The 2008 Financial Crisis Explained

What happened in the 2008 crisis?



At the peak of it all, the Lehman Brothers, a highly regarded financial giant on Wall Street filed for bankruptcy on September 15, formally beginning the start of the year’s financial crisis commonly referred to as the “Hamburger Crisis.” The crisis created rippling effects throughout the world and economies, so much so that some have yet to fully recover today. 



Cause of Bankruptcy



Lehman Brothers was a global financial service provider ranked as an institution “too big to fail”, meaning their importance to the world’s economy was vital and if fallen, would be catastrophically disastrous.

However, the bankruptcy was not the initial cause of the following events, but was rather the economic bubble present in the property sector in the United States caused by loans with little credit, causing the initial Subprime Crisis.

The sedimentation of issues in the U.S. damaged the country for years prior to the bubble burst in 2008, leading to mortgages and pawning off land and property. With low interest rates and loan requirements that were quite low, people were able to buy entire houses, despite the inability to even pay it off.

This led to damaging effects towards banks and financial institutions in terms of immense financial losses, wherein Lehman Brothers announced their official bankruptcy caused by a staggering debt of 6.13 hundred million U.S. dollars.

At the time, Hank Paulson, former U.S. Secretary to the Treasury, announced the government’s support of banks, causing concerns for investors and rendering the Dow Jones Industrial Average index and New York stock market to fall by 350 points. This news eventually sent negative ripples throughout the world’s financial markets.



Lesson

Undoubtedly, the Hamburger crisis was not the first and will not be the last financial crisis in the face of history, but it was indeed a landmark for numerous changes that led to financial policy changes and regulations to control loan interest fees more strictly in order to prevent history’s repetition. As a result, the world’s economic stability has been enhanced from its past status.

An important lesson learned from this crisis is that the world is always experiencing changes that may affect the world economy or can render them to a pause, much like the spread of the COVID-19 virus. Therefore, it has become evidently important to prepare for any future mishaps that may take place, even in terms of investment and risk management.



Opportunities

Opportunities go hand in hand with crises. In the viewpoint of investors, the falling of stocks could be an opportunity to purchase more stocks for long term profit, which is a lesson learned from risky short-term investments during economic crises.

In an overview of the U.S. stock market, ever since March 2009, the S&P index has adjusted positively upwards and investors that purchased stocks beforehand would now benefit from the uptrend market, the longest running one in history, in fact.





Conclusion

The Hamburger crisis is a result of immense amounts of loans for borrowers incapable of paying off their debt, leading to damaging effects for banks and financial institutions, like huge financial losses. This further led to the Lehman Brothers’ bankruptcy, which caused global distress and sent domino-like effects throughout the world’s economies.

Eventually, many central banks initiated policies and laws to strictly regulate bank loans to prevent the repetition of history. Nonetheless, with such historic catastrophes kept in mind, it is crucial for investors to devise risk management strategies, while also conducting in-depth research for safe and effective investments.



Reference:



BangkokBizNews, Investopedia(Subprime), HistoryExtra, Investopedia (2008 Financial), Bloomberg, FinancialPost, WashingtonPost, TheBalance