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Global Financial Crisis of 2008

The global financial crisis of 2008 is a major ongoing financial crisis, the worst of its kind since the Great Depression. It
became prominently visible in September 2008 with the failure, merger or conservator ship of several large United States-based financial firms. The underlying causes leading to the crisis had been reported in business journals for many months before September, with commentary about the financial stability of leading US and European investment banks, insurance firms and mortgage banks consequent to the sub-prime mortgage crisis.

Beginning with failures of large financial institutions in the United States, it rapidly evolved into a global crisis resulting in a number of European banks' failures and declines in various stock indexes, and significant reductions in the market-value of equities (stock) and commodities worldwide. The crisis has led to a liquidity problem and the de-leveraging of financial institutions especially in the United States and Europe, which further accelerated the liquidity crisis. World political leaders and national ministers of finance and central bank directors have coordinated their efforts to reduce fears, but the crisis is ongoing and continues to change, evolving at the close of October 2008 into a currency crisis with investors transferring vast capital resources into stronger currencies such as the Yen, the Dollar and the Swiss Franc, leading many emergent economies to seek aid from the International Monetary Fund. The crisis has roots in the sub-prime mortgage crisis and is an acute phase of the financial crisis of 2007-2008.

Sub-Prime Mortgage Crisis

Sub-prime, as the word suggests, is anything that is not prime. In the sub-prime crisis context, it simply means lending money to sub-prime borrowers, i.e., lending to people with low or poor credit worthiness. Much thought and energy has already been spent in the literature in understanding the causes of the sub-prime crisis.

To put it very simply, the sub-prime crisis was caused because the lending norms in the USA were very lax. It is joked about in the academic circles that any man who was not on a respirator was given a loan without any regard to his or her credit-worthiness. This was brought about by the "spend yourself out of the post dotcom bust recession" policy of the American government at that time.

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* Contributed by: -
Sunil Kumar Panda,
PGDBM, 1st Semester,
Fortune Institute of International Business, New Delhi.
Article posted on Fenruary 14, 2009.