The severe downturn in economic activity that began in 2007 and persisted for several years, affecting economies throughout the world, was known as the global financial crisis. During the 1930s Great Depression, this downturn is regarded as the most significant. The official duration of the U.S. downturn was from December 2007 to June 2009; however, the term “Great Recession” also refers to the subsequent worldwide recession that ended in 2009.
A worldwide economic downturn that would change economies and redefine financial rules began to engulf the world in 2007, signaling the beginning of massive instability in the global financial environment. This financial shaking originated in the US housing industry, where the burst of the subprime mortgage bubble set off a chain reaction that sent tremors around the globe. It is critical that we analyze the causes of the crisis, consider its broad implications, and derive lessons from the incidents of 2007-2009 that will strengthen the global financial system in the face of future crises.
The International Monetary Fund (IMF) reports that the world economy declined by 0.1% in 2009, the first downturn to hit the planet since the Great Depression. In 2009, the GDP of the United States, the center of the crisis, shrank by 2.8%. As a result of the aftermath, the countries that make up the Eurozone had a 4.5% contraction overall. Growth significantly slowed in Asia, whose economies were previously believed to be immune. China’s GDP dropped from 14.2% in 2007 to 9.2% in 2009.
Global unemployment increased dramatically with 5.6% of people without a job in 2007 falling to 6.6% in 2009. The unemployment rate in the US increased from 4.7% in 2007 to 10% in October 2009. The effect on housing markets was profound, with an average 30% decline in US home values.
The crisis was most severely felt by the banking sector. The Bank of England believes that between 2007 and 2009, losses to international financial institutions came to a total of $2.8 trillion. The Troubled Asset Relief Program (TARP), which was adopted only in the United States to save banking institutions, cost taxpayers almost $700 billion.
Governments all throughout the world responded to the crisis by implementing previously unheard-of economic intervention tactics. Interest rates were lowered by central banks and fiscal stimulus plans were unveiled to increase demand. The Federal Reserve of the United States lowered the federal funds rate to almost zero and implemented unusual monetary regulations, such as quantitative easing.
Similar measures were taken by the European Central Bank and other significant central banks. The government created initiatives to stop foreclosures, put money into struggling financial institutions, and passed laws to boost public trust in the banking sector.
The global financial architecture was found to have shortcomings during the 2007-2008 financial crisis, which led to a review of regulatory frameworks. Following the incident, a determined effort was made to improve financial control and stop such a terrible disaster from happening again.
International programs to improve the handling of risks and raise capital requirements for banks include the Basel III framework. To give regulators and investors more understanding of the operations of financial institutions, more disclosure standards and increased openness were put in place.
The worldwide economic downturn of 2007-2009 left deep scars that are still visible in the collective memories of economies around the world. A story of unparalleled economic decline, skyrocketing unemployment, and enormous financial losses is conveyed by the numerical indicators and percentages. Nevertheless, the crisis also acted as a spur for improvement, causing a reevaluation of international collaboration, risk management procedures, and financial rules.
To create a stronger and more resilient worldwide financial system, we must continue to be alert and utilize the lessons gained from the crisis as we manage the future. In addition to serving as a historical indicator, the monetary costs of the 2007-2009 crises should serve as a continual reminder of the importance of prudent financial procedures and efficient regulatory frameworks to protect against surprises in the future.