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    2008 Fin Crisis

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    The 2008 global financial crisis was triggered by a collapse in the US housing market and subprime mortgage crisis. Low interest rates led to rising house prices and excessive lending, while financial innovation spread risk. When housing prices declined, massive job losses and wealth destruction ensued globally. Central banks cut rates to historic lows and expanded balance sheets. Governments increased spending to stimulate economies, running large deficits. The crisis demonstrated the need for central banks and regulators to focus on financial stability over just inflation, and for governments to pursue responsible fiscal policies to create fiscal space in downturns.

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    2008 Fin Crisis

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    Xyz Yxz
    13 views8 pages
    The 2008 global financial crisis was triggered by a collapse in the US housing market and subprime mortgage crisis. Low interest rates led to rising house prices and excessive lending, while financial innovation spread risk. When housing prices declined, massive job losses and wealth destruction ensued globally. Central banks cut rates to historic lows and expanded balance sheets. Governments increased spending to stimulate economies, running large deficits. The crisis demonstrated the need for central banks and regulators to focus on financial stability over just inflation, and for governments to pursue responsible fiscal policies to create fiscal space in downturns.

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    The 2008 global financial crisis was triggered by a collapse in the US housing market and subprime mortgage crisis. Low interest rates led to rising house prices and excessive lending, while financial innovation spread risk. When housing prices declined, massive job losses and wealth destruction ensued globally. Central banks cut rates to historic lows and expanded balance sheets. Governments increased spending to stimulate economies, running large deficits. The crisis demonstrated the need for central banks and regulators to focus on financial stability over just inflation, and for governments to pursue responsible fiscal policies to create fiscal space in downturns.

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    © All Rights Reserved
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    13 views8 pages

    2008 Fin Crisis

    Uploaded by

    Xyz Yxz
    The 2008 global financial crisis was triggered by a collapse in the US housing market and subprime mortgage crisis. Low interest rates led to rising house prices and excessive lending, while financial innovation spread risk. When housing prices declined, massive job losses and wealth destruction ensued globally. Central banks cut rates to historic lows and expanded balance sheets. Governments increased spending to stimulate economies, running large deficits. The crisis demonstrated the need for central banks and regulators to focus on financial stability over just inflation, and for governments to pursue responsible fiscal policies to create fiscal space in downturns.

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    2008 Global Financial Crisis

    Backdrop of the crisis


    • Cyclical fluctuations in both activity and inflation had tended to trend
    down
    • The financial crisis that broke in mid-2007 and intensified following
    the Lehman Brothers bankruptcy in September 2008 has triggered a
    world-wide economic downturn.
    • Additionally, There was also jobless growth, sluggish real wages and
    the food and energy crisis.
    Reason
    • Bond yields in many countries fell to unusually low levels in historical
    comparison, both in nominal and real terms
    • Reflecting the low interest rate environment, real house prices shot
    up in most OECD countries
    • Against the background of rising house prices, and generally good
    economic conditions, housing construction also expanded rapidly to
    reach historical highs in terms of GDP in many countries
    • Low interest rates across the yield curve together with rapid
    development in financial innovation led to bank credit growing at
    rates more than usually in excess of GDP
    Reason
    • Bond yields in many countries fell to unusually low levels in historical comparison,
    both in nominal and real terms
    • Reflecting the low interest rate environment, real house prices shot up in most OECD
    countries
    • Against the background of rising house prices, and generally good economic
    conditions, housing construction also expanded rapidly to reach historical highs in
    terms of GDP in many countries
    • Low interest rates across the yield curve together with rapid development in
    financial innovation led to bank credit growing at rates more than usually in excess of
    GDP
    • Additionally, There was also jobless growth, sluggish real wages and the food and
    energy crisis.
    Impacts/Consequences
    • 8.8 million jobs lost, Unemployment spiked to 10% by Oct 2009, 8
    million home foreclosures, $19.2 trillion in household wealth
    evaporated, Home price declines of 40% on average – even steeper in
    some cities, S&P 500 declined 38.5% in 2008
    • $7.4 trillion in stock wealth lost from 2008-09, or $66,200 per
    household, on average
    • Employee sponsored savings or retirement account balances declined
    27% in 2008
    • Delinquency rates for Adjustable Rate Mortgages (ARMs) climbed to
    nearly 30% by 2010
    Impact of the 2008 Financial Crisis across
    world
    Remedial measures
    • Central bank policy rates were slashed to historic lows. The US Fed Funds rate was
    cut from 5% to 0%. Japan and Switzerland took policy rates below 0%.
    • Major central banks then undertook large-scale asset purchases, bringing down
    long-term yields, expanding their balance sheets and flooding markets with
    liquidity
    • In addition, governments stepped in to spend. The US clocked a federal deficit of
    9.8% of GDP in 2009, from 1.1% of GDP in 2007. The Euro area fiscal deficit,
    likewise, moved from 0.7% of GDP in 2007 to 6.3% of GDP in 2009.
    • Post the 2008 crisis, as India’s growth and exports fell sharply, our policymakers
    stepped in to support growth. The Reserve Bank of India slashed policy interest
    rates from 7% to an effective low of 3.25%. India’s 10y government bond yield
    dropped from 9% to 5% by end 2008. Moreover, the central government expanded
    the fiscal deficit from 2.5% of GDP in FY08 to 6% in FY09, and 6.5% in FY10.
    Learnings from the case
    • First, the policy objectives of central banks would have to be broader
    than price stability as conventionally defined.
    • Second, there is a need for fiscal consolidation to generate the fiscal
    space for macro management.
    • Third, financial institutions would have to be less leveraged and better
    regulated.

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