The Stock Market Crash of 2008: What Caused the Economic Crisis Essay


The stock market crash of 2008 was one of the most devastating events to occur in recent times. The economic crisis that followed caused many people to lose their jobs, and some even lost their homes. What caused this disaster? Some experts believe that it can be traced back to the housing bubble, which had been growing for a while before finally bursting in 2006. Others argue that the U.S.’s dependence on foreign oil is what led us down this path, but some say it’s because Wall Street bankers were too greedy with other people’s money during the 2000s.

The collapse of the Lehman’s Brothers investment bank in the fall of 2008 almost saw the destruction of the global financial system.  It took massive taxpayers, extecutive monetary, financial institutions rescue, and fiscal policies to save the industry. Throughout the fall of 2008, media headlines were marked with phrases such as credit crisis, bank collapse, and mortgage crisis. The global financial crisis synonymous with the 2008 financial crisis is considered the worst financial crisis since the 1930s Great Depression. While the government raced to rescue the industry, to date, the recovery remains asthenic compared with a precedent post-war upturn.

The rippling effect of the global economic surge continues to be felt to date. The GDP in many countries is still below its pre-crisis rate, particularly in Europe, where the conjuncture unfolded into the Euro debt crisis. The effects of the 2008 clash are still rippling across the world’s economy, global stock market prices are yet to recuperate,  global financial markets are still struggling to recover, Americans federal reserves is also back in scale, trillion of America’s household net worth is yet to be healed and so are the years of Americans retirement savings. The immediate effect led to foreclosures, eviction, and unemployment in multiple housing markets and failure insignificant businesses.

The liquidity crisis dates back years earlier though multiple events playing around the 2008 crisis continues to be leveled up to date. Reading about a decade earlier, it’s clear that the 2008 stock market crisis had several causes. Most noticeable are the financial institutions, federal reserves, and the government is partly to be blamed for failing to moderate the financial market. Nonetheless, historically, it appears that speculations are always to blame for stock market crashes. Beliefs caused the Great Depression over the railroad, and the 2008 stock market crash was also caused by speculations over real estate.

The years following the 2008 stock market crash were exhibited by a flood of mortgage lending to subprime borrowers. After that, the adjustable rate on mortgages continued to rise because of ease in credit availability. While banks increased their lending, house prices also accelerated, and credit booms vehicles such as collateralized debt obligations (CDO) and mortgage-backed securities (MBS) were on the increase. Over time, because of increased demand, housing prices were on a decline. To compound the existing risk, the total consumer debt continued to grow at a very high rate, and massive losses were reported by major financial institutions that had invested in subprime Mortgage-Backed Securities. Regardless of the reported anomalies, financial markets were still high in the fall of 2007, and the Dow Jones Industrial Average (DJIA) also reported high trends.

However, in July 2008, the financial market was at its lowest, and the federal government announced the takeover of significant subprime mortgage lenders because of heavy losses. A week later, Lehman Brothers, a prominent investment firm, declared the largest bankruptcy ever experienced in US history. In subsequent events, the stock markets plummeted, the Dow continued to fall. Panic ensued in financial markets, effectuating massive short-selling and redemption requests. The weeks that followed were marked by complete turmoil. Ultimately, the events leading to the 2008 stock market crash are a lesson on irrationality. While good intentions were the original catalyst to increasing the subprime housing market, somewhere, financial regulators failed. As home prices went up, banks accelerated their efforts to boost lending, disregarding the same consequences. Considering the investment vehicles driving the incredible growth in subprime mortgage and massive consumer debts, perhaps the stock market crisis in 2008 could have been avoided.

In conclusion, The causes of the economic crisis are still debated, but it is clear that many factors played a role. Unemployment was at its lowest in decades before 2008, and real estate prices were soaring. There’s no way to know what caused this recession, but there are some likely culprits like easy money policies by central bankers who led to an unsustainable housing bubble or too much debt on consumers’ balance sheets.