Crisis 2008: understand the causes and consequences in the economy

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Crisis 2008: understand the causes and consequences in the economy

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THE 2008 crisis it had a devastating effect on the global financial market, mainly for the United States and eurozone countries. Brazil, despite not being hit hard, also suffered losses for companies and the population.

Many people remember or have heard of this historic crisis, but not everyone knows exactly how and why it occurred.

With this in mind, we explain in this article everything you need to know about the 2008 crisis, its consequences and lessons for countries and investors. Interested? Stay with us!

What was the 2008 crisis?

Considered the worst crisis since the Great Depression of 1929, the 2008 crisis occurred due to the bursting of a housing bubble in the USA, caused by an increase in property values ​​that was not accompanied by an increase in the population's income.

In short, banks have high risk loans for people to buy real estate, without assessing whether they would be able to return the money.

In addition, they distributed investment packages around the world with bonds linked to these loans, promising very high interest rates to investors.

In the end, debtors were unable to repay loans and banks started to crash, causing a huge loss to investors worldwide.

Later on, we will go into detail about how the crisis started, evolved and what its consequences were. But first, it is necessary to understand the concept of the economic bubble.

Understand the economic bubble concept

One economic bubble it is the phenomenon that occurs when a financial asset starts to be traded well above its real value and then suffers an even more drastic price drop, causing huge losses to buyers.

Generally, it happens when a financial product has a reputation for good investment with low price and high return. Because of the high demand, prices rise and continue to rise until they reach a level well above what they are really worth.

With rising prices, assets lose liquidity, because it starts to become more difficult to sell them to other investors. In addition, due to the higher interest rates, many people lose the ability to pay them, leaving their hands tied.

In the case of the 2008 crisis, the assets in question were real estate and real estate titles, which by a succession of factors went from heaven to hell and ended up shaking the structures of capitalism.

Main causes of the 2008 crisis

crisis-2008-consequences

Now that you understand the concept of the economic bubble, it is time to delve into the causes and consequences of the 2008 crisis. Next, you will learn all about the root of the recession, how it has evolved and what its consequences have been.

The beginning of everything

Although the 2008 crisis was associated with the collapse of the centenary American bank Lehman Brothers, that was only the tip of the iceberg. The beginning of everything was in late 90s, more precisely in 1998.

During this period, there was a great movement of credit expansion in the United States. O Federal Reserve (the US Central Bank) kept the basic interest rate extremely low to encourage people to borrow money and increase consumption in the country.

As a result, banks adopted the strategy of offering very low interest mortgages for the population to buy real estate.

Mortgage, in case you don't know, is to offer a property as a guarantee to borrow money. If the person does not pay the debt, the bank takes the property for itself to cover the loss.

These credits, called subprimes, were released without risk assessment, considering only the guarantee offered by the mortgage.

In practice, people started mortgaging their houses to buy other properties at low interest rates, because the deal was too good not to be done. And banks lent money without being sure whether the other side would be able to pay.

The problem is that a large part of these credits were granted to unemployed people and other people in a delicate financial situation who there would be no way to pay them off. This was one of the points that generated the 2008 crisis along with other factors that we will see later.

The offer of CDOs

At the same time that lending high values ​​for the purchase of real estate, banks started to mix these high-risk debts with low-risk debts to assemble investment packages called CDOs (secured debt obligations, in London).

The idea was that when Americans paid their mortgages, that money would go back to investors with very high interest rates.

The return promise was extremely attractive, causing investors from all over the world to put their money in these bonds, without knowing the type of debt that existed in the packages.

Financial market confidence in CDOs was boosted by positive reviews risk rating agencies, such as Standard & Poor's and Fitch & Moody's, which were later criticized for their performance in the 2008 crisis, in addition to the banks.

Over time, debtors were no longer able to pay their mortgages. Consequently, banks were unable to pay investors, which generated a chain reaction that culminated in the recession.

Income stagnation and price hikes

But after all, why did people start running out of money to repay real estate loans?

One of the main reasons was the income stagnation US families that had been occurring since the 1980s. The problem was exacerbated by government spending on the wars in Iraq and Afghanistan that increased the inflation in the country.

In 2004, in order to control inflation, the Federal Reserve it started to raise the basic interest rate, which hurt many people who had mortgaged their homes to get real estate credits.

With higher interest rates, the value of the loan installments began to increase. In addition, property prices, which had already been rising with the heated market, started to grow even more, reaching levels far beyond reality.

This strangled the families financially, who had difficulty paying their mortgages. Those who tried to sell the acquired properties could not, because the prices were no longer as interesting as they used to be – on the contrary, they were too high.

In this way, people began to have huge debts that they could not get rid of, let alone pay.

When borrowers started defaulting on banks after rising interest rates, the net value of CDOs plummeted, causing losses to investors and the collapse of many of them.

After lending so much money and not getting it back, banks have run out of money to pay for their operations, which sparked the 2008 crisis.

Black Monday

In 2006, due to this combination of factors, some credit institutions that granted high-risk mortgages began to fail.

The US government started to provide financial aid to prevent the situation from reaching an unsustainable point, but the effort was in vain.

On September 15, 2008, a date that became known as black monday, the traditional Lehman Brothers bank declared bankruptcy.

On this day, stock exchanges around the world have suffered terrible declines with the devaluation of securities of various organizations. Without being able to pay the mortgages, several families had to leave their homes in several cities in the USA.

With the collapse of Lehman Brothers, the American government is under great political pressure and ended up refusing to save it, that is, putting public money to recover a private institution.

In the sequence, other banks announced huge losses, which generated months of high market instability.

2008 crisis: what were the consequences?

The 2008 crisis was not just about the financial sector: companies around the world had to close their doors and the unemployment soared worldwide, generating a period of great social and economic difficulties.

The consequences were greater in USA and on Europe, although all countries have felt the effects of the crisis, including Brazil. In some places, the level of employment has never returned to what it was before the housing bubble burst.

To save the economy, governments in several countries have injected billions into banks. See below what has been done in the USA, Europe and Brazil to contain the 2008 crisis.

U.S

On September 24, 2008, then President George W. Bush announced a program that envisaged aid from 700 billion dollars to save the banks.

Central banks in several countries have also launched incentive plans to try to increase market liquidity, facilitating access to credit for people and companies.

Even so, the crisis spread and hit companies considered solid, such as Chrysler and General Motors, which declared bankruptcy.

The social effects were also devastating. After the crisis, the family income in the USA fell 25% it's the unemployment rose 10.1%, the highest percentage since 1983 until then.

Europe

Even with the injection of more than 1 trillion dollars of central banks in the world economy, in two years the crisis has intensified in Europe, especially in the Pound zone.

The UK, the UK and Ireland who depended heavily on tourism, needed to adopt austerity measures to contain the crisis. THE Italy also suffered, but was less affected because it had a higher level of industrialization.

The most emblematic consequences occurred in the Greece. The country has contracted a very high public debt after taking several loans from the International Monetary Fund (IMF), in addition to having to implement severe spending cuts, with reduced labor rights, public servants' salaries and privatizations.

Brazil

In general, emerging countries like Brazil were less affected by the 2008 crisis, but there were serious losses involving the fall of the Ibovespa and the rise in the dollar.

In 2008, GDP increased by 5.2%, but the impact was felt in 2009, with fall of 0.3%. There was also the biggest drop in the stock market since the 70's until then, with a retraction of 4%.

Companies that had bought high-risk assets had huge losses. Sadia, for example, had a loss of 2 billion reais in a quarter. The solution to avoid bankruptcy was a merger with Perdigão, starting BR Foods.

At the time, to control the crisis, the government implemented measures such as:

  • reduction of Selic rate from 13.75% to 8.75%, to reduce the interest paid on loans from companies and individuals, increasing the circulation of money in the country;
  • tax cuts such as the IPI for products such as automobiles and building materials to insure prices and stimulate purchases;
  • billions of reais injections in banks, guaranteeing credit for industries to produce and for people to consume.

As we saw throughout the post, the 2008 crisis did not arise suddenly, but from a succession of mistakes made over the previous decade.

Now, use this learning to your advantage, assessing well the origin and risks of any investment you want, in addition to thinking very carefully before taking any type of credit.

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