14 September 2007

Financial crisis of 2007–2008: The Northern Rock bank experiences the first bank run in the United Kingdom in 150 years.

The Financial Crisis of 2007–2008, often referred to simply as the “Global Financial Crisis” or the “Great Recession,” was a severe worldwide economic crisis that occurred in the late 2000s. It was the most serious financial crisis since the Great Depression of the 1930s and had far-reaching economic and social consequences.

Housing Bubble: The crisis had its roots in the U.S. housing market. In the early 2000s, there was a housing bubble where home prices were rising rapidly, driven by lax lending standards and a surge in subprime mortgage lending. Many people who could not afford conventional mortgages were given loans with adjustable interest rates, which led to an increase in home ownership but also a rise in risky lending practices.

Mortgage-Backed Securities (MBS): Financial institutions bundled these subprime mortgages into complex financial products known as mortgage-backed securities (MBS). These securities were sold to investors worldwide as relatively safe investments, given the high credit ratings assigned to them.

Deterioration of MBS: As more subprime borrowers defaulted on their mortgage payments, the value of MBS began to deteriorate. This led to significant losses for financial institutions that held these securities, including major banks and investment firms.

Bank Failures: Some of the largest financial institutions in the world, such as Lehman Brothers, Bear Stearns, and AIG, faced severe financial distress or bankruptcy due to their exposure to MBS-related losses. Lehman Brothers’ bankruptcy in September 2008 marked a turning point in the crisis, causing widespread panic and a freezing of credit markets.

Credit Freeze: The crisis led to a credit freeze, where banks became extremely reluctant to lend money to each other or to businesses and consumers. This lack of available credit had a cascading effect on the broader economy, leading to a severe economic downturn.

Government Interventions: In response to the escalating crisis, governments and central banks around the world took various measures to stabilize financial markets and prevent a complete collapse of the financial system. These measures included bank bailouts, monetary policy actions, and stimulus packages.

Recession: The financial crisis quickly evolved into a global economic recession. Unemployment rates increased, housing prices plummeted, and many people lost their homes and jobs. The recession had profound and lasting effects on individuals, businesses, and governments.

Regulatory Changes: In the aftermath of the crisis, there were significant regulatory reforms aimed at preventing a similar crisis in the future. The Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States, for example, introduced various measures to increase transparency, strengthen financial oversight, and regulate risky financial practices.