2007-09 Global Financial Crisis

2007-09 Global Financial Crisis

What it is: Global recession characterized by falling financial markets, housing markets and tightened credit availability and liquidity circulation.

Causes: The boom economic environment of the first half of the 2000s led to lax lending practices, which further fueled growth initially. As assets and financial products became over-inflated in value, a backlash in the market brought about a bust trend, as housing values, stocks and other financial assets came crashing down in value.

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Sparked by the Housing Bubble/Subprime Crisis: A strong-growth housing market opened the way for riskier mortgage products, namely subprime mortgage loans. When increased foreclosures occurred worldwide, a disproportionate number of homes flooded the market, applying downward pressure on housing prices. Decreasing prices created more foreclosures, which placed an even a greater glutton of homes on the market. This downward spiral was also further exasperated by rapidly tightening lending practices, a direct response to over-exposure to the sinking housing market. This added even more momentum to the downward spiral by shrinking the pool of potential buyers. These subprime loans were bundled into security products made available on financial markets. They became so widespread, nearly every investment firm and bank in the western world (U.S. and Europe in particular) were highly vested. The crash in the housing market resulted in a precipitous drop in investment values, bringing a large number of banks and investment firms on the brink of failure (many did indeed fail), causing a crash in the financial system as well. In which case, the economic troubles became systemic, seeping into virtually all sectors of the worldwide economy. Naturally, consumer demand contracted substantially in the U.S. and abroad, accelerating a domino effect that has affected virtually every nation. Eastern Europe nations are in an especially difficult position, as their housing boom was largely financed by foreign lending institutions, such as those in Switzerland. As local currencies fell sharply in value (especially in comparison to the Swiss Franc), loans have become almost impossible to repay.

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