Financial Meltdown Of 2007-2008
Financial industry has encountered unprecedented changes in the last four decades. General public can borrow huge sums of money at nominal interest rates from banking institutions while the prospective investors can invest their funds in a wide array of financial products catering to their needs of risk and return portfolio. While the advancement in the financial sector has on one hand made the richest man in the world to reach the mark of $150 Billion individually as Net Worth (Mr. Jeff Bezos, owner of Amazon); on the other hand, such advancement has made the sector vulnerable to a worldwide meltdown.
During the years 2007 till 2009, the world witnessed the worst financial crisis since the Great Depression of 1929. The primary reason for the meltdown is attributed to the sub-prime mortgage crisis in the USA. Due to globalization phenomenon, this crisis froze the financial markets of the whole world, while economic activity came to a closure. As per the report of Federal Reserve Department US, an estimated $12.6 Trillion of human capital was lost due to this meltdown.
Sub-prime mortgage crisis was basically a housing bubble wherein lower interest loans were offered by financial institutions to the general public without any collateral. During the tenure of 2001 till 2008, US government enunciated a policy whereby they envisioned a home for every American. In order to achieve this vision, banking institutions engaged into the worst business practices of giving loans for mortgage to public, who were not even able to pay back the principal amount of the loan.
This in turn led to non-payment of mortgage instalments by the borrower and subsequent foreclosure of houses by the banks. This created a housing bubble which severely affected the financial institutions, so much so that the then fourth largest investment bank of USA i.e. Lehmann Brothers defaulted and filed for bankruptcy. It created a trigger among other banks as all were engaged in inter-bank borrowing with Lehmann Brothers.
In addition, there was a sense of fear among general public which led to huge lines outside banks and ATM’s in the USA. The US Federal Reserve had to step in and use $700 Billion of the taxpayer’s money to bail out the financial sector and restore the confidence of public in the industry.
A decade after the financial crisis, financial industry is still lurking with the same risks. Robust regulations were introduced by governments worldwide to enhance the safety net of financial institutions, but more needs to be done if the world intends to avoid such crisis in future.