Business Library: Conversational AI Knowledge Base

Aspect

Summary

Causes

The crisis was triggered by the collapse of the US housing market, which exposed the fragility and interconnectedness of the global financial system. Subprime mortgages, mortgage-backed securities, derivatives, and shadow banking were some of the factors that contributed to the crisis.

Events

The crisis developed gradually from early 2006 to mid-2007, when subprime lenders, hedge funds, and credit rating agencies faced losses, defaults, and downgrades. It escalated in August 2007, when the short-term funding markets froze. It reached a critical point in September 2008, when Lehman Brothers filed for bankruptcy. It threatened to destroy the international financial system and caused the failure or near-failure of several major financial institutions.

Conseq-
quences

The crisis had severe consequences for the real economy, as the credit crunch reduced the availability and increased the cost of borrowing for businesses and consumers. This led to a sharp decline in spending, investment, and output, as well as a surge in unemployment and bankruptcies. The crisis also triggered a global recession, as the slowdown in the US and other major economies affected trade and growth around the world.

Responses

The crisis prompted unprecedented policy responses from governments and central banks, who intervened to stabilize the financial system and stimulate the economy. Some of the measures included injecting liquidity into the banking system, lowering interest rates, providing fiscal stimulus, bailing out troubled financial institutions, and implementing financial reforms.

Lessons

The crisis exposed the need for financial regulation and the risks of financial globalization and imbalances. It also raised important questions and challenges for policymakers, regulators, and researchers, who have been trying to understand its causes, consequences, and lessons. Some of the lessons include the importance of responsible lending practices, consumer education, and financial literacy; the crucial role of the central bank in providing liquidity and stability; the effectiveness of fiscal policy in mitigating the impact of the crisis; and the vital role of international cooperation and coordination in addressing the global nature of the crisis.