Global Financial Crisis
The global financial crisis reached its acute phase in September 2008 with the bankruptcy of Lehman Brothers, the largest in American history, and became the worst economic contraction since the 1930s. Its origin was the American housing market. Rising prices, low interest rates and a mortgage industry paid on volume rather than performance produced enormous lending to borrowers who could not repay. The loans were pooled into securities, sliced into tranches, rated AAA by agencies paid by the issuers, and sold worldwide. Credit default swaps, written in a market with no clearing and no capital requirements, spread the exposure further — AIG alone had written some $440 billion of them. Prices peaked in 2006 and fell. Bear Stearns was sold to JPMorgan in March 2008 with Federal Reserve support; Fannie Mae and Freddie Mac were taken into conservatorship in September. Lehman was allowed to fail on 15 September, and interbank lending stopped almost entirely. AIG was rescued the next day. Governments guaranteed bank liabilities, recapitalised the system, and cut rates to near zero; central banks began quantitative easing. World trade fell faster in 2009 than in 1930. Around nine million American jobs were lost, and unemployment in Spain and Greece passed 25 per cent. Almost no senior banker was prosecuted, which shaped the politics that followed as much as the recession did. The crisis moved into sovereign debt in the eurozone from 2010, and its political consequences ran through the following decade. Regulation tightened afterwards through Dodd-Frank in the United States and Basel III internationally, raising bank capital substantially. Much of the risk migrated to non-bank lenders, which are less regulated and less well understood. Trust in expert institutions did not recover, and the populist movements of the following decade drew on that directly.
- Year: 2008 CE
- Category: Political
