance is an extension of the Federal Reserve’s conventional approach of influencing the funds rate’s current and future direction.
The Fed pursued two more types of policy in addition to forward guidance “During the Great Recession, unorthodox” policy initiatives were taken. Credit easing programs, as explored in more detail in “Federal Reserve Credit Programs During the Meltdown,” were one set of unorthodox policies that aimed to facilitate credit flows and lower credit costs.
The large scale asset purchase (LSAP) programs were another set of non-traditional policies. The asset purchases were done with the federal funds rate near zero to help lower longer-term public and private borrowing rates. The Federal Reserve said in November 2008 that it would buy US agency mortgage-backed securities (MBS) and debt issued by housing-related US government agencies (Fannie Mae, Freddie Mac, and the Federal Home Loan banks). 1 The asset selection was made in part to lower the cost and increase the availability of finance for home purchases. These purchases aided the housing market, which was at the heart of the crisis and recession, as well as improving broader financial conditions. The Fed initially planned to acquire up to $500 billion in agency MBS and $100 billion in agency debt, with the program being expanded in March 2009 and finished in 2010. The FOMC also announced a $300 billion program to buy longer-term Treasury securities in March 2009, which was completed in October 2009, just after the Great Recession ended, according to the National Bureau of Economic Research. The Federal Reserve purchased approximately $1.75 trillion of longer-term assets under these programs and their expansions (commonly known as QE1), with the size of the Federal Reserve’s balance sheet increasing by slightly less because some securities on the balance sheet were maturing at the same time.
However, real GDP is only a little over 4.5 percent above its prior peak as of this writing in 2013, and the jobless rate remains at 7.3 percent. With the federal funds rate at zero and the current recovery slow and sluggish, the Federal Reserve’s monetary policy plan has evolved in an attempt to stimulate the economy and meet its statutory mandate. The Fed has continued to change its communication policies and implement more LSAP programs since the end of the Great Recession, including a $600 billion Treasuries-only purchase program in 2010-11 (often known as QE2) and an outcome-based purchase program that began in September 2012. (in addition, there was a maturity extension program in 2011-12 where the Fed sold shorter-maturity Treasury securities and purchased longer-term Treasuries). Furthermore, the increasing attention on financial stability and regulatory reform, the economic consequences of the European sovereign debt crisis, and the restricted prospects for global growth in 2013 and 2014 reflect how the Great Recession’s fallout is still being felt today.
What happened in the UK during the recession of 2009?
The UK economy officially emerged from recession in the fourth quarter of 2009, after six quarters of negative growth. In the third quarter of 2008, the economy entered a technical recession as GDP declined for the second quarter in a row.
What caused the high unemployment in 2009?
The housing bubble burst in 2007 and 2008, triggering a protracted recession that saw the jobless rate rise to 10.0 percent in October 2009, more than double its pre-crisis level.
Why did the United Kingdom experience a recession in 2008?
The financial crisis of the late 2000s, rising global commodity prices, the subprime mortgage crisis entering the British banking sector, and a massive credit crunch The recession lasted five quarters and was the harshest in the United Kingdom since World War II. By the end of 2008, manufacturing production had fallen by 7%.
What big events occurred in the United Kingdom in 2009?
- April is the first month of the year. The economy continues to deteriorate, with numbers indicating a decrease of 2.4 percent in the first quarter of this year.
- While delivering oil-rig employees, a Super Puma helicopter crashes in the North Sea. All 16 persons on board are murdered, including 14 passengers and two staff members.
- Protests are taking place across London ahead of the G-20 summit the next day. 63 arrests have been reported across the city, with demonstrators targeting a Royal Bank of Scotland branch, believed to be in response to the ongoing outrage over former chief executive Fred Goodwin’s pension. One demonstrator died of a heart attack during the protests, according to the Metropolitan Police.
- 2 April In response to the escalating global financial crisis, the G-20 London conference is held. The leaders announce a variety of initiatives at the close of the summit, including a $1.1 trillion investment in the International Monetary Fund (IMF) and World Bank.
- 3 April Cardinal Cormac Murphy O’Connor is replaced as Archbishop of Westminster and leader of the Roman Catholic Church in England and Wales by Vincent Nichols.
- 5 April The Independent Police Complaints Commission announces that Ian Tomlinson, who died at the G20 protests earlier this month, will be investigated. Mr Tomlinson died of a heart attack after being shoved to the ground by a police officer, according to video evidence released on April 7.
- As part of the UK’s ongoing digital switchover, analogue television signals are being turned off in the Westcountry Television area.
- In North-West England, police and MI5 carry out eight counter-terrorism searches. Because operational information were evident on a document carried by an assistant Commissioner of the Metropolitan Police Bob Quick when he arrived at 10 Downing Street for a meeting with the Prime Minister earlier in the day, the raids had to be brought forward; Mr Quick resigned the next day.
- 11 April Damian McBride, Gordon Brown’s special adviser, resigns after it is revealed that he and another key Labour Party worker, blogger Derek Draper, exchanged emails discussing plans to smear Conservative Party politicians with a series of fake stories about their private lives.
- The Chancellor of the Exchequer, Alistair Darling, presents the government’s budget to the House of Commons. It involves the imposition of a 50% tax rate on people earning more than 150,000, as well as the announcement that the UK’s debt will reach 79 percent of GDP by 2013.
- Unemployment has now surged to almost 2,100,000 people, the highest level seen under the current administration.
- 27 April 2009 swine flu pandemic: the human pandemic H1N1/09 virus spreads to the United Kingdom, with two confirmed cases in Scotland.
- In England, three instances of swine flu have been verified. One adult has been diagnosed in Redditch, while another has been diagnosed in South London, and a 12-year-old girl has been diagnosed in Torbay. Meanwhile, Nicola Sturgeon, the Scottish Health Secretary, has said that 15 suspected cases in Scotland have been ruled out.
- The government’s policy on Gurkha settlement rights is defeated by 267 votes to 246 in the House of Commons on an opposition day motion.
- The Department of Health has confirmed three more instances of swine flu. The first two cases are in London, and the third is in Newcastle.
- After six years of combat, the British military’s involvement in Iraq has come to an end. In a ceremonial ceremony, the Basra Province is turned over to American forces ahead of the British troop pullout in the summer.
- The House of Commons passed a series of amendments to the regulations governing MPs’ expenses.
What triggered the 2008 financial crisis in the United Kingdom?
In September 2008, Lehman Brothers, one of the world’s largest financial organizations, went bankrupt in a matter of weeks; the value of Britain’s largest corporations was wiped out in a single day; and cash ATMs were rumored to be running out.
When did it begin?
Lehman Brothers declared bankruptcy on September 15, 2008. This is widely regarded as the official start of the economic crisis. There would be no bailout, according to then-President George W. Bush. “Lehman Brothers, one of the world’s oldest, wealthiest, and most powerful investment banks, was not too big to fail,” the Telegraph reports.
What caused the 2008 financial crash?
The financial crisis of 2008 has deep roots, but it wasn’t until September 2008 that the full extent of its consequences became clear to the rest of the globe.
According to Scott Newton, emeritus professor of modern British and international history at the University of Cardiff, the immediate trigger was a combination of speculative activity in financial markets, with a particular focus on property transactions particularly in the United States and Western Europe and the availability of cheap credit.
“A massive amount of money was borrowed to fund what appeared to be a one-way bet on rising property values.” However, the boom was short-lived since, starting around 2005, the gap between income and debt began to expand. This was brought about by growing energy prices on worldwide markets, which resulted in a rise in global inflation.
“Borrowers were squeezed as a result of this trend, with many struggling to repay their mortgages. Property prices have now begun to decrease, causing the value of many banking institutions’ holdings to plummet. The banking sectors of the United States and the United Kingdom were on the verge of collapsing and had to be rescued by government action.”
“Excessive financial liberalisation, backed by a drop in regulation, from the late twentieth century was underpinned by trust in the efficiency of markets,” says Martin Daunton, emeritus professor of economic history at the University of Cambridge.
Where did the crisis start?
“The crash first hit the United States’ banking and financial system, with spillovers throughout Europe,” Daunton adds. “Another crisis emerged here, this time involving sovereign debt, as a result of the eurozone’s defective design, which allowed nations like Greece to borrow on similar conditions to Germany in the expectation that the eurozone would bail out the debtors.
“When the crisis struck, the European Central Bank declined to reschedule or mutualize debt, instead offering a bailout package – on the condition that the afflicted countries implement austerity policies.”
Was the 2008 financial crisis predicted?
Ann Pettifor, a UK-based author and economist, projected an Anglo-American debt-deflationary disaster in 2003 as editor of The Real World Economic Outlook. Following that, The Coming First World Debt Crisis (2006), which became a best-seller following the global financial crisis, was published.
“The crash caught economists and observers off guard since most of them were brought up to regard the free market order as the only workable economic model available,” Newton adds. The demise of the Soviet Union and China’s conversion to capitalism, as well as financial advancements, reinforced this conviction.”
Was the 2008 financial crisis unusual in being so sudden and so unexpected?
“There was a smug notion that crises were a thing of the past, and that there was a ‘great moderation’ – the idea that macroeconomic volatility had diminished over the previous 20 or so years,” says Daunton.
“Inflation and output fluctuation had decreased to half of what it had been in the 1980s, reducing economic uncertainty for individuals and businesses and stabilizing employment.
“In 2004, Ben Bernanke, a Federal Reserve governor who served as chairman from 2006 to 2014, believed that a variety of structural improvements had improved economies’ ability to absorb shocks, and that macroeconomic policy particularly monetary policy had improved inflation control significantly.
“Bernanke did not take into account the financial sector’s instability when congratulating himself on the Fed’s successful management of monetary policy (and nor were most of his fellow economists). Those who believe that an economy is intrinsically prone to shocks, on the other hand, could see the dangers.”
Newton also mentions the 2008 financial crisis “The property crash of the late 1980s and the currency crises of the late 1990s were both more abrupt than the two prior catastrophes of the post-1979 era. This is largely due to the central role that major capitalist governments’ banks play. These institutions lend significant sums of money to one another, as well as to governments, enterprises, and individuals.
“Given the advent of 24-hour and computerized trading, as well as continuous financial sector deregulation, a big financial crisis in capitalist centers as large as the United States and the United Kingdom was bound to spread quickly throughout global markets and banking systems. It was also unavoidable that monetary flows would suddenly stop flowing.”
How closely did the events of 2008 mirror previous economic crises, such as the Wall Street Crash of 1929?
According to Newton, there are certain parallels with 1929 “The most prominent of these are irresponsible speculation, credit reliance, and extremely unequal wealth distribution.
“The Wall Street Crash, on the other hand, spread more slowly over the world than its predecessor in 200708. Currency and banking crises erupted in Europe, Australia, and Latin America, but not until the 1930s or even later. Bank failures occurred in the United States in 193031, but the big banking crisis did not come until late 1932 and early 1933.”
Dr. Linda Yueh, an Oxford University and London Business School economist, adds, “Every crisis is unique, but this one resembled the Great Crash of 1929 in several ways. Both stocks in 1929 and housing in 2008 show the perils of having too much debt in asset markets.”
Daunton draws a distinction between the two crises, saying: “Overconfidence followed by collapse is a common pattern in crises, but the ones in 1929 and 2008 were marked by different fault lines and tensions. In the 1930s, the state was much smaller, which limited its ability to act, and international financial flows were negligible.
“There were also monetary policy discrepancies. Britain and America acquired monetary policy sovereignty by quitting the gold standard in 1931 and 1933. The Germans and the French, on the other hand, stuck to gold, which slowed their comeback.
“In 1929, the postwar settlement impeded international cooperation: Britain resented her debt to the US, while Germany despised having to pay war reparations. Meanwhile, primary producers have been impacted hard by the drop in food and raw material prices, as well as Europe’s move toward self-sufficiency.”
How did politicians and policymakers try to ‘solve’ the 2008 financial crisis?
According to Newton, policymakers initially responded well. “Governments did not employ public spending cuts to reduce debt, following the theories of John Maynard Keynes. Instead, there were small national reflations, which were intended to keep economic activity and employment going while also replenishing bank and corporate balance sheets.
“These packages were complemented by a significant increase in the IMF’s resources to help countries with severe deficits and offset pressures on them to cut back, which may lead to a trade downturn. These actions, taken together, averted a significant worldwide output and employment decline.
“Outside of the United States, these tactics had been largely abandoned in favor of ‘austerity,’ which entails drastic cuts in government spending. Austerity slowed national and international growth, particularly in the United Kingdom and the eurozone. It did not, however, cause a downturn, thanks in large part to China’s huge investment, which consumed 45 percent more cement between 2011 and 2013 than the United States had used in the whole twentieth century.”
Daunton goes on to say: “Quantitative easing was successful in preventing the crisis from being as severe as it was during the Great Depression. The World Trade Organization’s international institutions also played a role in averting a trade war. However, historians may point to frustrations that occurred as a result of the decision to bail out the banking sector, as well as the impact of austerity on the quality of life of residents.”
What were the consequences of the 2008 financial crisis?
In the short term, a massive bailout governments injecting billions into failing banks prevented the financial system from collapsing completely. The crash’s long-term consequences were enormous: lower wages, austerity, and severe political instability. We’re still dealing with the fallout ten years later.
In 2009, what financial catastrophe occurred?
- The Great Recession was a period of economic slump that lasted from 2007 to 2009, following the bursting of the housing bubble in the United States and the worldwide financial crisis.
- The Great Recession was the worst economic downturn in the United States since the 1930s’ Great Depression.
- Federal authorities unleashed unprecedented fiscal, monetary, and regulatory policy in reaction to the Great Recession, which some, but not all, credit with the ensuing recovery.