The Global Economic Crisis

The Global Economic Crisis

The global economy is in a tailspin. The recession that began in the United States in 2007 is predicted to continue well into this year and to affect the economies of nearly every major industrialized country. Stock exchanges around the world have fallen steeply, and credit (money) markets remain tight despite massive infusions of government capital. Major investment banks and other lending institutions have failed or required a government bailout while other industries are clamouring for government assistance. Home foreclosures are widespread, and the unemployment rate in the United States and other countries threatens to rise further. Go Inside Britannica to explore the causes and consequences of the global economic crisis.

The Housing Boom and Subprime Lending

During the boom in the American and European housing markets in the late 1990s and early 2000s, less-qualified borrowers were offered subprime mortgages with adjustable but initially low interest rates. Banks viewed subprime loans as sound investments, and pools of subprime loans were purchased by investment banks (and in the U.S. by the federally chartered corporations Fannie Mae and Freddie Mac) and sold as mortgage-backed securities (MBSs) to other banks and investors. Funds from the sale of MBSs enabled mortgage originators to issue new home loans, and the asset value of MBSs enabled their holders to extend credit to other banks and businesses.

Crisis and Collapse

By 2007 interest rates charged by central banking authorities had increased, pushing the mortgage payments of homeowners with subprime loans to levels they could not afford. Many were forced out of their homes by foreclosure. In 2008 defaults and foreclosures accumulated in the United States and Europe, driving down the value of MBSs. Some major banks failed, and credit markets tightened, forcing cash-starved companies to cut costs by reducing purchasing and laying off employees. Stock exchanges suffered significant declines as worried investors sold off shares.

Government to the Rescue

The Bank of England and the European Central Bank made direct investments and loans to troubled financial institutions, and in September 2008 Fannie Mae and Freddie Mac were placed under U.S. federal conservatorship. A month later Congress passed the Emergency Economic Stabilization Act (EESA). It and related measures represented in financial terms the largest government intervention in private industry in American history, larger even than the New Deal programs created in the 1930s in response to the Great Depression. Today, the ongoing economic crisis stands as one of the most significant challenges to the administration of U.S. President Barack Obama.

InsideFACT

The fundamental cause of the Great Depression in the United States was a decline in spending, which led to a decline in production as manufacturers and merchandisers noticed an unintended rise in inventories. By 1933, after a string of banking panics, one-fifth of the banks in existence in the United States at the start of 1930 had failed. As much as one-fourth of the labour force in industrialized countries was unable to find work in the early 1930s.