Global Financial Crisis
The Global Financial Crisis of 2008 was the most severe disruption of the world's financial system since the Great Depression. Its most dramatic moment came in September, when the American investment bank Lehman Brothers filed for bankruptcy, but the crisis spread far beyond one firm. It froze credit markets, toppled or crippled major banks on both sides of the Atlantic, and pushed much of the world into a deep recession. Estimates of the wealth lost vary widely, but figures in the trillions of dollars, often cited as around $10 trillion in stock market value alone, give a sense of the scale.
The roots of the crisis lay in the preceding decade. In the early 2000s, low interest rates and abundant global capital helped fuel a housing boom in the United States. Lenders extended mortgages to buyers with weak credit, including many "subprime" loans, often on the assumption that rising home prices would protect against losses. These loans were bundled into complex securities and sold to investors around the world, while banks and other institutions relied heavily on borrowed money. Regulators, rating agencies, and the firms themselves underestimated how risky and interconnected these holdings had become. Economists still debate the relative weight of each cause, including lax regulation, global imbalances, and flawed incentives.
When U.S. house prices began to fall in 2006 and 2007, mortgage defaults rose and the securities built on them lost value. Trouble surfaced in 2007, and in March 2008 Bear Stearns was rescued through a sale to JPMorgan Chase with government support. In September, the government took over the mortgage giants Fannie Mae and Freddie Mac, and Lehman Brothers was allowed to fail after no buyer emerged. Within days, the insurer AIG required a large federal rescue, a major money market fund "broke the buck," and lending between banks seized up. Governments responded with emergency measures, including the U.S. Troubled Asset Relief Program, bank recapitalizations in Europe, and coordinated interest rate cuts.
The consequences were long-lasting. The U.S. and many other economies entered the "Great Recession," with millions losing jobs and homes. Central banks adopted unconventional policies such as near-zero interest rates and large-scale asset purchases. In Europe, the shock helped trigger a sovereign debt crisis, most severely in Greece, Ireland, Portugal, and Spain. Governments later passed new rules, including the Dodd-Frank Act in the United States and the Basel III standards internationally, aimed at strengthening bank capital and oversight.
The crisis also had political and social effects. Public anger at bank bailouts, which many felt rewarded those responsible, contributed to movements such as Occupy Wall Street and later fed populist politics in several countries. Historians and economists continue to argue over whether the reforms went far enough and whether the response, particularly austerity in Europe, helped or prolonged the recovery.