GLOBAL

FINANCIAL
CRISES- 2008
Chirag Anand-23BC126
Vaibhav Raghuvanshi-23BC132
Naman khandelwal-23BC139
CONTENT
01 Overview of global financial crises

02 Causes of the crises

03 Impact on financial institutions

04 Economic Consequences

05 Statistic

06 Policies Responses
 What is Financial Crisis
A financial crisis can take several
forms, comprising credit panic and
banking or a stock market crash. In
a financial crisis, asset prices notice
a sharp decline in value, consumers
and businesses are unable to pay
their debts, and financial entities
face a shortage of liquidity.
Financial Crisis 2008
The financial crisis of 2007–08 was a severe
contraction of liquidity in global financial markets
that originated in the United States due to the collapse
of the U.S. housing market. caused the failure (or
near-failure) of several major investment and
commercial banks, mortgage lenders, insurance
companies, and savings and loan associations.
 ROLE IN CRISIS
Commercial Banks

Insurance Investment
Companies Banks

Credit Rating
Investors/ HNIs
Agencies
CAUSES
01 Housing Bubble and Inflated Prices:

• Easy access to credit and low-interest rates fueled a housing

bubble. Home prices rose rapidly, often exceeding their
intrinsic value.
• Speculative buying further inflated the bubble as people
bought homes not to live in but to resell quickly for a profit.
CAUSES
02 Subprime Mortgage Lending and defaults:

• Subprime mortgages are loans offered to borrowers with poor

credit histories or limited income.
• These borrowers are considered high-risk and are charged
higher interest rates to compensate for the risk.
• By 2007, the total value of subprime mortgages in the U.S.
was $1.3 trillion.
CAUSES
03 Bank size and deregulation

• since the 1980s, bank mergers led to a growing number of

large banks
• financial sector became deregulated
• “too big to fail”: when a company grows so large that its
failure would cause widespread economic harm in terms of
lost jobs and diminished asset values
• “too big to fail” mentality of banks encouraged more risk
taking
• governments had to bail out banks
 Global Recession: World GDP
Growth Rate Plummeted
The global GDP growth rates experienced a sharp decline during this period.
1 According to the International Monetary Fund (IMF), the global GDP growth
fell from 5% in 2007 to -0.1% in 2009

United States GDP contracted by 2.5% in 2009, marking the worst economic
2 downturn since the Great Depression.

Eurozone economies were hit hard, with GDP declining by 4.5% in 2009,
3 leading to widespread unemployment and austerity measures.
 Financial Market Turmoil:

57% Decline Investor Panic

Dow Jones index
The S&P 500 Index, a bellwether of the
U.S. stock market, declined by a STATISTIC
Felt nearly 778 points in one day. It The financial crisis triggered
was the largest point drop in history widespread panic among investors,
staggering 57% from its peak in
until the market crashed in March 2020 leading to a massive sell-off and a
October 2007 to its trough in March
at the start of the COVID-19 pandemic. precipitous drop in stock prices across
2009.
global markets.
Housing Market Downturn: U.S. Home Prices Declined
Significantly

40% Price Drop Subprime Mortgage Crisis

The crisis was fueled by the bursting of the U.S.
Home prices plummeted, with the Case-
housing bubble, which was largely driven by the
Shiller Home Price Index falling by 40%
proliferation of subprime mortgages and risky
from 2006 to 2009.
lending practices.

SE RATES

Ripple Effects FORECLOUSE RATES

The collapse of the housing market had
far-reaching consequences, dampening
consumer spending, eroding household
wealth, and a contraction in
construction and related industries.
Foreclosure rates soared, reaching a
peak of 2.23% of all mortgages in
2010, up from 0.58% in 2006.
 Banking Sector Instability
Over 500 Banks Failed
For instance, Lehman Brothers filed
for bankruptcy, and Merrill Lynch,
AIG, Freddie Mac, Fannie Mae,
HBOS, Royal Bank of Scotland, and
other banks came close to following
suit
Bailouts and Restructuring
Governments and central banks
were forced to implement
unprecedented bailout measures
and restructuring efforts to
stabilize the banking system.
Liquidity Crunch
The crisis also led to a freeze
in credit markets, with banks
reluctant to lend to each other
due to a lack of trust in the
financial system
TARP
In the United States, the
Troubled Asset Relief Program
(TARP) was established,
providing $700 billion to
purchase toxic assets and equity
stakes in banks to stabilize the
financial system
Global Trade Disruption: World Trade Volume Contracted

1 2 3
As the crisis unfolded, Export and import numbers Export-oriented economies
world trade volume also declined, with the World like Germany and China
contracted by a Bank estimating that global experienced steep declines in
staggering 12.2% in merchandise trade would trade, leading to widespread
2009, severely disrupting decline by 9% in 2009 layoffs and factory closures.
global supply chains and
trade flows.
STATISTICS

• 8.8 million jobs lost

• Unemployment spiked to 10% by October 2009
• Eight million home foreclosures
• $17 trillion in household wealth evaporated
• Home price declines of 40% on average
• S&P 500 declined 38.5% in 2008
• Nasdaq composite had its worst year ever, plunging
40.5%.
• $7.4 trillion in stock wealth lost from 2008-09
• Employer-sponsored savings and retirement account
balances declined 25% or more in 2008
POLICY
RESPONSES
 AUSTERITY

QUANTITATIVE EASING
 AUSTERIT
Y AIM
TYPES OF AUSTERITY

•To reduce budget government deficit

•Increase government revenues raising taxes. through spending cuts ,tax increases or a
•Decrease government spending. combination of both.

Applicability
•It is used by government that find it
difficult to borrow or meet their existing
obligation.
 QUANTITATIVE EASING

•The economy is slowing down less demand for goods and services.
•The fed reserve decided to use quantitative easing.
•The fed purchases, bonds and securities from the open market.
•This increases money supply, thus demand for goods.
•The Economy is expected to improve as people demand more goods and service
 INDIA'S RESPONSE AFTER CRISES
Steps by RBI to tackle crises situation:

CURRENCY WAR RESERVES

•Fast depreciation of rupee due to
•RBI reduced the CRR(Cash reserve ratio)
massive capital outflow by Fiis.
and SLR(Statutory liquidity ratio) interest
•The RBI started selling Dollars in
rates to ensure sufficient liquidity in the
the reserves to prevent the
banking system. RBI reduced the repo rate, as
depreciation of (*)ssive capital
a result, banks reduced the lending rates.
outflow by fiis
STEPS BY GOVT TO TACKLE CRISES SITUATION

Increase in government expenditure on infrastructure projects to create jobs

and stimulate economic growth

Measures included farm loan waivers, employment guarantee schemes, rural

infrastructure improvements, and subsidies for farmers, aimed at boosting rural
demand.