![]() The increase in cash out refinancings, as home values rose, fueled an increase in consumption that could no longer be sustained when home prices declined. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 trillion. It was among the five worst financial crises the world had experienced and led to a loss of more than $2 trillion from the global economy. It was also followed by the European debt crisis, which began with a deficit in Greece in late 2009, and the 2008–2011 Icelandic financial crisis, which involved the bank failure of all three of the major banks in Iceland and, relative to the size of its economy, was the largest economic collapse suffered by any country in history. The crisis sparked the Great Recession, which, at the time, was the most severe global recession since the Great Depression. financial sector since 1860 The New York City headquarters of Lehman Brothers Background World map showing real GDP growth rates for 2009 (countries in brown were in recession) Share in GDP of U.S. The TED spread spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008, reaching a record 4.65% on October 10, 2008. ![]() The TED spread (in red), an indicator of perceived risk in the general economy, increased significantly during the financial crisis, reflecting an increase in perceived credit risk. The Basel III capital and liquidity standards were also adopted by countries around the world. In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the US as a response to the crisis to "promote the financial stability of the United States". The recession was a significant precondition for the European debt crisis. The crisis sparked the Great Recession which resulted in increases in unemployment and suicide, and decreases in institutional trust and fertility, among other metrics. ![]() In the U.S., the October 3, $800 billion Emergency Economic Stabilization Act of 2008 failed to slow the economic free-fall, but the similarly-sized American Recovery and Reinvestment Act of 2009, which included a substantial payroll tax credit, saw economic indicators reverse and stabilize less than a month after its February 17 enactment. Īfter the onset of the crisis, governments deployed massive bail-outs of financial institutions and other palliative monetary and fiscal policies to prevent a collapse of the global financial system. This market development went unattended by regulators and thus caught the U.S. Arguably the largest contributor to the conditions necessary for financial collapse was the rapid development in predatory financial products which targeted low-income, low-information homebuyers who largely belonged to racial minorities. However, in 1999, parts of the Glass-Steagall legislation, which had been adopted in 1933, were repealed, permitting financial institutions to commingle their commercial (risk-averse) and proprietary trading (risk-taking) operations. Congress had passed legislation encouraging financing for affordable housing. The preconditioning for the financial crisis was complex and multi-causal. Financial institutions worldwide suffered severe damage, reaching a climax with the bankruptcy of Lehman Brothers on September 15, 2008, and a subsequent international banking crisis. Mortgage-backed securities (MBS) tied to American real estate, as well as a vast web of derivatives linked to those MBS, collapsed in value. Predatory lending targeting low-income homebuyers, excessive risk-taking by global financial institutions, and the bursting of the United States housing bubble culminated in a " perfect storm". It was the most serious financial crisis since the Great Depression (1929). The 2007–2008 financial crisis, or Global Financial Crisis ( GFC), was a severe worldwide economic crisis that occurred in the early 21st century.
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