The world financial and economic system was on the brink. Questionable speculation business with American home loans turned into a global liquidity and confidence crisis between the banks. The financial crisis kept the world in suspense for many months. The stock prices tumbled into the basement, one large financial house after the other reported billions in depreciation, or had to file for bankruptcy. New bad news reached the financial markets almost every day. Governments around the world tried to calm the panicked financial world. Solutions were sought at national, European, and international levels to limit the extent of the financial and economic crisis. Gross domestic product in Germany in 2009 was five percent lower than in the previous year. This was the sharpest decline in the post-war period.
The 2008 Financial Crisis: Crash Course Economics
The central banks steered against the crisis with a policy of cheap money. The taxpayer paid for the crisis. The German taxpayer was there with around 60 billion euros. Banks were supported by government billions. The consequences of the weakening economy – falling tax revenues, skyrocketing unemployment, rising social spending and billions of bailouts for banks – are putting a strain on national budgets, particularly in the weaker countries of the euro area. The result was the euro crisis. One eurozone after the other threatened to slide into insolvency. Due to the European Central Bank’s (ECB) low-interest-rate policy, savers lost hundreds of billions in lost interest, but loans were cheap. Investors migrated to the stock and real estate markets. The DAX has tripled since 2009, real estate is more expensive than ever before.
The world was in the worst financial and economic crisis since the 1930s. Then as now, there was too much speculation, too much trust in the mechanisms of the financial markets, and too little regulation of those who had started the crisis. The stock prices tumbled into the basement, one large financial house after the other reported billions in depreciation, or had to file for bankruptcy. New bad news reaches the financial markets almost every day.
Governments around the world tried to calm the panicked financial world and restore trust among consumers. Solutions were sought at national, European, and international levels to limit the extent of the crisis.
How did the financial crisis come about?
The subprime crisis is seen as a trigger for the global financial and economic crisis. Years of rising real estate prices in the United States, which had developed into a real estate bubble, stagnated and even fell in certain areas. At the same time, more and more borrowers could no longer service their loan installments, partly because of rising interest rates and partly because of a lack of income. Problematic borrowers (subprime – mortgage loans with low credit ratings) were charged with higher and higher interest rates after initially low-interest rates. With a debt rescheduling, the expensive loan for the property, which has now increased in value, should be repaid and a new loan should be taken out. However, real estate prices collapsed in mid-2006 and the business model no longer worked.
The situation was aggravated by daring constructions. In order to refinance themselves, the real estate banks bundled the high-risk loans into new types of securities that were sold to investors worldwide. These securities were initially rated as low-risk by rating agencies – but in the course of the real estate crisis, the securities were rated increasingly poorly, leading to corresponding losses in the banks’ balance sheets.
More and more subprime loans (low-quality mortgage loans) burst, confidence in the value of the securities allegedly secured by US mortgage contracts fell – and with it their price on the markets. As a result, banks sometimes had to drastically correct the values of these papers in their books, which resulted in deep red numbers in the balance sheets. Two hedge funds from New York investment bank Bear Stearns had speculated because they were heavily involved in the property-backed paper.
In Germany, Mittelstandsbank IKB, HSH Nordbank, SachsenLB, WestLB, Landesbank Baden-Württemberg and BayernLB, both under public law, came into crisis because of false speculation on the US real estate market.
In September 2008, the events rushed. The US government had to take control of the bankrupt US mortgage companies Fannie Mae and Freddie Mac. On September 15, 2008, 158-year-old Lehman Brothers filed for bankruptcy, while competitor Merrill Lynch was bought out by Bank of America. The US leading index Dow Jones suffered the biggest daily loss since September 11, 2001. Next, the US insurance company AIG was hit by capital losses and was only saved by a loan from the US Federal Reserve.
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