2008 Market Crash - The Global Financial Crisis
It is unbelievable, but it is over 15+ years since the global recession's outset. The 2008 crash was the worst shock to the global financial system in a century, pushing the world's financial system to collapse.
It all began in 2007 with a breakdown of US subprime mortgages. And it grew into a full-blown international banking crisis with the collapse of one of the biggest investment banks in the world, Lehman Brothers, on September 15, 2008.
The bank declared bankruptcy. £90 billion was wiped off the value of Britain's largest corporations in a single day, and ATMs were reportedly running empty.
Origin of the 2008 Stock Market Crisis
The 2008 financial meltdown has deep roots, but its consequences only became evident to the rest of the world in September 2008. The immediate cause was a combination of speculative behaviour in financial markets, particularly in real estate transactions - primarily in the US and Western Europe - and the provision of cheap credit.
It all began with the subprime mortgage market in the United States, a sector segment that lends to borrowers with low credit records and typically few means to repay debts. These subprime mortgages were then divided and bundled with standard mortgages before being sold to investors.
So what could go wrong now that the risk had been spread?
In the near future, it worked, assisting in preserving a real estate prices boom. Unfortunately, it didn't work out in the long run. The increase in the number of defaulting loans was the catalyst.
The 2008 housing market began to decline, and the repackaged mortgage assets became harmful. Worse, no one knew who owned the bad debts. As a result, banks grew wary of lending to one another. The world was on the verge of a catastrophe.
The 9th of August 2007, when the danger of systemic risk became apparent, was a watershed moment at the beginning of the crisis. French bank BNP Paribas dissolved three funds subjected to the US mortgage market. It was attributed to the "complete evaporation of liquidity."
Why Did the Stock Market Crash in 2008?
Globally, many people researched the 2008 market crash reason.
Foul debt accumulation led to several government bailouts, starting with Bear Stearns, a struggling investment bank. The government-sponsored bailout train continued with Fannie Mae and Freddie Mac (nicknames for the Federal Home Loan Mortgage Corporation).
Due to its overexposure to subprime mortgages, Lehman Brothers fell in September 2008.
It was the most significant bankruptcy filing in United States history at the time. The Federal Reserve issued yet another bailout afterwards. This time, American International Group, Inc. (AIG) ran out of money while playing the subprime mortgage game.
The Dow Jones fell with each bailout announcement as markets reacted to the financial uncertainty. The Fed's announcement of a bailout package temporarily boosted investor confidence.
On September 29, 2008, the Senate voted against the bank rescue measure. As a result, the Dow fell 777.68 points, the most significant single-day collapse in history. The hysteria spread through worldwide markets, provoking global instability.
Congress ultimately passed the bailout bill in October. However, harm was done. As the Dow Jones continued its downward spiral, the Labor Department revealed massive job losses.
Effect of the 2008 Financial Crisis
The crisis impacted countless individuals around the globe.
First, it caused a massive surge in unemployment claims from 401k to roughly 650k between October 2007 and April 2009, when the US economy lost nearly $14 trillion in wealth or around $50k per American household, and it continues to influence growth today with slow recovery and high debt levels throughout the Obama government since 2009.
Second, this created a significant divide between the top 20% of earners, who accumulated more assets than earlier, and the bottom 80%, who lost a substantial net worth as housing prices sank by 30% after the bubble burst and mass layoffs commenced. Third, many Americans defaulted on mortgages, resulting in foreclosures/evictions across America.
Also read, History of Stock Market Crashes In India – Known And Unknown
2008 Market Crash Cost
The US government initiated TARP, a 700-Billion-dollar plan to bail out major financial services companies in the US financial market.
|
Financial Service Companies |
Financial Aid |
|
Citigroup |
US $25 billion |
|
JP Moran chase |
US $25 billion |
|
Wells Fargo |
US $25 billion |
|
Bank of America |
US $15 billion (it acquired Merrill Lynch, which received US $10 billion from the US government) |
|
Morgan Stanley |
US $10 billion |
|
Goldman Sachs |
US $10 billion |
Apart from these, many commercial and investment banks and other financial institutions in the US received additional capital from the US treasury and external investors to cover up the massive losses that accumulated later. As a result, in the final months of 2008, the US lost nearly two million jobs.
The unemployment rate shot up to 7.2% in December 2008 from its recent low of 4.4% in March 2007, and it was almost certain to continue rising into 2009. In addition, US economic output shrank by 0.5% in the 3rd quarter of 2008.
New Year, New Hopes - 2009
The Dow reached 9,034.69 on January 2, 2009. Investors anticipated that the incoming Obama administration's team of economic experts would be able to deal with the recession. Yet, the terrible financial news persisted. The Dow Jones Industrial Average reached a low of 6,594.44.37 on March 5, 2009.
Soon after, President Obama's economic stimulus package developed a faith to end the fear. As a result, the Dow reached a new high on July 24, 2009. It finished at 9,093.24, exceeding its high from January. For the most part, the 2008 stock market meltdown was over.
Conclusion
The 2008 stock market crash was triggered by a plethora of events that resulted in the collapse of several of the biggest companies in US history. Additionally, once the housing bubble 2008 burst, it impacted banks and financial institutions that had wagered on future price hikes.
At this time, many people lost their jobs, houses, and retirement savings. It was the most severe economic downturn since the Great Depression. Individuals heavily engaged in real estate and stocks suffered tremendous portfolio losses.
It is why spreading your risk by diversifying your investments is critical. A strong investing strategy that accounts for the stock market's ups and downs has a higher chance of providing consistent returns over time.