Ten years ago, in 2008, the world witnessed the most shocking financial news of the century. Dow Jones went down by 777 points in a single day, marketing the official beginning of the financial meltdown in America.
It rendered hundreds of businesses crippled and several people went bankrupt, forced to leave their jobs. The banks were no more trustworthy and a sense of doom prevailed all over the place. The after affects of this shock was felt around the world and major world economies came to a screeching halt.
It all started in 2007
The script of the meltdown was being written from a very long time. However, the real consequences were felt only after the housing market crashed in 2007. Banks and other financial institutions were lending to subprime debtors relentlessly. It worked like a classic Ponzi scheme and the bubble crashed one day. When it happens, at least 10 million homeowners lost their houses.
It followed the interest rate rise by the Federal Reserve when the housing prices fell sharply. Due to floating interest rates, many homeowners suddenly had to pay a higher mortgage for a lower priced house. Selling was not an option and the houses were eventually foreclosed. The government could not save the homeowners.
Banking sector collapsed
The collapse in the banking sector was the real nail in the coffin of these American crash. Lehman Brothers announced bankruptcy in September 2008, soon after the Treasury Secretary announced that there will be no more bailouts by the government.
A $60 billion protection to the Lehman Brothers could have possibly averted the situation. However, the government was forced to withdraw from negotiations following increasing pressure about staying away. Once the bankruptcy was announced, American and global markets panicked and landed in a recession.
Banks panicked as well and $160-billion ultra-safe money market accounts were drained. The situation grew worse as banks were holding $190 billion in cash, about 100 times more than the $2 billion regular reserve. The Federal Reserve had to lower the interest rates to handle the situation but banks continued to hold on to the cash.
The mighty stock crashes
In just one day, the Dow Jones Industrial Average fell by 777 points. During the Great Recession, the Down Jones fell by 80 percent. This time it went down by 50 percent. This event was enough to send ripples of crashes across the world markets which led to a global economic slowdown.
The Great Recession took three years to do the damage to the world economy. With the 2008 meltdown, it took only 17 months. The government had to finally offer billions of dollars in bailouts which led to more pressure on the economy but helped in recovery. Since then, banking regulations were stricter than ever.
The 2009 financial market meltdown has become a lesson for government’s world over to regulate the banking sector further and ensure that such an event doesn’t take place in the future. You should also take measures to save more and ensure that you have a financial cushion for bad times.