Batyrkhan Jumatov | 02.10.2025
The 2008 Global Financial Crisis
Historic event in the global financial marketplace, the 2008 Global Financial Crisis was perhaps the greatest economic event in the contemporary period. Even though its roots lay in the United States, the crisis soon spread rapidly around the world, eliciting deep and prolonged recessions across various nations. The crisis was occasioned by government interventions of unprecedented size and enduring effects in terms of highlighting inherent weaknesses in risk management, financial regulation, and global economic interlinkages.
The bursting of the US housing bubble was the main cause of the crisis. Financial institutions had widely issued subprime home mortgages or bad borrower loans during the pre-2008 period. Bad mortgages were packaged and sold as complex financial instruments known as mortgage-backed securities (MBS) by assigning high credit ratings that created a false sense of security around the majority of these securities. Increasing numbers of borrowers were defaulting on mortgages as interest rates rose. The value of the MBS thus fell as financial institutions held these assets and enormous losses were maintained by these institutions.
The over-leveraging of the financial system merely worsened things further. In attempting to increase their profit margins, investment houses as well as banks had constructed enormous debt piles that made them highly susceptible to a depreciation in asset prices. Matters were further compounded when Lehman Brothers failed in September 2008, something that sent financial markets reeling and forced a mass credit freeze on the entire system. No longer were banks lending freely to banks as confidence between banks collapsed, and consumer as well as business credit flows dropped sharply. World stock exchanges plummeted, as an acute recession wrought devastation on the global economy.
Government and central bank authorities responded with a series of interventions. In the United States, the Federal Reserve had been following a policy called quantitative easing, under which interest rates had been cut towards zero and vast asset purchases were being made. In the stabilization of the financial system, the United States government also set up the $700 billion Troubled Asset Relief Program (TARP). Comparable policy responses, involving monetary easing, rescues of banks, as well as fiscal stimulus packages, were found in Europe as much as other areas. Even if these averted collapse of the financial system, the recovery that followed was uneven and most countries had years of slow growth as well as unusually elevated rates of unemployment.
Financial regulation and supervision were placed on a more prominent agenda after the crisis. The US Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 had provisions that would safeguard consumers, lower systemic risk, as well as increase transparency more broadly. The Basel III system was agreed internationally for enhanced bank risk management as a way to fund capital requirements. Reform was aimed at correcting regulation's flaws that had enabled such over-the-top risk-taking as weak accountability across the financial system.
Massive long-term political and social consequences also followed from the 2008 financial crisis. Because the benefits of recovery and effects of job losses, foreclosures, and diminished public services diffused disproportionately to the majority of common people, economic disparity widened. Spreading skepticism towards governments and financial institutions yielded political instability as well as the development of populist movements across several nations. The crisis highlighted the dangers that accrue in faulty regulation, over-dependence on debt, as well as irrational optimism regarding the market's efficiency. Since financial systems are interconnected as well as a balance issue in an economy can create a swift effect elsewhere, it also highlighted global coordination.
The structure of the global economy was also affected profoundly by the crisis. Financial globalisation was speeded up as was concentration of economic power in a few leading institutions. The collapse of such giant financial institutions as Lehman Brothers and AIG showed the riskiness of a financial system in more complexly interconnected form. Moreover, as large institutions were regarded as a necessity for the functioning of the global economy, the "too big to fail" syndrome emerged, deepening concerns over moral hazard as well as over concentration of financial power. Discussion over how much multinational corporations, and banks and other financial institutions first of all, do shape economic policy as well as government grew in strength following the event. Overall, the crisis of 2008 was a massive event that changed the direction of the global economy. Radical policy changes and structural adjustments in the economy were justified by the revelation of deep flaws in financial procedures as well as in regulation procedures. Even though the immediate crisis was eventually fixed, its memory lingers in theory and policy in the field of economics until this day. Long-term global economy stability as well as preventing future financial crisis greatly depends on the lessons derived by the crisis.
The bursting of the US housing bubble was the main cause of the crisis. Financial institutions had widely issued subprime home mortgages or bad borrower loans during the pre-2008 period. Bad mortgages were packaged and sold as complex financial instruments known as mortgage-backed securities (MBS) by assigning high credit ratings that created a false sense of security around the majority of these securities. Increasing numbers of borrowers were defaulting on mortgages as interest rates rose. The value of the MBS thus fell as financial institutions held these assets and enormous losses were maintained by these institutions.
The over-leveraging of the financial system merely worsened things further. In attempting to increase their profit margins, investment houses as well as banks had constructed enormous debt piles that made them highly susceptible to a depreciation in asset prices. Matters were further compounded when Lehman Brothers failed in September 2008, something that sent financial markets reeling and forced a mass credit freeze on the entire system. No longer were banks lending freely to banks as confidence between banks collapsed, and consumer as well as business credit flows dropped sharply. World stock exchanges plummeted, as an acute recession wrought devastation on the global economy.
Government and central bank authorities responded with a series of interventions. In the United States, the Federal Reserve had been following a policy called quantitative easing, under which interest rates had been cut towards zero and vast asset purchases were being made. In the stabilization of the financial system, the United States government also set up the $700 billion Troubled Asset Relief Program (TARP). Comparable policy responses, involving monetary easing, rescues of banks, as well as fiscal stimulus packages, were found in Europe as much as other areas. Even if these averted collapse of the financial system, the recovery that followed was uneven and most countries had years of slow growth as well as unusually elevated rates of unemployment.
Financial regulation and supervision were placed on a more prominent agenda after the crisis. The US Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 had provisions that would safeguard consumers, lower systemic risk, as well as increase transparency more broadly. The Basel III system was agreed internationally for enhanced bank risk management as a way to fund capital requirements. Reform was aimed at correcting regulation's flaws that had enabled such over-the-top risk-taking as weak accountability across the financial system.
Massive long-term political and social consequences also followed from the 2008 financial crisis. Because the benefits of recovery and effects of job losses, foreclosures, and diminished public services diffused disproportionately to the majority of common people, economic disparity widened. Spreading skepticism towards governments and financial institutions yielded political instability as well as the development of populist movements across several nations. The crisis highlighted the dangers that accrue in faulty regulation, over-dependence on debt, as well as irrational optimism regarding the market's efficiency. Since financial systems are interconnected as well as a balance issue in an economy can create a swift effect elsewhere, it also highlighted global coordination.
The structure of the global economy was also affected profoundly by the crisis. Financial globalisation was speeded up as was concentration of economic power in a few leading institutions. The collapse of such giant financial institutions as Lehman Brothers and AIG showed the riskiness of a financial system in more complexly interconnected form. Moreover, as large institutions were regarded as a necessity for the functioning of the global economy, the "too big to fail" syndrome emerged, deepening concerns over moral hazard as well as over concentration of financial power. Discussion over how much multinational corporations, and banks and other financial institutions first of all, do shape economic policy as well as government grew in strength following the event. Overall, the crisis of 2008 was a massive event that changed the direction of the global economy. Radical policy changes and structural adjustments in the economy were justified by the revelation of deep flaws in financial procedures as well as in regulation procedures. Even though the immediate crisis was eventually fixed, its memory lingers in theory and policy in the field of economics until this day. Long-term global economy stability as well as preventing future financial crisis greatly depends on the lessons derived by the crisis.
