The History Book

330

A CRISIS WHICH

BEGAN IN THE

MORTGAGE MARKETS

OF AMERICA HAS

BROUGHT THE WORLD’S

FINANCIAL SYSTEM

CLOSE TO COLLAPSE

THE GLOBAL FINANCIAL CRISIS ( 2008 )

T

he turn of the 21st century

brought troubling signs

of a worldwide recession.

Low interest rates and unregulated

credit had induced more and more

people to get into unsustainable

debts. Bankers, particularly in the

US, offered mortgages to customers

with a poor credit history. These

mortgages were called “subprime

mortgages”. It was hoped that if

people could not keep up with their

mortgage payments, their houses

could be repossessed and sold at a

profit, but this depended on house

prices rising. In 2007, interest rates

crept up, and house prices fell.

People began defaulting on their

monthly repayments. Across the US,

IN CONTEXT

FOCUS

Globalization and

inequality

BEFORE

1929 The Wall Street Crash

leads to the Great Depression,

the worst economic crisis of

the 20th century.

1944 Delegates of 44 countries

meet at Bretton Woods, New

Hampshire, to reshape the

global financial system.

1975 F ra nc e, It a l y, G e r m a ny,

Japan, Britain, and the US

form the Group of Six (G6) to

foster international trade.

1997–98 The Asian financial

crisis, starting in Indonesia and

spreading around the world, is

a precursor to events in 2008.

AFTER

2015 World leaders pledge

to eradicate world poverty

by 2030.

US_330-333_Financial_crisis.indd 330 15/02/2016 16:46

331

See also: The Wall Street Crash 282–83 ■ The 1968 protests 324 ■ The launch of the first website 328–29 ■

Global population exceeds 7 billion 334–339

houses were repossessed at a great

loss, with bankers fearing they

would not get their money back.

The crisis spreads to Europe

In August 2007, the French bank

Paribas revealed that it was at

risk from the subprime mortgage

market. Bankers had gambled with

trillions of dollars of investment on

risky mortgages that might now be

worthless. Panic set in, and banks

stopped lending to one another.

British bank Northern Rock faced

a shortage of readily available cash,

and was forced to ask the British

government for an emergency loan.

Around the world, shares began

to plummet. In September 2008,

US mortgage lenders Fannie Mae

and Freddie Mac were rescued

by the American government,

while Lehman Brothers, a powerful

investment bank heavily involved

in the subprime mortgages market,

was forced to file for bankruptcy.

The US government considered

Lehman Brothers too insolvent

and did not bail it out.

The turmoil in financial markets

led to a severe economic downturn

in most Western economies. Share

prices plummeted, and world trade

decreased because governments

THE MODERN WORLD

Many countries enjoy

historically low

interest rates.

The world is plunged

into the worst recession

since the Great

Depression.

Subprime mortgages

in the US are considered

a safe investment.

Complex financial

instruments mask debt

levels incurred by banks.

Mortgage defaults

soar. Banks and financial

institutions risk collapse.

The interlinking

of financial

markets leads to

a global crisis.

spent less. Ireland became

the first European country to

fall into recession, a period of

economic decline. Iceland’s

government resigned in October

2008 after the country became

almost bankrupt. Some

governments—such as those

in the US, China, Brazil, and

Argentina—planned stimulus ❯❯

Lehman Brothers, an investment

bank with a long history of trading,

filed for bankruptcy on September

15, 2008, after getting involved in the

failing subprime mortgage market.

US_330-333_Financial_crisis.indd 331 16/02/2016 16:38