The Causes of the 2008 Financial Crisis in the West

The twenty-first-century economists consider the 2008 financial crisis that characterised the western world the worst of its kind. Indeed, the great depression that affected the US between 1929 and 1939 is the only more severe global crisis in the recent history, in comparison to the global financial crisis that was evidenced from 2007 through 2008 and beyond (Mellor 2010). The crisis was caused by many factors, some of which range decades beyond 2007, and one of them includes the economic crisis that was phenomenal in the subprime mortgage segment of the American economy (Brunnermeier 2009b). Furthermore, the bankruptcy of the significant finical institutions in the global market like Lehman Brothers (worth of $90 million) in 2008 was a contributing factor for the 2008 financial crisis in the West (Brunnermeier 2009b). The crisis manifested globally with an escalating impact because most financial institutions took an excess risk in their perennial operations. Despite the necessary measures taken to avert a global crisis, for instance, the financial bail-outs and friendly policies to offer palliative care for collapsing commercial organisations, the impending great recession persisted. In similar circumstances, the growing European financial debt also played a significant role in the collapse of the global financial stability in 2008, hence both the dollar and the euro lost ground as the most stable currency in the West, Mainland Europe and beyond (Mellor 2the 010).  The Consumer Protection Act of 2010 would be passed to ensure financial stability for Wall Street.  To exhaustively explore the financial crisis that afflicted the western countries after September 2008, it is not only imperative to discuss the causes of the crisis but also crucial to outline the resultant effects.

Causes of the Financial Crisis That Hit the Western World after September 2008

One of the primary causes of the post-2008 September financial crisis in the West is the failure on the part of financiers to make strategic policies that could effectively oversee and balance the forces of demand and supply in the financial market. For instance, the Anglo-Saxon claims that new mechanisms to banish financial risks were in place was a hoax (Klagge et al. 2010). In fact, at the point the claim was made, it was almost clear that warning signs were already manifesting. Considering that other influential financial institutions like the central bankers also tolerated the Anglo-Saxon economic opinions that lacked evidence-based grounds are also to blame for the 2008 financial crisis. Indeed, the risk-taking habits in the commercial market were fostered by the support of the central bankers for the stable growth and low inflation rhetoric (Hemmelgarn & Nicodeme 2010). European banks also played a significant role in the accentuation of the then-looming 2008 financial crisis. European banks borrowed heavily from the American financial markets, and the borrowed money was inappropriately invested in dodgy deals, a misguided financial move that would contribute to the polarising effects of the looming economic depression.

Furthermore, financial institutions also made mistakes that lay the ground for the post-September 2008 crisis. For instance, before the recession, irresponsible and voluminous lending for mortgages across the US was widely experienced (Brunnermeier 2009b). People who did not have credible financial history were given loans for mortgages, the credits which they struggle to make payments. Consequently, subprime borrowers in America contributed to the crisis. Furthermore, the financial engineers in big banking institutions pooled together the considerably small loans under the category of small-risk credit, without the insight that the combined loans were to cause a tremendous tall to the economy. Big banks chose not to share critical information on mortgages, with the notion that each bank would be affected independently, which was wrong as the depression swept across the country (Mellor 2010). Consequently, the year 2006 experienced witnessed a significant price slump for the housing sector, which served as an indicator for the approaching market failure.  The pooled together mortgages in the US were labelled as collateralised debt obligations by banks, and they were then sold in different quarters. Most investors bought the collateralised debt obligations because the banks had placed higher returns. Unfortunately, the financial market was yielding diminishing interest rates, and soon the whole deal would backfire (Klagge et al. 2010). On the one hand, economists have argued that the low-interest rates lead to the financial crisis. On the other, financial experts have asserted that the broader shifts across the world markets are what caused the primary challenge. Nonetheless, the interest rates gave a banks room for incentives, which then attracted more borrowing and investment, because investors were sure of the returns that would typically exceed the borrowing costs (Brunnermeier 2009b). On the contrary, because short-term financing did not attract much interest and uncertainties were inevitable, investors chose to borrow more money, make long-term investments in the hope for higher-yielding securities. As it would alter unfold, the financiers and the financial institutions thus made multiple mistakes that caused the 2008 financial crisis.

Other than the mistakes made by financial institutions, the regulators and the policymakers that had the responsibility to monitor and authenticate the operations of banks did fail in their duties and hence directly contributed to the 2008 financial crisis. For instance, once the regulator watched as Lehman Brothers went deep into bankruptcy without efforts to bail the substantial financial institutions out; it was the beginning of a financial crisis.  Immediately Lehman Brothers collapsed, trust in financial institutions went low, panic struck the commercial market, and soon neither individuals nor financial institutions could trust nobody from lending or borrowing money (Mishkin 2011). Manufacturing companies and other nonfinancial entities began to hoard capital, a move that led to the increasing number of unpaid employees, indebted suppliers, and failed contracts; effects that directly set an environment for economic failure.  As Lehman Brothers went down, the government came in to contain the situation, but it was already late. The growing interest of the government to monitor and stabilise Lehman Brothers was an indicator of the already panicked market that an economic crisis was looming.

Other than letting Lehman Brothers go bankrupt, the regulators made other financial mistakes that encouraged the onset of the 2008 crisis. For instance, regulators of banks and financial institutions were in support of the increased mortgage and housing finance despite the significant imbalances in current accounts (Klagge et al. 2010). Furthermore, Asian markets were doing excessive saving; a situation that would undoubtedly compromise the stability of the American financial market, but the European markets instead blindfolded the Asian challenge. On the contrary, the US was already experiencing dire deficits by 2005, as the European firms were over borrowing from the US, and overusing the same money in while dodging the American based securities (Mishkin 2011). Nevertheless, the increasing market for the dominance of the euro also led to the collapse of the European financial markets, hence escalating the situation of the economic depression to the global arena. Bust of property and increasing housing in Ireland and Spain also served to weaken the euro. Indeed, while Southern European nations were struggling with a financial deficit, those in the north were enjoying an economic surplus. Hence the volatile spending environment created adverse debts for the euro dominated zones (Mellor 2010). Consequently, just as the China-American markets contributed to the 2008 financial crisis escalation, so did the European markets and the euro.

In summary, therefore, the September 2008 economic recession in the west was an occurrence that came into place in a chronological turn of events.  From the failing commercial markets, consumer confidence across all facets of the economy began to decline. Because the consumer ability has reduced, the demand for goods and services in the market also decreased.  Consequently, once the natural flow of the supply and demand forces in the market had become compromised, it became inevitable that the business cycle was tampered with. Therefore, the spending and investment exuberance that had characterised the period before 2008 vanished suddenly, and the contraction effect began to cave in. The public lost confidence, and hence people embraced a defensive mode, which means people boycotted to spend, and those who had money kept it at home to literary abstain from circulating the cash. The retail business dwindled, jobs became fewer, the failing economy could only support a few new jobs, and the existent jobs were at risk as the volumes in manufacturing companies reduced due to the declining demand. The government and the central bank stakeholders took initiatives to bring the situation under control in vain. Once the Gross Domestic Product became adversely affected, it became inevitable that the causes hitherto had finally caused the 2008 economic recession.

Effects of the Financial Crisis That Hit the Western World after September 2008

The American government lost hundreds of millions of dollars from September in 2008 until 2009 during the recession. Furthermore, because the revenue quarters for the government had significantly reduced, the increased national government cost put an additional cost of $2050 for each household in the country. Moreover, inside of the 2008 July and 2009 March timeframe, every American family spent $100 thousand more to back the declining stocks (Brunnermeier 2009). Consequently, the economic depression of 2008 affected the taxpayer in significant proportions.

The economic crisis of 2008 reduced the growth rate of the US economy as well as other countries within the region and beyond. In the context of the American government, for instance, over $648 worth of billion was lost, because of the declining economic growth (Ohanian 2010). The reduced income for the government through revenues, directly and indirectly, affected the income of individual Americans. Indeed, every family unit in America lost up to $5800 in profit. On the contrary, the government increased spending in efforts to contain the escalating effects of the 2008 economic crisis. As a result of those additional costs, the taxpayer was under obligation to pay $78 billion more (Ohanian 2010).

The 2008 recession also affected real estate business and the profit margins of homeowners immensely. It should be noted that part of what caused the crisis is the unregulated and irresponsible mortgagees for housing. Subprime investors borrowed loans to build homes, and most ended up struggling to pay the loans hence creating a compromised financial atmosphere suitable for the then-looming economic crisis of 2008 (Brunnermeier 2009). Approximately $3.4 trillion in the sector of real estate from 2008 to 2009 was lost (Ohanian 2010).  On average, it means that every American family lost about $30300 on the declining housing profits because of the recession.  Moreover, the situation became worse because over 500 thousand housing units were brought to a halt across the country.

Because the financial depression directly affected the Wall Street operations, Americans lost over $7.4 trillion in stocks. The stock markets could no longer function. Indeed, following the collapse of major financial institutions, people and banks feared to invest in the stock exchange. It was apparent that the money markets were full of uncertainties, and hence the high risk deterred most potential investors from releasing their money. On average, therefore, every American household lost $66200 in stock market proceeds between 2008 and 2009.

Finally, the 2008 economic recession led to the loss of jobs and hence unemployment surged.  The commercial was experiencing dwindling growth, and therefore the creation of new jobs was almost impossible during the recession. On the contrary, 5.5 million jobs were lost across the country. The spending power of most states reduced significantly. Manufacturing institutions lay off workers because of the reduced consumer ability in the market. Small retail shops closed down, and supplies could not be paid because money hoarding was on the rise. Therefore, the government need more money to just keep the available jobs sustainable, as the risk was running high toward 2009 (Brunnermeier 2009). Production of raw material for industrial use also declined. Indeed, farmers experienced immense losses because manufactures reduced the margins of raw material consumption. Therefore, the whole chain of employment from the producer to the consumer was interfered with adversely.

References

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Ohanian, L.E., 2010. Understanding economic crises: The great depression and the 2008 recession. Economic Record, 86(SUPPL. 1), pp.2–6.