The global financial crisis

The story

A home for everyone

At the end of the 1990s and in the early 2000s, in the United States, buying a house seemed a safe deal. Prices rose every year, and banks competed to grant mortgages, that is, loans for buying a home, even to people with low incomes and little security. These risky loans were called “subprime”. Many people took advantage, convinced that the house would keep on being worth more and more: if they could not pay, they could just sell it at a higher price.

The banks, however, did not keep those mortgages. They bundled them together into big packages, turned them into financial securities, hard to understand even for experts, and sold them on to other banks, investment funds and insurance companies, in America and all over the world. Those who bought them thought they were making a good deal, because the rating agencies gave those securities very high marks. Meanwhile many banks were borrowing money to invest more and more.

The bubble bursts

In 2006 house prices stopped rising and began to fall. At that point many people could no longer pay their instalments, especially when the interest on their mortgages went up. Foreclosed homes, that is, homes taken over by the banks, numbered in the millions. The securities based on those mortgages lost value, and the people who held them found they had lost a lot of money. But nobody knew which banks had the most, so the banks stopped trusting one another and stopped lending each other money.

On 9 August 2007 a big French bank, BNP Paribas, froze three of its investment funds: this is seen as the start of the crisis. In March 2008 a New York investment bank, Bear Stearns, was rescued and quickly sold to another bank with the help of the American central bank. But the worst was still to come.

15 September 2008

Lehman Brothers was a Wall Street bank that had existed for more than a hundred and fifty years. It had invested heavily in mortgages and risky securities, and was full of debts. The American government decided not to save it. On 15 September 2008 Lehman declared bankruptcy: it was the biggest bankruptcy in the history of the United States, with assets of over 600 billion dollars. Within a few days fear spread all over the world.

Stock markets crashed. A big insurance group, AIG, was rescued by the government with 85 billion dollars. Banks almost completely stopped lending to one another, and even ordinary businesses struggled to get credit. The American government approved a 700-billion-dollar plan to support the banks. In Europe too several institutions were rescued with public money.

The Great Recession

The crisis turned from a financial one into an economic one. Businesses cut production, many closed, and millions of people lost their jobs: in the United States unemployment reached 10% in 2009. In many countries the economy shrank, and world trade also suffered its sharpest fall since the Second World War (about 12% in 2009). People spoke of the “Great Recession”.

From 2010 the crisis moved to Europe, where some countries with high public debts, such as Greece, Ireland, Portugal, Spain and Italy, struggled to find anyone to lend them money at affordable rates. International loans and programmes of cuts and reforms were needed, often very harsh. In July 2012 the president of the European Central Bank, Mario Draghi, said that the bank would do “whatever it takes” to save the euro: the tension on the markets calmed down.