I will review and describe the 2008 financial crisis. The media also call it the Great Recession, it was probably the first economic shock since 1930 (Great Depression). This crisis began in the USA and gradually spread to the rest of the world and led to financial instability everywhere. Let’s consider the causes, consequences of the crisis, and rules for preventing a crisis in the future. Will also compare the financial crisis with the crisis caused by the Covid 19 pandemic and measures to prevent future crises.

Let’s talk about the reasons why the crisis of2008 occurred. The crisis originated in the US housing market. Housing loans were easy to issue, housing prices began to rise sharply from 2000 and the bubble burst in 2007. Housing loans were issued to borrowers with bad credit history. Financial institutions consolidated mortgage loans, converted them into MBS (Mortgage Back Securities) and sold them around the world. These securities attracted many because of their low interest rates and promised high returns. But there was a collapse of these securities due to rising interest rates and failing housing prices, and the loans were declared in default. Accordingly, the cost of MBS fell, including CDO (Collateralized Debt Obligations). Everyone who invested in these funds suffered huge losses. The weak link for the onset of the crisis was: lack of or incomplete oversight by regulatory authorities. Example: Moody’s and Standard and Poor’s have given toxic mortgage-backed securities high ratings. They were unsafe and risky, misled people and failed in 2008. The crisis was the result of systemic problems, not the action of a few individuals. Credit markets froze and lenders stopped issuing loans. Major financial institutions went bankrupt and asked for government bailouts. Example: Lehman Brothers leverage ratio was 30:1 before the crash.

The crisis reached its peak in September 2008, when Lehman Brothers bank went bankrupt, with assets of more than $600 billion. Fannie Mae and Freddie Mac played a central role in the mortgage market and were taken over by the US government. Bear Sterns a major investment bank collapsed when the housing market collapsed, and they couldn’t cover MBS securities and asked government bailouts. We can also name other financial institutions: Moody’s Standard and Poor’s, Fitch which were subject to great criticism due to fraud with mortgage-backed securities. Examples: AIG (American International Group) had a large number of credit default swaps (CDS) and insured mortgage-backed securities held by banks. During the crisis AIC could not cover its obligations. But with $182 billion from the government, it became a major insurance company. Goldman Sach was fined $550 million in 2010 for fraud, selling toxic securities and misleading investors. Ben Bernanke and Hank Paulson. Paulson-minister of Finance, former director Goldman Sachs. Bernanke-chairman of the Federal Reserve. They stabilized the system, but their assistance was limited to helping the banks. Many consider them heroes, but some argue that because of them many homeowners were left without help.

The central bank and government had to intervene to prevent a complete collapse of the US financial system. The bailout program TARP (Trouble Asset Relief Program) was adopted in October 2008, when the treasury bought up to $700 billion of toxic assets from banks. The interest rate has been greatly reduced by the Federal Reserve and initiated Quantitative Easing (QE), which planned large purchases of financial assets to inject money into the economy. In 2008, the government adopted a decision to save Fannie Mae and Freddie Mac and allocated $187 billion to save it. The reason for bailing out these companies was the fact that these institutions owned half of the US home loans. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed to prevent a financial crisis, introducing strict rules and control over financial institutions. The law also introduced Volcker rule, where banks could not engage in speculation, which could lead to another crisis. The US government also bailed out automakers General Motors and Chrysler, by providing $80 billion, which saved jobs and saved the auto industry. In 2009, stress tests of large banks were carried out to determine how financially stable the banks were; the audit was carried out by the Federal Reserve System. The Obama administration opened the affordable housing program HAMP (Home Affordable Modification Program) and managed to help 1.7 million borrowers.  The global crisis has spread throughout the world, leading Europe to a debt crisis. For Example: Royal Bank of Scotland. The G20 has become the main forum for international economic coordination and gas committed more than $1 trillion to rebuild the global economy.

The crisis of 2008 brought great destruction to economies around the world. Unemployment in the US by October 2008 was 10%. GDP was 1.7 %, world trade fell by 10%. In Spain, the number of unemployed people increased to 26% by 2013.  Job losses in Greece, Spain, Italy led to unrest and protests. Public confidence was greatly damaged, especially in banks. In 2001 there was Occupy Wall Street protest. Capitalism increasingly began to be regarded as a positive fact only for the rich at the expense of the middle and working classes. China, Germany, and Great Britan experienced a sharp economic downturn. Foreign investment fell, commodity prices fell. Example: China faces a large decline in export demand. They allocated $586 billion to restore the economy. In Iceland there was a severe collapse of the banking system, and they turned to IMF (International Monetary Fund) for monetary assistance. Royal Bank of Scotland (RBS) asked for cash bailout and was given 45.5 billion euro. The 2008 crisis increased income inequality, the middle class became poorer, and the rich continued to accumulate wealth. International Labor Organization (ILO) Showed that wages have stopped and have not risen for many years. The crisis also led to widespread political instability. Recession hit many countries, and some experienced prolonged economic stagnation.

The 2008 crisis was attributed to a laissez-fair policy that allowed risks in the financial market. Large financial institutions took excessive risks and thought that they were too big to fail and did not think about the consequences. Critics of capitalism decided that the crisis showed that uncontrolled freedom of markets is not beneficial. But there were still other proponents of capitalism who argued that the government was not necessarily intervening by encouraging subprime lending. For example: Fannie Mae and Freddie Mac.

The 2008 crisis brought a big mess to the world of economics. The government decided to make significant changes to eliminate and reoccur in such crises in the future. The Dodd-frank Wall Street Reform and Consumer Protection Act was passed in 2010. The law was aimed at reducing systemic risk and increasing the transparency of financial markets. Consumer Financial Protection Bureau (CFPB) supervises mortgage lending and is able to protect consumers from theft. The Volcker Rule was created speculative activities and does not steal customer deposits.  Bank were required to increase capital and have financial reserves in order to confidently withstand the economic crisis in the future. Many enterprises and institutions have begun to choose more sustainable business models to minimize a necessary risk. Consumer cut spending and savings rates increased in the years following the risk. Many people think that the reforms adopted by the government are enough to prevent another future economic crisis. But critics argue that the Dodd-Frank Wall Street reform does not eliminate the risk of large business going bankrupt. Other critics are calling for reinstatement of the Glass-Stegall (which separated commercial and investment banking activities until repealed in 1999) and the adoption of stricter rules to reduce the risk of speculation in the future.

The Covid-19 recession and the 2008 crisis greatly undermined the global economy, but they had differences. The Covid-19 recession was caused by spread of the virus and economic activity was stopped, there were restrictions on travel around the world to prevent the virus from spreading. The global supply chain was disrupted. Consumers were at home and businesses were closed. During the Covid-19 period, consumer-facing businesses were hit hard: tourism. Restaurants, retail, small business and airlines. Companies that moved their business online at that time flourished. Unemployment in 2020 increased even more compared to 2008 and reached 14.7%. During Covid-19, the Cares law provided for payments to individuals, increased unemployment benefits. And provided assistance to small businesses.

The government response was massive and immediate. The great recession of 2008 and the Covid-19 recession were global economic crises, but the government responded to them differently. Both crises required a tailored approach to mitigate the consequences.