The Great Recession of 2008 stands as the most crucial economic crisis of modern history. Stemming from a perfect storm of interconnected factors, this recession shaped the way governments, financial institutions, and societies approach economic stability.
In this article, let us delve into the key causes, consequences, and lessons learned from the Great Recession.
A Brief History
One of the background reasons that shattered the market at that time was the overheated housing market. Irresponsible lending practices led to the proliferation of subprime mortgages. This gives the borrower a weak credit history and defaulting of loans starts. It is the foundation where the financial system began to crumble.
Financial institutions packaged subprime mortgages into complex financial products known as mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) which were sold to the investors, spreading the risk throughout the financial system. When housing prices decline, this security loses their value causing a ripple effect across the global financial landscape.
Immediate Consequences & Policies
The lax regulatory environment which failed to adequately monitor and control the activities of the Financial institutions exacerbated the crisis. Also, the bankruptcy of Lehman Brothers in September 2008 eventually eroded the investors’ confidence leading to severe credit freeze.
The aftermath is characterized by the economic turmoil and fundamental revolution of economic policies and practices. Some of the most prominent consequences that took place were:
- Massive unemployment reduced consumer spending resulting in job losses across industries.
- Governments around the world intervened to respond to the unprecedented measures to stabilize financial markets and prevent further collapse.
- The US Fed changed the monetary and fiscal policies vehemently introducing new provisions under American Recovery and Reinvestment Act.
- The Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States was a notable outcome of these efforts.
- Investors became more cautious about financial products and due diligence of understanding investment instruments.
Learning from the Past
The recession marks a stark reality of the investment world and the potential consequences of unchecked risk-taking. The lessons learned from this crisis instar maintain vigilant approach to risk management, promote transparency, and ensure that mistakes of the past are not repeated. By this way, we can strive for a more stable and resilient global economic landscape
