How did the financial crisis end in 2008

2008 financial crisis

The real estate crisis in the USA

The share prices plummeted. Comments around the world were unanimous: "It is the worst crisis since Black Friday of 1929" or "The world as we know it will not be the same".

The bursting of the real estate bubble in the USA is considered to be the trigger for the financial crisis. Many low-income US residents were given loans to buy a home.

In extreme cases, these home builders didn't even have a job or any other property to secure the loan. These were then the so-called ninja credits: NO income, nO jwhether, no asset (English for: no income, no job, no assets).

The credit market often traded with ill-informed customers. Some were literally forced to borrow with the promise that they could make a fortune. Since there was a lot of money, and above all cheap, on the money market, the banks were also able to grant many loans.

It was a mistake made by Alan Greenspan, head of the central bank at the time, to immediately pump a lot of money into the market whenever the economy deteriorated and to keep interest rates permanently low.

One such crisis was the bursting of the dot-com bubble in 2000, when technology stocks plummeted on the stock exchanges. In response to the internet crisis, the market was flooded with cheap money.

Everything was fine for the homeowners. As long as house prices rose, people could use new loans to pay off their old mortgages. Often they did not notice that a flexible interest rate was agreed in the contract, which was initially set low and continued to rise over time.

When US policy rates rose again, house prices fell and the dream of owning a house vanished into thin air. By the end of 2006, many Americans who had bought their own home on credit could no longer pay their installments. The real estate had to be foreclosed.

How the real estate crisis turned into a banking crisis

The banks were taking ever greater risks in their business practice. The banks wanted to achieve ever higher profits through the increased use of outside capital. One such risky business was the American real estate loan trade.

The investment banks transferred the mortgages with good, medium and bad credit ratings to special purpose vehicles, which created tradable securities from them, so-called Mortgage Backed Securities (MBS).

These securities were in turn bundled in funds to form so-called collateralized debt obligations (CDO). This means that asset-backed securities have been combined with other financial products. Due to the different quality of the loans, it was believed that they had a buffer that could absorb the failure of a loan.

The dangerous thing about the newly created financial products was that they were split up again and tied into new security packages that were sold to banks around the world. This ultimately led to the fact that no financial institution knew what papers were on his books.

But the business was worth it for the investment banks. With every real estate loan that they resold as security, there was a lot of money. As a result, the banks' remuneration system further exacerbated the crisis. Because the higher a bank's profit, the higher the bonus that a banker received.

The greed of the brokers who traded these bad loans was limitless. The rating agencies ensured that the bad loans contained in the structured financial products could be traded easily. They often gave the securities the best rating: a triple A, i.e. an AAA. Thus the papers could be sold worldwide without any problems.

After house prices fell and many properties were foreclosed, the buyers of the credit-insured mortgages, including many banks, had to write off billions of euros.

The first climax of the crisis came in the summer of 2007. The banks no longer trusted each other and no longer lent money. Even then, global financial flows came to a standstill. The central banks provided liquidity, but in the end a year was given away to prevent worse from happening.

The course of the crisis

After the investment bank "Lehman Brothers" filed for bankruptcy on September 15, 2008, events rolled over. The stock market values ​​fell worldwide. Two days later, the insurance giant AIG had to be bailed out by the US Federal Reserve with $ 85 billion. On September 19, the US government announced that it would support the financial industry with $ 700 billion.

In the last week of September the largest US savings bank "Washington Mutual" collapsed and the governments of the Benelux countries saved the financial group "Fortis" with a total of 11.2 billion euros.

On October 7, the Icelandic Prime Minister warned of "national bankruptcy" and took control of the banking system. The island in the Atlantic could no longer meet its payment obligations. The banks were deeply caught in the maelstrom of the financial crisis.

The federal government intervened on October 13, 2008. It passed the most expensive law in German history: with a rescue package for the banks that amounted to almost 500 billion.

The German problem child was "Hypo Real Estate", which was repeatedly saved from ruin with billions in loans and guarantees. The German state pumped a total of 102 billion euros into the bank, which was eventually nationalized.

The world in the vortex of the economic crisis

But it did not stop with the financial crisis: it was already clear at the end of 2008 that Germany, the USA and many other industrialized countries were slipping into a recession, the largest since the Second World War. Consumption worldwide, especially in the USA, fell sharply. Cars and other consumer goods were no longer bought, and industrial production collapsed massively.

Since the German economy is extremely export-oriented, it was particularly hard hit, especially in the automotive and mechanical engineering sectors. The states around the world are trying to contain the consequences of the economic crisis with economic stimulus programs.

From the financial crisis to the currency crisis

Why the financial crisis turned into a European currency crisis and thus a sovereign debt crisis can be explained by fundamental structural problems. On the one hand, interest rates in the monetary union were at a low level. This also made it possible for countries with weaker economies to borrow capital on good terms.

Greece and Portugal, for example, managed to get money - and only have to pay little interest for it. They lent more money than their real economic strength actually allowed.

On the other hand, the financial crisis brought increased risk awareness among financiers, who were now trying to work more defensively. Capital was frozen, existing conditions were defended.

In addition, the risks were re-rated, in some cases by rating agencies, and therefore mostly worse. It was feared that the problems of financially weaker countries could also affect other European countries.

Greece is sliding into crisis

The real estate crisis in the USA was declared by the EU as unproblematic for the euro zone and national solutions were sought in the collapse of the banking system instead of finding common solutions. The national debt of almost all European countries increased enormously in order to stabilize the national and international banking systems.

Due to the high debt, the creditors trusted some euro countries less and less. In order to restore confidence in the euro as a currency within the euro zone and to be able to take out new loans, the individual countries first tried to give creditors a positive sign by making savings. The monetary union itself should not bear the costs.

In the winter of 2009, the interest rates on Greek government bonds rose rapidly, so that the creditworthiness of Greece was increasingly doubted. The euro partners first tried to present this as a national problem.

But it quickly became clear that Greece could only be saved from bankruptcy with the help of the EU. The European Central Bank (ECB) became a creditor in 2010 and the euro partners became guarantors.

More and more states were taking on the role of debtor. The euro states were able to apply for loans, but only received them with high savings. That is still the case today. The Troika takes control of this. It is a team of three made up of the European Commission, the European Central Bank and the International Monetary Fund.

The budget problems of the countries in the euro zone contain uncontrollable risks, so that it is not certain whether the austerity efforts of the individual countries and the loans of the donor countries and credit institutions will really help to stimulate the economy again.