World financial crisis. How did it all start?

In 2008, the world economy faced the most dangerous crisis since the Great Depression of the 1930s. After the United States housing mortgage bubble finally burst, the infection quickly spread, first to the entire US financial sector and then to financial markets abroad. Victims in the United States included the entire investment banking industry, the largest insurance company, two businesses set up by the government to facilitate mortgage lending, the largest mortgage lender, and the two largest commercial banks.

The carnage was not limited to the financial sector, however, as companies that typically rely on credit have been hit just as hard. The American auto industry, which asked for federal bailouts, is on the brink of an abyss. Even more threatening, banks, not trusting anyone to pay them back, simply stopped lending, which most businesses need to regulate their cash flows and without which they cannot do business. Stock prices plunged globally - the US Dow Jones Industrial Average lost 33.8% of its value in 2008 - and by the end of the year, a deep recession swept across much of the globe.

Each in their own way, foreign countries did their business with the United States. By the end of the year, Germany, Japan, and China were in a recession, as were many of the smaller countries. Many in Europe have paid the price for dabbling in American securities in the real estate market. Japan and China have largely escaped this trap, but their export-oriented producers have been hit by the recession in their main markets - the US and Europe - due to deep demand for their products. Less developed countries have also lost markets abroad, and their foreign investment, on which they depended for capital growth, has waned.

What was the 2008 financial crisis like?

The crash of 2008 was the greatest blow to the global financial system in nearly a century - it pushed the global banking system to the brink of collapse.

Within weeks in September 2008, Lehman Brothers, one of the world's largest financial institutions, went bankrupt. 90 billion pounds was wiped off the face of the earth of the largest UK companies in one day. The ATMs were empty. Most governments ran into gigantic debt.

On September 15, 2008, Lehman Brothers [Wall Street investment bank] filed for bankruptcy. Usually, this date is considered the day when the economic crisis began in earnest. Then-President George W. Bush announced that there would be no salvation.

Where did the crisis begin?

The crisis has reached dangerous proportions. It started with the explosion of the US housing bubble in 2004, after a long period of steadily rising house prices. More families were able to get mortgages than before. Lenders began to engage in a practice called “subprime lending” - lending to “risky” borrowers who are usually not eligible for a mortgage to buy a home. People whose annual income barely reached 40 thousand a year could easily get a mortgage on a house worth $ 1 million. A lot was allowed, some even took out several mortgages. Then these loans were sold to other financial institutions, from there they were transferred to third parties, and so on.

Subprime mortgages tended to generate low interest for the first few years and then skyrocket. The risks were usually not fully explained, and many borrowers were told that they could easily refinance their mortgages within a few years to keep interest rates low. Economists warned of the dangers, but for the most part, no one in the US wanted to interrupt the party atmosphere of the housing bubble. Everyone seemed to be making money: construction companies, realtors, banks, and materials firms. Happy consumers were able to become homeowners for the first time in their lives. The US government did little to oversee this industry. And the largest rating agencies sold their positive ratings, even for the most unthinkable loans.

But in 2005-2006 it was time to pay the bills. Interest rates on subprime mortgages have skyrocketed. Many new homeowners were unable to pay or refinance. The crisis was to be limited to US homeowners. Unfortunately, the banks and lenders that issued these loans were selling the debt to investors. Debt assets were sliced ​​up and sold to other investors and banks around the world in complex financial schemes that few people seemed to understand.

During 2007, about 1.3 million US homes were foreclosed, up 79% from 2006. All of a sudden, banks stopped lending to each other, which led to a "credit crunch", at a time when there is little liquidity (or money) in the system because no one is lending. The losses began to accumulate. By July 2008, major banks and financial institutions around the world had reported losses of about $ 435 billion.

Banks and other financial institutions could not get a single loan and were stuck in one place with their bad assets. Many had to file for bankruptcy or were close to it. Governments had to bail out these institutions for fear that their collapse could affect the economy as a whole. These institutions are Freddie Mac and Fannie May in the US, insurance giant AIG, Northern Rock in the UK, and Fortis and Dexia in Belgium. Expected future bankruptcies prompted the US government to prepare a $ 700 billion bailout package to bail out as they arise.

The subprime mortgage and credit crunch were not the only contributors to the 2008 economic crisis. Oil prices were at an all-time high, driven by the growing energy needs of China and developing countries like India. This has greatly impacted consumers in North America and Europe in two ways. Consumers have been forced to pay much higher fuel prices to refuel their cars and heat their homes, and at the same time, food prices have skyrocketed as food requires fuel to produce and transport. Food has become so expensive in the developing world that in some cases it has led to food riots.

Europe

The disaster struck the banking and financial system of the United States for the first time, and also spread to Europe. Here, another crisis - sovereign debt - has arisen from the misdirection of the eurozone. This allowed countries like Greece to take out loans on conditions similar to Germany, in the confidence that the eurozone would save debtors.

When the crisis hit, the European Central Bank refused to defer or offset the debt and instead offered a bailout package - on the condition that the affected countries followed austerity policies.

And now a little more about the main countries.

Iceland

In 2003, the three largest Icelandic banks had only a few billion dollars in assets. Over the next three and a half years, they have already exceeded $ 140 billion. The Icelandic example can be described as the fastest-growing banking sector in history. The value of the local stock market has increased 9 times. Property prices have tripled. By 2006, the average Icelandic family, compared to 2003, had become three times richer. However, virtually all of the wealth acquired was closely tied to a new industry - investment banking. The Icelandic nation was actively buying up shares in real estate, particularly in the United States. The local crown was growing and interest rates were 15.5%. Icelanders who wanted to expand their business, but did not have enough money, borrowed money not in kroons, but in yen and Swiss francs. They took loans at 3% per annum and received a large jackpot on currency trading, as the crown continued to grow rapidly.

When all three of Iceland's largest banks collapsed, the banking sector lost more than $ 100 billion. As a result, the country got into debt, which amounted to 850% of GDP.

Greece

Attractive cheap loans did not pass by Greece. After the outbreak of the global crisis, one of the world's leading rating agencies, Moody's, downgraded Greece's credit rating to the lowest level at which the state bonds turned into junk. The government has amassed $ 400 billion in debt and an additional $ 800 billion in pensions. Although the IMF allocated $ 145 billion, it was rather a beautiful gesture, since this amount did not even come close to solving the problems of the Greeks. Apart from the huge hole in the budget left by the government, they did their job in a terrible way. The Greek population took advantage of this and many were reluctant to pay taxes. Bureaucracy and procedural procedures dragged out tax evasion cases for many years, allowing many Greeks to abuse it and not pay taxes at all.

Ireland

The construction boom has played a bad trick on Ireland, which suffered an estimated $ 10.6 trillion in losses following the crash. The Irish scenario is reminiscent of Iceland, although the stock market was growing there at a rapid pace, and here real estate became a gold mine. Since 1994, the average cost of housing in Dublin has grown by over 500%. And in the hands of Irish commercial property builders was an amount of 100 billion euros, almost equal to all Irish bank deposits. The developers alone received 40% more loans than the entire Irish people. When the real estate bubble burst, on September 29, 2008, depositors began raiding, in one trading session alone, the shares of the country's three main banks collapsed from 20 to 50%.

Germany

Since Germany was the main creditor of many insolvent countries in Europe, it was on her shoulders that all the problems that needed to be resolved fell. According to the latest data, the losses of the Germans amount to $ 21 billion in Icelandic banks, $ 100 billion in Irish banks, $ 60 billion in American mortgage bonds, and huge sums of money allocated to Greece. The largest German banks invested their money in subprime loans in the United States. Commerzbank became the first private local bank to be rescued by the German government from bankruptcy at a cost of $ 25 billion. It is also worth mentioning Japan, which, just like Germany, invested a lot of money in the US economy, from which it suffered later.

What were the consequences of the 2008 crisis?

In the short term, massive aid - from governments pumping billions into affected banks - has prevented a complete collapse of the financial system. In the long term, the consequences of the disaster were enormous: declining wages, the economy as a whole, and deep political instability. Twelve years later, we are still living with the consequences. It is also worth noting that in the United States, only one person from the banking sector has been prosecuted.

Prepared by: Alexander Boltrukevich alexbolt@tempting.pro