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The 2008 ECONOMIC CRISIS AND ITS RIPPLE ON THE MODERN WORLD

16/6/23

By:

Kaustubh Krishna

Beyond the Crash: How the 2008 Economic Downturn Continues to Shape Our Present and Future

Introduction

We're taking a trip down memory lane to the not-so-distant past, to a time when Wall Street was a chaotic mess, quite like certain MLA elections, with the economy being on the brink of collapse.


That's right, we're talking about the 2008 financial crisis, a time when words like "subprime mortgage" and "credit default swap" became part of our household vocabulary (whether we wanted them to or not).


But this crisis was more than just a blip in the history books – its ripple effects continue to be felt today, shaping the modern world as we know it. So grab your home loans, because we're about to dive deep into the world of finance, economics, and the lasting legacy of the 2008 economic crisis.


What happened back in 2008?

Not to bore you with specifics but, in a nutshell, the crisis was caused by a bunch of rich bankers who began exploiting a loophole in the eerily stable housing market. What goes around, comes around, and because of this exploit, the valuation of the market dropped.


Like, a lot.


The crisis led to a credit crunch, with banks and other lenders becoming reluctant to lend money, causing a recession that lasted from 2008 to 2009. The crisis also resulted in widespread unemployment, bankruptcies, and foreclosures, affecting millions of people across the world.


Now you might be wondering what this “exploit” was, so strap in for a mini-lecture on the housing market.


In the early 2000s, the housing market in the USA experienced an all-time high, with everyone investing in real estate. Because of this, banks and mortgage lenders began offering subprime (garbage) mortgages. These were loans given to borrowers with low credit scores and a high risk of default (failing to meet the legal bindings of the loan.)


Such subprime mortgages were often bundled together with other mortgages and sold as mortgage-backed securities (MBSes) to investors, who thought that they were a safe and profitable investment.


The demand for MBSes increased, leading to the creation of collateralized debt obligations (CDOs), which were bundles of MBSs that were then sold to investors at lower rates. It’s like a subprime mortgage is a chocolate, an MBS is a box of chocolates and a CDO is a truckload of these boxes.


However, many of the subprime mortgages given out were based on inflated home values and had variable interest rates which meant that many borrowers were unable to keep up with their mortgage payments once the interest rates increased, which led to a wave of defaults and foreclosures, causing the value of MBSs and CDOs to eventually and rightfully plummet - by an insane amount.


And well the rest is simple.


Banks shut down, unemployment, recession, foreclosures, lawsuits - all the good stuff. But how does some real-estate mishap that happened 15 years ago have anything to do with the golden era of TikTok and NFTs that we live in now? Well, more than you might think.


How it affected our H&M hoodies and Starbucks pumpkin spice lattés


For starters, the economic crisis birthed and paved the way for the rise of a group known as populists. 2008 fueled widespread anger and frustration among many working-class people who felt left behind due to globalization. This sense of dissatisfaction caused many “occurrences” such as the election of Donald Trump in the USA and the beloved Brexit vote that helped the UK leave the European Union.


The 2008 economic crisis resulted in widespread job losses, leading to a shift away from traditional employment towards the rise of the "gig economy."


This economy involves workers taking on short-term contracts or freelance work, providing them with more flexibility but less job security and benefits. The gig economy has grown rapidly since then, but it has also faced criticism for the lack of protections and benefits it provides to workers. Such jobs include graphic design, writing, consultancy and photography among many others, which are some of the most popular opportunities in this day and age.


The real-estate market was at the epitome of the 2008 financial crisis, and its aftershocks can still be felt today.


While the market has largely recovered in many countries, housing affordability remains a major issue in many cities, with skyrocketing prices making it difficult for many people to own a home in metropolitan cities like New York, Mumbai and Singapore.


Governments worldwide implemented various measures to revive their economies after the 2008 financial crisis, which included adopting fiscal stimulus policies that led to significant levels of debt.


These policies were successful in preventing a deeper recession, but the resulting debt burden continues to pose challenges for several countries. To balance economic growth with the need to reduce debt, governments have resorted to austerity measures, such as cutting public spending and raising taxes. These measures, however, can have negative social and political repercussions, such as increased inequality and political unrest - with vulnerable groups being disproportionately affected. Therefore, the quest for a viable solution to the debt challenge remains a complex and pressing issue globally.


2008 also led to a global reassessment of banking regulations, with many countries implementing new rules designed to prevent a similar crisis from happening again. These regulations have had a lasting impact on the banking industry, with some arguing that they have made it more difficult for banks to lend and spur economic growth.


In conclusion - to conclude

Money - It makes the world turn.


But ever so often we, humans, learn how to abuse minute loopholes in the financial system. It’s like yanking a lion’s tail and then being scared when it gets angry - what did you expect?


Of course, humans don't learn.


Economists and statisticians predict another recession in 2023, they place the odds at approximately 64%. Banks are collapsing with vultures (JPMorgan Chase, I’m looking at you) left to collect the scraps (for legal reasons this is a joke).


So far, banks like Silicon Valley, Signature and First Republic have just seemingly evaporated.


This begs the question, will we or will we not have a full economic crisis? The answer, simply put, is maybe. It is highly unlikely we will undergo a crisis of the magnitude of 2008, however, chances are hovering of a recession during this year.


Oh and just in case you didn’t know, a recession is defined as a period of economic loss during which both trade and industrial activity dwindle - identified by a consistent fall in GDP (Gross domestic product, come on basic economics).


This won’t really shatter the middle class though so you can carry on with the aesthetic bookstore and cafe mirror selfies for Instagram. Just remember, the world lies in the hands of the financial system - a conflicted one - with more loopholes than Fight Club, so yeah, just bear in mind.

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