Sample Essay on the 2008 Financial Crisis

2008 Financial Crisis

The 2008 financial crisis is considered by many economists across the globe as the worst recession after the Great Depression of 1929-1930. It was a serious economic state despite efforts by the Treasury department and the Federal Reserve to prevent it and the US banking system from collapsing.

Due to the crisis, housing prices fell by 31.8percent more than that of the Great Depression. Two years after the 2008 financial crisis, the recession ended but the rate of unemployment was still high. Many people had given up looking for jobs and they were no longer counted amongst the jobless. The number was alarming.

What caused the 2008 financial crisis?

According to economists and researchers, signs of a financial crisis were evident from mid-2007. The first cause was linked to a fall in housing prices in 2006. Many realtors by 2006 were however relieved because, they thought housing prices and housing market would normally resume or rise to a sustainable level.

The realtors however failed to realize that many homeowners had a questionable credit rating. Many homeowners had loans for more than 100 percent of their home’s value. A large number of financial institutions and mortgage lenders had also resold mortgages in packages. This was part of mortgage backed securities.

Initially, Federal Reserve always thought a subprime crisis would affect other sectors but would always be isolated to housing market. However, financial institutions across different parts of the globe and hedge funds owned most homes in form of mutual funds, pension funds and corporate assets.

It is also good to note that original mortgages had been resold in pieces and the remaining actual derivatives were impossible to price. The value of the mortgages plummeted and investors across the globe started to panic.

Many pension funds institutions bought risky assets thinking that they would be protected from downsides risks. As a matter of fact, many owned insurance in the form of credit default swaps but it could not help to prevent the 2008 financial crisis.

After a short span of time, financial institutions began to panic. They realized that they were the only ones to absorb losses as a result of poor credit by many homeowners. No one wanted to be caught up in the crisis. Banks started to exercise caution and avoided lending money to each other. They tried to avoid situations where they could get stuck with worthless mortgages as their collateral. Inter-banking costs or interbank borrowing costs rose in the end aggregating the situation.

What was the cost of the 2008 financial crisis?

The Treasury department spent up to $150 billion to subsidize the economy and to finally take up Freddie Mac and Fannie Mae. Federal Reserve on the other hand had to use $85 billion and eventually $150 billon to bail out the AIG. Federal Reserve had to pump liquidity into the banking but it was not enough.

In March 2008, many investors went for Beas Stearns because it was rumored to have the worthless assets. Bear later approached Morgan Chase to bail it out from the situation. In September 19, 2008, the crisis led to run on Ultra Safe Money Market Funds. Within a short span of time, businesses moved to safer Treasury bonds.

Safer Treasury bonds sustained many businesses. Later on, $350 was used to buy automotive company stocks because the prices were depressed. By 2010, banks had picked up and paid back $194 billion.

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