2008 financial crisis

The financial crisis of 2007 to 2009 began in the American housing market and grew into one of the most severe financial crises the world has known. Losses on mortgage-linked securities froze lending between banks in 2007, and the collapse of the investment bank Lehman Brothers in September 2008 set off a global panic. Governments and central banks responded with bank rescues and stimulus on an unprecedented scale. The crisis deepened the Great Recession, threw millions out of work and reshaped financial regulation.

In the years before the crisis, credit in the United States was cheap. The Federal Reserve cut interest rates sharply between 2000 and 2003, and lenders increasingly offered high-risk "subprime" mortgages to borrowers with weak credit, often on adjustable rates. These loans were bundled into mortgage-backed securities and more complex derivatives and sold to investors around the world, while insurance-like contracts called credit default swaps tied large institutions together. Mortgage debt rose from an average of 46 per cent of American GDP in the 1990s to 73 per cent in 2008. Critics also point to the repeal in 1999 of parts of the Glass–Steagall Act, which had separated ordinary banking from riskier investment activities, and to weak oversight of the lending boom.

As interest rates rose between 2004 and 2006, payments on many adjustable mortgages jumped and defaults followed. In April 2007 the subprime lender New Century went bankrupt. On 9 August the French bank BNP Paribas froze three of its investment funds, citing a complete evaporation of liquidity, a sign that banks no longer trusted one another. In September depositors queued to withdraw their money from the British lender Northern Rock, which had to be rescued by the Bank of England and was nationalised early in 2008. In March 2008 the Wall Street bank Bear Stearns was sold to JPMorgan Chase in a deal backed by the Federal Reserve.

The crisis peaked in a few weeks. On 7 September the US government took over the mortgage giants Fannie Mae and Freddie Mac. On 15 September Lehman Brothers, refused the support given to Bear Stearns, filed for the largest bankruptcy in American history, and Merrill Lynch was sold to Bank of America. The next day the Federal Reserve rescued the insurer AIG, and investors pulled money out of money market funds, freezing short-term lending to businesses. Washington Mutual became the largest bank failure in American history. Congress at first rejected a $700 billion rescue fund, and markets plunged, before passing it on 3 October. In the week that followed, the Dow Jones index suffered its worst weekly fall on record.

The crisis spread quickly. In October all three of Iceland's major banks failed, and Iceland turned to the International Monetary Fund for an emergency loan. Governments rescued banks from Switzerland to the United States, central banks made coordinated interest-rate cuts, and the Federal Reserve cut its main rate to near zero in December and began buying bonds on a large scale, a policy known as quantitative easing. The IMF estimated that large American and European banks lost over $1 trillion on toxic assets and bad loans between 2007 and 2009.

In the United States some 8.7 million jobs were lost, and unemployment roughly doubled to about 10 per cent by October 2009. Household wealth fell by about $11 trillion, the Dow Jones lost more than half its value between October 2007 and March 2009, and poverty rose. World trade shrank, and the downturn fed into the eurozone debt crisis that began in Greece in late 2009.

A stimulus package signed by President Barack Obama in February 2009, together with action by other countries, helped end the worst of the recession by mid-2009. In 2010 the Dodd–Frank Act overhauled American financial regulation, though parts were later relaxed, and countries around the world adopted the stricter Basel III rules on bank capital and liquidity.

National borders did not change as a result of the crisis; our 2010 map shows the world as it stood in its aftermath.