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The truth behind the subprime mortgage crisis: Why did unstable loans detonate the economy?
From late 2007 to mid-2009, economies around the world experienced a severe market downturn, a period known as the "Great Recession." According to the International Monetary Fund (IMF), this recession is the worst economic and financial collapse since the Great Depression. There are many reasons for the Great Recession, the main root of which is the bursting of the US housing bubble and the resulting subprime mortgage crisis.
When housing prices fell and homeowners began to abandon their mortgages, the value of the mortgage-backed securities held by investment banks declined, causing several financial institutions to collapse or be bailed out.
The Great Recession began in December 2007 and lasted until June 2009, a total of 19 months. During this period, the economies of many countries were severely affected, especially developed economies such as North America, South America and Europe. Some emerging markets, such as China, India and Indonesia, have achieved significant economic growth in the process. This phenomenon has undoubtedly triggered deep thinking among investors and scholars about the global economic landscape.
The IMF noted that the global economy met the criteria for a global recession in 2009, based on a decline in real GDP per capita.
However, the recession did not occur suddenly; rather, financial market vulnerabilities had accumulated gradually over several years. The shadow banking system in the United States has grown stronger, but the lack of corresponding supervision puts the entire system at risk. Starting in 2006, as the housing bubble burst, low-quality subprime mortgages were once again exposed, forcing investors to become increasingly uneasy about the high-risk assets they held.
The emergence of subprime loan losses marked the beginning of the financial crisis, and market panic intensified with the collapse of Lehman Brothers in September 2008.
As loan default rates rise, credit liquidity in various countries is affected, making it difficult for consumers and businesses to borrow money. In the United States, rising household debt has made the economic system increasingly fragile. Data from the United States show that median household wealth fell by 35% between 2005 and 2011.
During this crisis, many people's trust in financial institutions has been severely hit, even leading to large-scale government financial bailouts.
Governments and central banks immediately launched large-scale fiscal stimulus and monetary policies in an effort to stabilize people's livelihood and restore the economy. The crisis has led many economists to re-examine Keynesian theory and reflect on strategies for dealing with recessions.
Economists stressed that stimulus measures such as quantitative easing should be withdrawn promptly after economic recovery to avoid long-term reliance on these policies.
While the economy has gradually recovered, income inequality has increased during this period. In 2012, research showed that income inequality had increased in more than two-thirds of U.S. metropolitan areas. At this point, people began to question what impact this economic crisis had on ordinary families?
The Great Recession was rooted in multiple vulnerabilities in the financial system, including mistakes in housing policy and excessive lending by banks. The interweaving of government regulatory failures and financial risks ultimately led the entire world into a common economic adversity.
This series of events not only revealed the fragility of financial markets, but also provided important lessons for future financial policies.
Economists point out that if the stability of the financial system is not fundamentally improved, higher risks will once again engulf the global economy. So as we look back at everything we’ve learned since the Great Recession, is it possible to avoid making similar mistakes again?
