In the late 2000’s what was known as the “Global Recession” or “The Credit Crunch” occurred. The only financial crisis comparable to the recent 2008 United State recession was the Great Depression, which occurred in the 1930’s. The financial crisis of the late 2000’s resulted in the downfall of the largest financial institutions as measured by market capitalization vales. The situation created the need for governments and regulators to bailout most banks and caused dramatic drops in stock market values around the world (Allen, 198).
However these were only the effects seen on a macroeconomic level. Throughout America millions of people found themselves homeless as the housing market began to collapse upon itself. These evictions and foreclosures were a major contributing factor the failure of many businesses, which were dependent on consumer spending for their revenues (Allen 198). The failure of these businesses led to a huge decline in consumer wealth that is estimated to be in the trillions of US dollars.
By 2008, due to the failures of large financial institutions, there were severe liquidity problems within the US banking system. When the housing bubble peaked in late 2007 the values of securities linked to U.S. real estate pricing began to plummet (Stiglitz 55). This was a critical hit to financial institutions across the globe. Questions began to arise amongst consumers and members of government alike in regards to the solvency of banks due to poorly performing loans and mortgages, which in turn led to declines in the availability of credit.
The complete loss of investor confidence impacted stock markets globally. Securities suffered large losses during late 2008 and early 2009. As the restrictions on credit grew, international trade began to decline and economies all over the world began to slow. The government’s response to this, working with the central bank, was fiscal stimulus programs (Stiglitz 60). This consisted of monetary expansion as well as large institutional bailouts. Although complete stability was never attained, the financial crisis was deemed “under control” between late 2008 and late 2009.
While there were many contributing factors to the global recession it has become obvious to both analysts and consumers alike that due to risky and complex financial products which are misunderstood, the failure of regulators to monitor properly, the reluctance of credit rating agencies to be brave and honest, the failure of government regulators to detect the problems and deregulation of certain industries- the global recession occurred.
The complex financial products that were the securities that were bundled, traded and sold prior to the 2008 recession were the first sign of a weakening economy. Due to the subprime mortgage crisis there was a steep rise in mortgage foreclosures. The result was that the securities which were tied to the mortgages of these homes began to decline drastically in value.