Global Financial Meltdown of 2008-09: Causes, Implications, and Lessons

Global Financial
Meltdown of 2008-09

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Causes and conditions that led to American housing bubble 2008 including laymen brother’s
bankruptcy...................................................................................................................................3
Similarities and differences with other events that fall under the same category are as under:. .4
Direct and indirect implication of the above events:...................................................................5
The lessons that are drawn from the outcome of the crisis of 2008-09.......................................6
Responses that came from the public and the criticism faced.....................................................8
Suggestions that can be needed regarding the change in policy..................................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
The financial crises of 2007- 2008 and great depression of 1930s was one of the worst
economic and financial disaster that affects almost all industries, business giants and financial
corporations working across the globe in their era respectively (Diniz-Maganini, Rasheed and
Sheng, 2021). These crises lead to great recession and depression in an economy in such a way
that unemployment increases, poverty ratio rises, industrial production declines and so on.
Similarly, in financial crises, residential and commercial housing project price declines
drastically and home loans are granted by banks more than their mortgage property value. Their
impact is so long that still unemployment rate is above 9% in US market. This report indicates
effects and conditions for such disasters and it lays down the differences and similarities between
two crises. It also specifies direct and indirect impact in US economy. Further it lays down the
role plays by laymen brothers in financial crises of 2008. Further this report also mentions,
lessons and responses that could be drawn from the above event. At the end there are some
suggestions & solution and policy changes that may be required.
MAIN BODY
Causes and conditions that led to American housing bubble 2008 including laymen brother’s
bankruptcy
The bubble starts at beginning of 2006, where price of residential homes starts falling in us
market for the first time. At the beginning of such downfall, it was look like there is a slowdown
in real estate sector, which is heavily priced in market. But in such a situation, certain factors are
ignored by market players such as interest rate on home loans becomes cheaper, credit
worthiness of the home loan applicants is not properly analysed by the banking institutions. Even
mortgage loans are granted more than the value of residential property which is collateral as
security against loans (Antoniades and Antonarakis, 2022).
Further these mortgage properties are backed by guarantee of certain financial institutions
providing assurance to banks regarding their funds. This whole process involves various
intermediaries such as commercial banks, mortgage lenders, insurance companies and so on that
lead to such major crises that not only affect US market but also influence, international financial
system.

The laymen brothers are one of the prestigious US firm engaged in financial services plays
an important role in such crises. They become bankrupt in 2008 after filling petition for
bankruptcy to court. The main reason for such downfall is that firm entered into mortgage
backed securities and collateral debt obligation along with some financial players. They acquired
five corporations engaged in mortgage lending such as Aurora loan services, BNC mortgage etc.
which specialises in subprime mortgage lending which is riskier. Further they provide security
against such loan without proper documentation and borrowers of such subprime mortgages
becomes defaulters at the time of repayment of loan. This leads to a sharp downfall in
profitability of the firm in quarter end results and they continued till company filed their petition
to court for insolvency (Yildiran, 2021).
Similarities and differences with other events that fall under the same category are as under:
The great depression of late 1920s and last until 1930s was the most longest and severe
downfall in the modern history as it lasts almost for 10 years. This depression leads a sharp
decline in industrial production, creates mass unemployment and increases poverty ratio. In the
united states, effect of such depression was worst as compare to other countries as there is a
decline in industrial production nearly by 47%. Their GDP declines by 30% and unemployment
crossed the mark of 20% of total population (Demirgüç-Kunt, Peria and Tressel, 2020).
The differences between financial crises 2008 and great depression 1930s are as under:
 The unemployment rate in great depression is more than 20% whereas in the financial
crisis such rate is 8.5%.
 9000 plus bank fails during great depression which represent 50% (Approx) of the banks
nationwide whereas in financial crises 57 banks of the US gets affected representing 26%
(Approx.) of total financial institution of US.
Similarities in both crises can be viewed as leads to bigger change in the federal structure,
amendment in various policies and rules made by government. Further strong laws have been
incorporated by government to control the industries, financial institutions, and other class of
businesses in order to restrict all those unlawful activities that are against the public interest in
general (Diniz-Maganini, Rasheed and Sheng, 2021).