Day 13 — The Big Recession of 2008

The primary cause of the great recession was the credit crunch (2007–08) where the global banking system became short of funds, leading to a decline in confidence and decline in bank lending.

1. In 2000–2007, US banks made a big increase in sub-prime mortgage loans. These mortgages were very risky, but there was a good deal of ‘irrational exuberance‘ and belief house prices would keep rising.
2. US mortgage companies sold these ‘risky mortgage bundles’ on to banks around the world. (Credit rating agencies gave them AAA ratings — despite the fact they were very risky.)
3. Starting around 2005, US interest rates rose, and homeowners in the US began to default on these risky mortgages.
4. US banks lost money, but also banks around the world later realised the ‘safe’ mortgage bundles they bought were actually useless. So many banks around the world saw a big fall in liquidity and value of their assets.

The UK were hit hard by the recession in the US which was quickly spreading globally. GDP fell dramatically and it was the slowest recovery on record…the economy did not catch up the lost output. The global nature of the crisis meant that there was also a drop in world trade. Countries saw a drop in exports as the global downturn led to lower demand.

• Unemployment. Unemployment rose in US and Eurozone.
• Government debt. Government debt rose sharply due to the recession. This ushered in a period of ‘austerity’ with many governments in Europe seeking to cut spending.
• Euro crisis. The Eurozone saw a rise in bond yields in 2010–12 — partly due to recession, and also due to lack of Central Bank willing to intervene.

The recession carried on and plagued the nation during 2009, causing the central Bank to make a sharp cut in interest rates, therefore causing the people to lose and the banks to profit out of this recession. However some banks were wither forced to nationalize or raise capital, leading to them preserving their capital ratios as a result.

To respond to the crisis the government gave £500 million in loans and guarantees, and £200 million in short term loans, as well as this a strategic and coordinated global effort was made by central banks to reduce inflation as they cut interest rates by 0.5 percent.