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The Collapse of the U.S. Housing Bubble: How Did it Trigger the Global Financial Crisis?
The global financial crisis of 2008 caused irreversible losses to countless families and businesses. Its roots can be traced to the bursting of the bubble in the U.S. housing market. The crisis caused by the collapse of the real estate market has become one of the most profound economic shocks to the global economy since the Great Depression.
This crisis is not only a problem in the United States, but a global financial crisis.
According to the analysis of the International Monetary Fund (IMF), the financial crisis broke out because of a series of vulnerabilities in the financial system, which subsequently triggered a series of out-of-control events. From 2005 to 2012, the real estate bubble in the United States continued to expand and began to collapse in 2007.
During this period, housing prices in the United States gradually declined, and many homeowners chose to abandon their mortgages, which directly caused the prices of securities backed by mortgages to fall. This process is called the "subprime mortgage crisis." As the value of these toxic assets held by investment banks declined rapidly, many banks failed or were bailed out by the government.
The disruption in financial institutions' capital chains has frozen credit markets, further weakening the overall economy.
As credit supplies tighten, businesses are unable to access funds to stay afloat and households are paying down debt rather than spending. This situation officially triggered a recession in the United States in December 2007 and lasted for 19 months until June 2009. Compared with other recessions, the impact of this economic crisis is clearly more profound and balanced, especially in developed countries.
In this crisis, there are many reasons for the economic downturn, including not only high-risk investment in the housing market, but also a lack of understanding of the complexity of financial markets and insufficient supervision. Even though a handful of economists warned of a credit bubble bursting in its early stages, most were dismissive of such a crisis.
If we cannot fully understand the financial system, how can we hope to regulate it effectively?
With funds frozen and international trade declining, unemployment soaring and world markets changing rapidly, the economies of many countries have begun to suffer. In media reports, economist Paul Kluman even called the crisis the "Second Great Depression," and governments and central banks in many countries were forced to adopt a series of economic stimulus policies to revitalize the economy.
In order to prevent the situation from getting worse, governments in many countries have begun to increase fiscal expenditures and change monetary policies, including quantitative easing and other means. However, while these policies boost the economy, they also convey the risk of income inequality to society. The median household wealth in the United States fell significantly during the crisis, plummeting from $106,591 in 2005 to $68,839 in 2011, showing a clear trend of widening income gaps.
Looking at the lessons of the past, whether it is from policies, the behavior of financial institutions, or the debt repayment behavior of individuals, there is no single factor that contributed to the global financial crisis. Economists point out that transparent regulation and sound economic policies must go hand in hand to prevent a similar crisis from happening again. In this way, is the current era invisibly repeating the same mistakes?
