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The Domino Effect: Decoding The 2008 Financial Crises

What: The Great Financial Crises was a recession that originated in the United States. A recession is basically a prolonged, severe downturn in economic growth and activity. The crises started in October 2007 and carried on till March 2009. However, due to globalisation and interdependence of nations, particularly on the US, many other economics suffered economic decline, some for an even longer duration.

Why: The Great Financial Crises was caused, in a very basic sense, was the careless mortgage lending to people who would not normally qualify for a home loan. Prior to this, the US Federal reserve had tried to recover from a very minor economic downturn by lowering interest rates. This eld to a boom of said “subprime” mortgages. Cheap credit and lax lending standards led to improper lending behaviour, and severely inflated housing prices. People even lied about their income to obtain a house. 

Ultimately, as this housing bubble popped, banks were left with billions of dollars of given loans. Many of the consumers were unable to pay interest rates, and banks had to seize properties. This now led to aa shortage of properties, with no one willing to buy any of them, as people were already struggling to pay their bills during the inflated times. Banks now had hundreds of houses, useless loans, and people lost their houses. Many economists today wonder how no one saw it coming. 

Effects of the Crisis:

Stocks - The S&P500 had its first major crash in price after the 9/11 attacks. Over a span of one and a half years, it crashed over 55%. The Dow Jones Industrial Average, a relatively stable index fund, fell over 51%.

Society - Housing lost demand, house prices crashed, banks seized homes, people were left homeless. People were unable to pay bills. The economy suffered a severe pullback, forcing companies to start laying off employees to maintain margins. 

Banks - banking companies such as the Lehman Brothers, who were until the crisis very reputable and famous, were forced to close down and declared bankruptcy. 

Regulatory Changes: the Dodd Frank act, for example, aimed to reduce chances of systemic collapse and reduce risk even if one part of the financial machinery breaks down. Dodd-Frank established a series of new rules and agencies with the aim of reducing systemic risk, which exists when the failure of one firm threatens to destabilize the entire financial system. These included measures for banks to limit the overall risk they can take on, ensure they can be orderly broken up in bankruptcy, and expand federal oversight of their transactions.



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