The financial crisis of 2007-2008 had been building for years. By the summer of 2007, financial markets worldwide were exhibiting symptoms that the years-long feast on cheap borrowing was finally coming to an end. Subsequently, many regular individuals lost their jobs, life savings, houses, or all three because of the financial and economic crisis.
Sowing the crisis’ seeds
Years of ultra-low interest rates and lax lending regulations created a home price bubble in the United States and worldwide, laying the groundwork for the financial catastrophe.
Deregulation in the banking industry was the primary cause of the financial catastrophe, allowing banks to engage in derivatives-based hedge fund trading. Consequently, they devised interest-only loans that subprime applicants could afford.
The Federal Reserve hiked the fed funds rate in 2004 while the interest rates on these new mortgages were adjusted. As supply surpassed demand, housing prices began to decrease in 2007. Homeowners who couldn’t afford the payments but couldn’t sell their homes were imprisoned. When derivatives’ prices plummeted, banks stopped lending to one another.
As a result, the financial crisis erupted, resulting in the Great Recession.
- Thanks to a change in bank investment laws, customers’ money began to get invested in derivatives.
- Subprime residential mortgage derivatives were formed, and demand for houses surged.
- Subprime mortgage borrowers couldn’t afford their mortgages once the Federal Reserve boosted interest rates.
- Borrowers defaulted on their mortgages, and derivatives and other assets linked to them lost value.
- Unscrupulous investment banking and insurance practices contributed to the financial crisis, bypassing investors’ risk.
When Dominoes started to fall
By August 2007, it was clear that the financial markets couldn’t fix the subprime crisis and that the issues were spreading well beyond the United States.
Fear of the unknown caused the interbank market, which keeps money moving worldwide, to freeze totally. Meanwhile, banking institutions battled to evaluate the trillions of dollars in now-toxic mortgage-backed securities that sat on their balance sheets. Moreover, the demise of Bear Stearns and the Lehman Brothers fall in March and September 2008, respectively, have a greater impact on the global economy.
Aftermaths of GFC
Housing Sector
The subprime mortgage market crashed during the Great Recession, causing many individuals to lose their houses and economic stagnation. As the value of their homes dropped well below the borrowed amount and subprime interest rates rose, Americans faced financial ruin. In some areas of the country, monthly mortgage payments have nearly doubled.
As a result, home building decreased significantly, limiting the availability of new dwellings for an ever-increasing population. Due to a supply shortage and growing demand, the real estate business became a seller’s market. More individuals were vying for fewer homes, resulting in a spike in property prices.
Mining Industry
The mining industry was also stuck in a quagmire. Due to the financial crisis, all mineral commodity prices dropped, mining firm share values declined dramatically, and mineral consumption tumbled. The significant fall in mineral prices is a natural follow-up to the destruction of the price bubble.
The reciprocal superposition and effect of the mining growth cycle and the financial crisis, which was unlikely to occur in a century, has hastened the pace of termination of the mining boom and the onset of the downturn phase.
Automobile Business
The car business was one of the hardest-hit industries during the current crisis. New car sales
have dropped by roughly 40%, and employment in the automobile business has plummeted by more than 45%. Faced with bankruptcy, the US government used TARP monies to bail out Chrysler and General Motors. Hence, the Big Three and Toyota gave significant reductions throughout their product lines.
From 2008 to 2010, the Great Recession negatively influenced Suzuki, Hyundai, and Honda. Because of the market environment and the turmoil in the global economy, the firms’ sales have plunged. Manufacturers in Asia, Europe, North America, and others have used innovative marketing approaches to entice hesitant customers since most have seen double-digit percentage sales decreases.
Unemployment Scenario- Now & then
As a result of the diminishing demand for products and services during the global financial crisis, private enterprises and government institutions have cut millions of jobs and halted new employment.
This resulted in a global increase in the number of unemployed people, which reached 205 million by the end of 2009, up 27 million from 2007 (International Labor Organization, 2011).
According to the World Employment and Social Outlook: Trends 2021, the jobs shortage caused by the new COVID-19 pandemic was 75 million in 2021 and is anticipated to be 23 million in 2022. Recent research studies reported that worldwide unemployment would reach 205 million in 2022, exceeding the 187 million bar.
As you can see in this YouTube video made by Comparethemarket, Spain, Greece and other European countries were heavily affected by the GFC and still haven’t recovered.
The Bottom Line
Many findings demonstrated; that the present COVID-19 pandemic is more severe in economic activity than the global financial crisis. While the GFC revealed that the US financial system had some structural issues before the crisis, the pandemic has been proven to shock the US market and the entire world simply by spreading into countries, forcing the US government to limit and restrict every movement and program to stop the contagion. The pandemic-induced catastrophe in the United States is today known as the Black Swan or Great Compression.
Both the global calamities are based on a lack of proper measures. Therefore, presenting these preparations might prove beneficial in reducing the pandemic impact. For example, sufficient stress testing and presence of system-wide exercises, adequate equipment stocks, supplies, staff, and space, clear understanding of resources and circumstances, standard data collection measures, red flag identification, full-proof strategies to battle the global contagion, operational risk determination, consider individualism, building models for miscellaneous systems.
