2008 Global Financial Crisis and British Economy Impacts

5 Questions

Explain the period of extreme stress in global financial markets and banking systems between mid 2007 and early 2009 and its impact on the British economy.

The period of extreme stress in global financial markets and banking systems between mid 2007 and early 2009 was caused by a downturn in the US housing market, which spread from the United States to the rest of the world through linkages in the global financial system. This crisis had a significant impact on the British economy, leading to large losses for many banks and millions of job losses.

What were the main causes of the Global Financial Crisis (GFC)?

The main causes of the GFC included excessive risk-taking in a favorable macroeconomic environment, imprudent borrowing by households to purchase and build houses, and similar borrowing by property developers and households in European countries based on expectations of rising house prices.

What were the impacts of the GFC on the global financial system and banking institutions?

The impacts of the GFC on the global financial system and banking institutions included large losses incurred by many banks around the world, leading them to rely on government support to avoid bankruptcy.

In what ways did millions of people suffer as a result of the GFC?

Millions of people suffered as a result of the GFC through the loss of their jobs, as the major advanced economies experienced their deepest recessions since the Great Depression in the 1930s.

How did economic conditions in the United States and other countries contribute to the lead up of the GFC?

In the years leading up to the GFC, economic conditions in the United States and other countries were favorable, with strong and stable economic growth, low rates of inflation, unemployment and interest, and strong growth in house prices. This led to imprudent borrowing by households and property developers.

Study Notes

Global Financial Crisis (GFC)

The period of extreme stress in global financial markets and banking systems lasted from mid-2007 to early 2009.
It was a global phenomenon, affecting the British economy and other countries.

Causes of the GFC

Subprime mortgage crisis in the United States: banks had invested heavily in these high-risk mortgages, which began to default.
Deregulation of financial markets: lack of regulation allowed banks to take on excessive risk.
Global imbalances: large trade deficits in the US, financed by foreign central banks, fueled consumption and housing bubbles.
Complex financial instruments: securitization and credit default swaps (CDS) made it difficult to assess risk.

Impacts on the Global Financial System and Banking Institutions

Widespread bank failures: Lehman Brothers, Bear Stearns, and others failed or were sold.
Credit crunch: banks stopped lending, leading to a sharp decline in economic activity.
Systemic risk: the entire financial system was at risk of collapse.
Bailouts and government intervention: governments and central banks provided capital injections and guarantees.

Human Impacts of the GFC

Unemployment rose: millions of people lost their jobs, leading to increased poverty and inequality.
Home foreclosures: millions of people lost their homes, particularly in the US.
Reduced economic activity: GDP growth slowed, leading to reduced consumer spending and investment.

Contributions to the Lead-up of the GFC

Housing market bubble in the US: fueled by low interest rates and lax regulation.
Overconsumption and low savings rates in the US: fueled by easy credit and consumer spending.
Trade deficits: large deficits in the US, financed by foreign central banks, contributed to the global imbalances.
Monetary policy: low interest rates in the US and other countries encouraged borrowing and risk-taking.