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Finance Encyclopedia Entry 1776933906

** The **Financial Crisis of 2007-2008**, also known as the **Global Financial Crisis**, was a severe economic downturn that originated in the United States and spread globally, resulting in widespread job losses, home foreclosures, and a significant decline in economic output. **CONTENT:** ### **Overview** The **Financial Crisis of 2007-2008** was a global economic downturn that was triggered by a housing market bubble bursting in the United States. The crisis was characterized by a sharp decline in housing prices, a subsequent increase in mortgage defaults, and a freeze in the global credit markets. This led to a severe contraction in economic activity, resulting in widespread job losses, home foreclosures, and a significant decline in economic output. The crisis was marked by a series of high-profile failures of major financial institutions, including Lehman Brothers, Bear Stearns, and AIG. These failures led to a loss of confidence in the financial system, causing a sharp decline in asset prices and a credit crunch. The crisis also led to a significant increase in government debt and a sharp decline in economic output, resulting in a global recession. ### **History/Background** The roots of the crisis can be traced back to the early 2000s, when the US housing market began to experience a significant increase in prices. This was fueled by lax lending standards, low interest rates, and an increase in subprime lending. As housing prices continued to rise, many homeowners took out mortgages that they could not afford, leading to a surge in defaults and foreclosures. In 2006, the housing market began to decline, and the number of defaults and foreclosures increased sharply. This led to a freeze in the global credit markets, as lenders became increasingly risk-averse and began to tighten their lending standards. The crisis was further exacerbated by the failure of several major financial institutions, including Lehman Brothers, which filed for bankruptcy in September 2008. ### **Key Information** * **Causes:** The crisis was caused by a combination of factors, including lax lending standards, low interest rates, and an increase in subprime lending. * **Key Events:** + 2006: The housing market begins to decline, leading to an increase in defaults and foreclosures. + 2007: The global credit markets begin to freeze, as lenders become increasingly risk-averse. + September 2008: Lehman Brothers files for bankruptcy, leading to a sharp decline in asset prices and a credit crunch. * **Consequences:** + Widespread job losses: The crisis led to a significant increase in unemployment, with millions of people losing their jobs. + Home foreclosures: The crisis led to a surge in home foreclosures, with millions of people losing their homes. + Global recession: The crisis led to a sharp decline in economic output, resulting in a global recession. ### **Significance** The **Financial Crisis of 2007-2008** was a significant event in modern economic history, with far-reaching consequences for the global economy. The crisis led to a significant increase in government debt, a sharp decline in economic output, and a widespread loss of confidence in the financial system. It also led to a significant increase in regulation, including the passage of the Dodd-Frank Act in the United States. The crisis also highlighted the need for greater financial stability and the importance of prudent lending standards. It led to a significant increase in the use of derivatives, such as credit default swaps, and a greater emphasis on risk management. The crisis also led to a significant increase in the use of quantitative easing, a monetary policy tool used by central banks to stimulate economic growth. **INFOBOX:** - **Name:** Financial Crisis of 2007-2008 - **Type:** Global Economic Downturn - **Date:** 2007-2008 - **Location:** Global - **Known For:** Triggering a global recession and leading to widespread job losses and home foreclosures. **TAGS:** Financial Crisis, Global Economic Downturn, Housing Market Bubble, Subprime Lending, Credit Crunch, Quantitative Easing, Risk Management, Derivatives, Government Debt, Economic Output, Unemployment, Home Foreclosures.