2008 financial crisis

The 2008 financial crisis, also known as the global financial crisis, was a major worldwide economic crisis, centered in the United States, which triggered the Great Recession of late 2007 to mid-2009, the most severe downturn since the Wall Street crash of 1929 and Great Depression. The causes of the financial crisis included predatory lending in the form of subprime mortgages and a resulting U.S. housing bubble, excessive risk-taking by global financial institutions, and lack of regulatory oversight. The first phase of the crisis began in early 2007, as mortgage-backed securities (MBS) tied to U.S. real estate, and a vast web of derivatives linked to those MBS, collapsed in value. A liquidity crisis spread to global institutions by mid-2007 and climaxed with the bankruptcy of Lehman Brothers in September 2008, which triggered a stock market crash and international banking crisis.^[1]

During the 1990s, the U.S. Congress had passed legislation intended to expand affordable housing through looser financing rules, and in 1999, parts of the 1933 Banking Act (Glass–Steagall Act) were repealed, enabling institutions to mix low-risk operations, such as commercial banking and insurance, with higher-risk operations such as investment banking and proprietary trading.^[2] As the Federal Reserve ("Fed") lowered the federal funds rate from 2000 to 2003, institutions increasingly targeted low-income homebuyers, largely belonging to racial minorities, with high-risk loans;^[3] this development went unattended by regulators.^[4] As interest rates rose from 2004 to 2006, the cost of mortgages rose and the demand for housing fell; in early 2007, as more U.S. subprime mortgage holders began defaulting on their repayments, lenders went bankrupt, culminating in the bankruptcy of New Century Financial in April. As demand and prices continued to fall, the financial contagion spread to global credit markets by August 2007, and central banks began injecting liquidity. In March 2008, Bear Stearns, the fifth largest U.S. investment bank, was sold to JPMorgan Chase in a "fire sale" backed by Fed financing.

In response to the growing crisis, governments around the world deployed massive bail-outs of financial institutions and other monetary and fiscal policies to prevent a collapse of the global financial system.^[5] By July 2008, Fannie Mae and Freddie Mac, companies which together owned or guaranteed half of the U.S. housing market, verged on collapse; the Housing and Economic Recovery Act of 2008 enabled the federal government to seize them on September 7. Lehman Brothers (the fourth largest U.S. investment bank) filed for the largest bankruptcy in U.S. history on September 15, which was followed by a Fed bail-out of American International Group (the country's largest insurer) the next day, and the seizure of Washington Mutual in the largest bank failure in U.S. history on September 25. On October 3, Congress passed the Emergency Economic Stabilization Act, authorizing the Treasury Department to purchase toxic assets and bank stocks through the $700 billion Troubled Asset Relief Program (TARP). The Fed began a program of quantitative easing by buying treasury bonds and other assets, such as MBS, and the American Recovery and Reinvestment Act, signed in February 2009 by newly elected President Barack Obama, included a range of measures intended to preserve existing jobs and create new ones. These initiatives combined, coupled with actions taken in other countries, ended the worst of the Great Recession by mid-2009.

Assessments of the crisis's impact in the U.S. vary, but suggest that some 8.7 million jobs were lost, causing unemployment to rise from 5 percent in 2007 to a high of 10 percent in October 2009. The percentage of citizens living in poverty rose from 12.5 percent in 2007 to 15.1 percent in 2010. The Dow Jones Industrial Average fell by 53 percent between October 2007 and March 2009, and some estimates suggest that one in four households lost 75 percent or more of their net worth. In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was passed, overhauling financial regulations.^[6] It was opposed by many Republicans, and it was weakened by the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018. The Basel III capital and liquidity standards were also adopted by countries around the world.^[7][8] The recession was a significant factor in the European debt crisis of the 2010s.